Financial Accounting

SOP 97-2 May Be Modified

The Institute has been working the kinks out of its recent SOP 97-2, Software Revenue Recognition. First, FASB gave AcSEC the go-ahead to issue SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, which deferred for one year certain portions of the SOP covering multiple-element arrangements. (See "Changes for SOP 97-2," JofA, May98, page 17.) Now, AcSEC has issued an ED, Modification of the Limitations on Evidence of Fair Value in Software Arrangements, to make that deferral permanent.

Specifically, SOP 98-4 deferred the second sentence of paragraph 10 in SOP 97-2, which limits vendor-specific objective evidence (VSOE) of the fair value of the various elements in a multiple-element arrangement to (a) the price charged when the same element is sold separately or (b) for an element not yet being sold separately the price established by management having the relevant authority. (Under SOP 97-2, if VSOE does not exist to support the fair value of each element, all revenue from the arrangement must be deferred.)

Financial Accounting Image The guidance in that sentence would have led to unduly conservative patterns of revenue recognition, according to AICPA senior technical manager Fred Gill. Consider, for example, a piece of software that always comes with one year of telephone support. Because the software is never sold separately, all revenue from the arrangement would have to be deferred, even though the fair value of each element could be inferred from the price of the package and the price of renewal telephone support.

The 60-day comment period ended September 30. Although AcSEC still needs to consider comment letters and get final approval from the FASB, Gill said it was likely the ED would be approved, although possibly with modifications.

Deposit Accounting: Later, Not Sooner

With the FASB's approval, AcSEC has issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk. The lengthy title describes what this SOP covers, but just as important is what it does not cover: Although it applies to all entities, it exempts long-duration life and health insurance contracts. These remain under the authority of FASB Statement no. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, and Statement no. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. SOP 98-7 also does not address when deposit accounting should be applied. (For more on this SOP, see "Deposit Accounting Gets Its First Treatment," JofA, June97.)

According to AICPA technical manager Elaine Lehnert, the effective date of the statement has been postponed at the FASB's suggestion. It is now effective for fiscal years beginning after June 15, 1999, with earlier application encouraged. (The effective date in the ED was December 15, 1998.)

To order a copy of SOP 98-7 call the AICPA at 888-777-7077.


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