Case 1.10 Gemstar-Tv Guide International, Inc.
1. We are all familiar with the basic revenue recognition rule: revenue should generally be recognized when it is realized or realizable and when it is earned. Although seemingly simple, that rule can be difficult to apply, particularly in rapidly evolving high-tech industries. Revenue recognition within the software industry has been a complex and controversial issue since the inception of that industry during the latter part of the twentieth century. The FASB addressed that issue at length in Statement of Position 97-2 (pre-codification GAAP), which was released in October 1997. A more general discussion of revenue recognition can be found in the SEC’s Staff Accounting Bulletin No. 101 that was issued in December 1999. SOP 97-2 identified four conditions that must be met to recognize revenue on the sale of software and related “arrangements,” which would include the licensing of technology:
Persuasive evidence exists of an arrangement: In most cases, such evidence will be provided by a written contract between the software vendor and customer.
Delivery has occurred: Since software may be delivered electronically, SOP 97-2 provides guidance on when this criterion is met. For example, if a customer has been provided access codes to download the given software off the Internet, then delivery is generally assumed to have occurred (whether or not the download has actually taken place).
The vendor’s fee is fixed or determinable: Again, SOP 97-2 provides interpretive guidance for this revenue recognition criterion. For example, the vendor’s fee is not considered to be fixed or determinable if the total revenue from the sale of the software will be a function of the number of copies of that software ultimately distributed to the buyer. Likewise, if the buyer has a right to return the software, then before revenue can be recognized on the sale of the software there must be a means to reasonably estimate the expected sales returns.
Collectibility is
Persuasive evidence exists of an arrangement: In most cases, such evidence will be provided by a written contract between the software vendor and customer.
Delivery has occurred: Since software may be delivered electronically, SOP 97-2 provides guidance on when this criterion is met. For example, if a customer has been provided access codes to download the given software off the Internet, then delivery is generally assumed to have occurred (whether or not the download has actually taken place).
The vendor’s fee is fixed or determinable: Again, SOP 97-2 provides interpretive guidance for this revenue recognition criterion. For example, the vendor’s fee is not considered to be fixed or determinable if the total revenue from the sale of the software will be a function of the number of copies of that software ultimately distributed to the buyer. Likewise, if the buyer has a right to return the software, then before revenue can be recognized on the sale of the software there must be a means to reasonably estimate the expected sales returns.
Collectibility is