"2. Revenue Recognition for Software (25 points) a. A software vendor sold $300,000 software to a customer. The price includes the software (no addition development or modification needed), the installation of the software and a one-year technique support. If the software can be purchased at a standalone price of $250,000 with the fair values of installation and one-year technique support of $5,000 and $57,500, respectively, how should the company recognize the sales price of $300,000 upon the delivery and the completion of the installation? You need to provide the supporting documents for your answer (i.e., ASC number). Requiredment: 2 pages with 12pts doubled space"

Financial Accounting Standards Board 1 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... March 21, 2012 [985-605] Software - Revenue Recognition [985-605-00] Revenue Recognition - Status General [985-605-05] Revenue Recognition - Overview and Background General > Hosting Arrangement [985-605-15] Revenue Recognition - Scope and Scope Exceptions General > Overall Guidance > Entities > Transactions [985-605-20] Revenue Recognition - Glossary [985-605-25] Revenue Recognition - Recognition General > Basic Principles >> Software Requiring Significant Production, Modification, or Customization >> Software Not Requiring Significant Production, Modification, or Customization >> Multiple-Element Arrangements > Persuasive Evidence of an Arrangement Exists > Delivery Has Occurred >> Customer Acceptance >> Multiple Copies of Software Products versus Multiple Licenses >> Delivery Other than to the Customer >> Delivery Agents >> Authorization Codes > The Vendor's Fee Is Fixed or Determinable and Collectibility Is Probable >> Factors that Affect the Determination of Whether a Fee Is Fixed or Determinable and Collectible >>> Extended Payment Terms >>> Reseller Arrangements >>> Customer Cancellation Privileges >>> Fiscal Funding Clauses > Multiple-Element Arrangements >> Additional Software Deliverables and Rights to Exchange or Return Software >>> Upgrades or Enhancements >>> Additional Software Products >>> Rights to Exchange or Return Software >> Postcontract Customer Support >>> Postdelivery Telephone Support at No Additional Charge >>> Postcontract Customer Support Granted to Resellers 3/21/2012 5:31 PM Financial Accounting Standards Board 2 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... >> Services >>> Funded Software-Development Arrangements > Contract Accounting >> Segmentation >> Measuring Progress-to-Completion Under the Percentage-of-Completion Method >> Input Measures >> Output Measures [985-605-50] Revenue Recognition - Disclosure General [985-605-55] Revenue Recognition - Implementation Guidance and Illustrations General > Implementation Guidance >> Flowchart of Revenue Recognition on Software Arrangements >> Multiple-Element Arrangements >>> Effect of Multiple Contracts or Agreements >>> Arrangements that Include Usage-Based Fees >>>> Separate Fees for License, Usage, and Renewal of Postcontract Customer Support >>>> Postcontract Customer Support Included in Usage-Based Fee >>>> All Fees Usage-Based >> Extended Payment Terms >>> Effect of Prepayments >>> Illustration of Extended Payment Terms >>> Concessions by a Software Vendor to Customers >>> Overcoming the Presumption of Concessions in Arrangements with Extended Terms >>> Subsequent Cash Receipt when Vendor Does Not Have a Practice of Providing Extended Terms >>> Transfer by Vendor of Extended Payment Rights to Independent Third Party Without Recourse >>> Effect of Customer Financing of Extended Payments >>>> Customer Financing with No Vendor Participation >>>> Effect of Prepayments on Software Revenue Recognition when the Vendor Participates in Customer Financing >>>> Indicators of Incremental Risk when Vendor Participates in Customer Financing >>>> Overcoming the Presumption of Incremental Risk when Vendor Participates in Customer Financing >>>> Vendor Actions that May Not Indicate Incremental Risk >>>> Effect of Interest Rate Buydown in Connection with Customer Financing >>>> Additional Considerations when a Reseller Obtains Financing >> Postcontract Customer Support >>> Postcontract Customer Support During Deployment Phase >>> Fair Value of Postcontract Customer Support >>>> Fair Value of Postcontract Customer Support in a Perpetual License >>>> Fair Value of Postcontract Customer Support in a Short-Term License >>>> Fair Value of Postcontract Customer Support in a Multiyear Time-Based License >>>> Fair Value of Postcontract Customer Support in Perpetual and Multiyear Time-Based Licenses 3/21/2012 5:31 PM Financial Accounting Standards Board 3 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... >>>> Fair Value of Postcontract Customer Support with a Consistent Renewal Percentage (but Varying Renewal Dollar Amounts) >>>> Fair Value of Postcontract Customer Support Renewals Based on Users Deployed >>> Postcontract Customer Support in an Arrangement Accounted for Using Contract Accounting >>> Bug Fixes Provided to Customers that Choose Not to Obtain Postcontract Customer Support >> Effect of Customer Acceptance Provisions >> Accounting for Significant Incremental Discounts >> Applicability of Discount Accounting to Option to Buy Additional Copies of Software >> Effect of Discounts on the Residual Method >> Subsequent Event Related to Vendor-Specific Objective Evidence of Fair Value >> Delivery and Fixed and Determinable Fee >>> Delivery Terms if Arrangement Requires Physical Delivery of Software >>> Effect of Change in License Mix >>> Effect of Commencement of Initial License Term >>> Effect of Commencement of Extension or Renewal of License Term >>> Effect of Additional Products in an Extension or Renewal of License Term >> Effect of Option to Extend a Time-Based License Indefinitely >> Hosting Arrangement > Illustrations >> Example 1: ScopeAn Automobile Manufacturer >> Example 2: ScopeA Developer of Interactive Training Courses >> Example 3: Additional Software ProductsPrice per Copy >>> Case A: Maximum Number of Copies of Undelivered Product >>> Case B: No Limit on Number of Copies of Undelivered Product >> Example 4: Authorization CodesOptional Functions >> Example 5: Authorization CodesAccess to Additional CPU >> Example 6: Multiple-Element ArrangementsProducts >>> Case A: Undelivered Product Not Essential to Functionality of Delivered Products >>> Case B: Undelivered Product Essential to Functionality of Delivered Products >> Example 7: Multiple-Element ArrangementsRight to New Product when Available >>> Case A: Price Not Established at Arrangement Date >>> Case B: Price Established at Arrangement Date >> Example 8: Multiple-Element ArrangementsProducts and Services >>> Case A: Implementation Services >>> Case B: More than Minor Modifications >>> Case C: Implementation Services Not Customarily Sold Separately >> Example 9: Multiple-Element ArrangementsProducts and ServicesApplication of the Residual Method >> Example 10: Accounting for Significant Incremental Discounts >>> Case A: Application of Discount to Each Element Covered by the Arrangement >>> Case B: Future Products or Services Unknown, but Maximum Future Discounts Quantifiable >>>> Case B1: Dollar Discount on Any One Additional Product Purchased >>>> Case B2: Half-Price Discount on Any Future Purchases with Cumulative Maximum >>>> Case B3: Discount Future Purchases Significant and Incremental to Discount on Original Purchase 3/21/2012 5:31 PM Financial Accounting Standards Board 4 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... >>> Case C: No Maximum Future Discount >>> Case D: Discount Significant but Not Incremental >> Example 11: Effect of Discounts on Future Products on the Residual Method >> Example 12: Multiple-Element ArrangementsProducts and Discounted Postcontract Customer Support >> Example 13Arrangements That Include Tangible Products and Software Elements >>> Case A: Computer with Operating System Included >>> Case B: Computer with Operating System Excluded More Than Infrequently >>> Case C: Computer and Multiple Operating Systems >>> Case D: Computer with Additional Software Products Included >>> Case E: Personal Digital Assistant >>> Case F: Computer with Operating System Sold Separately >>> Case G: Computer and Undelivered Software Elements >>> Case H: Standalone Sale of an Operating System >>> Case I: Computer with Nonessential Software and Postcontract Customer Support Included >>> Case J: Networking Equipment >>> Case K: Similar Products >>> Case L: Change in Business Practice [985-605-65] Revenue Recognition - Transition and Open Effective Date Information General [985-605-75] Revenue Recognition - XBRL Elements XBRL Links to Codification 985-605-00 Status General Note: The Status Section identifies changes to this Subtopic resulting from Accounting Standards Updates. The Section provides references to the affected Codification content and links to the related Accounting Standards Updates. Nonsubstantive changes for items such as editorial, link and similar corrections are included separately in Maintenance Updates. General 985-605-00-1 The following table identifies the changes made to this Subtopic. Paragraph Action Accounting Standards Update 985-605-15-3 985-605-15-4 985-605-15-4A 985-605-25-10 985-605-50-1 985-605-55-211 through 55-236 Amended Amended Added Amended Added Added Accounting Accounting Accounting Accounting Accounting Accounting Standards Standards Standards Standards Standards Standards Update Update Update Update Update Update No. No. No. No. No. No. Date 2009-14 2009-14 2009-14 2009-14 2009-14 2009-14 10/07/2009 10/07/2009 10/07/2009 10/07/2009 10/07/2009 10/07/2009 3/21/2012 5:31 PM Financial Accounting Standards Board 5 of 62 985-605-65-1 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... Added Accounting Standards Update No. 2009-14 10/07/2009 985-605-05 Overview and Background General Note: The Overview and Background Section provides overview and background material for the guidance contained in the Subtopic. It does not provide the historical background or due process. It may contain certain material that users generally consider useful to understand the typical situations addressed by the standards. The Section does not summarize the accounting and reporting requirements. General 985-605-05-1 This Subtopic provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing, or otherwise marketing computer software. 985-605-05-2 [Not used] 985-605-05-3 Software arrangements range from those that provide a license for a single software product to those that, in addition to the delivery of software or a software system, require significant production, modification, or customization of software. > Hosting Arrangement 985-605-05-4 Structurally, the form of a hosting arrangement may be split into two elements: a. The right to use software b. The hosting service. The arrangement may or may not include a license right to the software and the customer may or may not have an option to take delivery of the software. The guidance beginning in paragraph 985-605-55-119 addresses the scope application of this Subtopic to a hosting arrangement. 985-605-15 Scope and Scope Exceptions General Note: The Scope and Scope Exceptions Section outlines the items (for example, the entities, transactions, instruments, or events) to which the guidance in the Subtopic does or does not apply. In some cases, the Section may contain definitional or other text to frame the scope. General Note for Financial Instruments: Some of the items subject to the guidance in this Subtopic are financial instruments. For guidance on matters related broadly to all financial instruments, (including the fair value option, accounting for registration payment arrangements, and broad financial instrument disclosure requirements), see Topic 825. See Section 825-10-15 for guidance on the scope of the Financial Instruments Topic. 3/21/2012 5:31 PM Financial Accounting Standards Board 6 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... General > Overall Guidance 985-605-15-1 This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 985-10-15, with specific qualifications and exceptions noted below. > Entities 985-605-15-2 > The guidance in this Subtopic applies to all entities. Transactions 985-605-15-3 The guidance in this Subtopic applies to the following transactions and activities: a. Licensing, selling, leasing, or otherwise marketing computer software. b. [Subparagraph superseded by Accounting Standards Update No. 2009-14] c. The software and software-related elements of arrangements that include software that is more-thanincidental to the products or services in the arrangement as a whole. Indicators that software is more-thanincidental to the products or services in an arrangement as a whole include (but are not limited to): 1. The software is a significant focus of the marketing effort or is sold separately. 2. The vendor is providing postcontract customer support. 3. The vendor incurs significant costs that are within the scope of Subtopic 985-20. In such arrangements, the guidance in this Subtopic applies to the software and software-related elements in the arrangement unless a scope exception in paragraph 985-605-15-4 is present. Software-related elements include software products and services such as those listed in paragraph 985-605-25-5. A service is within the scope of this Subtopic if software in the arrangement is essential to the functionality of that service. d. More-than-insignificant discounts on future purchases that are offered by a vendor in a software arrangement. More-than-insignificant discounts have all of the following characteristics: 1. Incremental to the range of discounts reflected in the pricing of the other elements of the arrangement 2. Incremental to the range of discounts typically given in comparable transactions 3. Significant. If the discount or other concessions in an arrangement are more than insignificant, a presumption is created that an additional element or elements (as defined in paragraph 985-605-25-5) are being offered in the arrangement. Judgment is required when assessing whether an incremental discount is significant. e. Arrangements to deliver software or a software system, either alone or together with other products or services that require significant production, modification, or customization of software (see Subtopic 605-35). Paragraphs 985-605-25-88 through 25-107 provide guidance on applying contract accounting to certain arrangements involving software. If a software arrangement includes services that meet the criteria discussed in paragraph 985-605-25-78, those services should be accounted for separately. The guidance beginning in paragraph 985-605-55-119 addresses the scope application of this Subtopic to a hosting arrangement. 985-605-15-4 The guidance in this Subtopic does not apply to the following transactions and activities: a. Arrangements for products or services containing software that is incidental to the products or services as a whole 3/21/2012 5:31 PM Financial Accounting Standards Board 7 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... b. Leases of software that include a tangible product (such as property, plant, or equipment), if the software is incidental to the tangible product as a whole or the software and nonsoftware components of the tangible product function together to deliver the tangible product's essential functionality c. Marketing and promotional activities not unique to software transactions, such as the following: 1. Insignificant discounts on future purchases that are offered by a vendor in a software arrangement. For example, a vendor may offer a small discount (a coupon or other form of offer for 5 percent off) on additional licenses of the licensed product or other products that exist at the time of the offer but are not part of the arrangement. 2. Discounts that are not incremental to discounts typically given in comparable transactions (for example, volume purchase discounts comparable to those generally provided in comparable transactions). d. Nonsoftware components of tangible products e. Software components of tangible products that are sold, licensed, or leased with tangible products when the software components and nonsoftware components of the tangible product function together to deliver the tangible product's essential functionality f. Undelivered elements that relate to software that is essential to the tangible product's functionality in (e). 985-605-15-4A In determining whether a tangible product is delivered with software components and nonsoftware components that function together to deliver the tangible product's essential functionality, a vendor shall consider all of the following: a. If sales of the tangible product without the software elements are infrequent, a rebuttable presumption exists that software elements are essential to the functionality of the tangible product. b. A vendor may sell products that provide similar functionality, such as different models of similar products. If the only significant difference between similar products is that one product includes software that the other product does not, the products shall be considered the same product for the purpose of evaluating (a). c. A vendor may sell software on a standalone basis. The vendor may also sell a tangible product containing that same software. The separate sale of the software shall not cause a presumption that the software is not essential to the functionality of the tangible product. d. Software elements do not need to be embedded within the tangible product to be considered essential to the tangible product's functionality. e. The nonsoftware elements of the tangible product must substantively contribute to the tangible product's essential functionality. For example, the tangible product should not simply provide a mechanism to deliver the software to the customer. 985-605-20 Glossary General Note: The Master Glossary contains all terms identified as glossary terms throughout the Codification. Clicking on any term in the Master Glossary will display where the term is used. The Master Glossary may contain identical terms with different definitions, some of which may not be appropriate for a particular Subtopic. For any particular Subtopic, users should only use the glossary terms included in the particular Subtopic Glossary Section (Section 20). Authorization Code A vehicle used by vendors to permit customers access to, use of, or duplication of software that would otherwise be 3/21/2012 5:31 PM Financial Accounting Standards Board 8 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... restricted. Also called a key. Core Software An inventory of software that vendors use in creating other software. Core software is not delivered as is because customers cannot use it unless it is customized to meet system objectives or customer specifications. Customer A user or reseller. Delivery A transfer of software accompanied by documentation to the customer. The transfer may be by any of the following: a. A physical transfer of tape, disk, integrated circuit, or other medium b. Electronic transmission c. Making available to the customer software that will not be physically transferred, such as through the facilities of a computer service bureau d. Authorization for duplication of existing copies in the customer's possession. If a licensing agreement provides a customer with the right to multiple copies of a software product in exchange for a fixed fee, delivery means transfer of the product master, or the first copy if the product master is not to be transferred. Enhancement See Upgrade. Fixed Fee A fee required to be paid at a set amount that is not subject to refund or adjustment. A fixed fee includes amounts designated as minimum royalties. Hosting Arrangement In connection with the licensing of software products, an arrangement in which an end user of the software does not take possession of the software; rather, the software application resides on the vendor's or a third party's hardware, and the customer accesses and uses the software on an as-needed basis over the Internet or via a dedicated line. Licensing Granting the right to use but not to own software through leases or licenses. Maintenance Activities undertaken after the product is available for general release to customers to correct errors or keep the product updated with current information. Those activities include routine changes and additions. Milestone A task associated with long-term contracts that, when completed, provides management with a reliable indicator of progress-to-completion on those contracts. Off-the-Shelf Software Software marketed as a stock item that customers can use with little or no customization. Platform The hardware architecture of a particular model or family of computers, the system software, such as the operating system, or both. Platform-Transfer Right A right granted by a vendor to transfer software from one hardware platform or operating system to one or more other hardware platforms or operating systems. Postcontract Customer Support The right to receive services (other than those separately accounted for as described in paragraph 985-605-25-79) or unspecified product upgrades or enhancements, or both, offered to users or resellers, after the software license 3/21/2012 5:31 PM Financial Accounting Standards Board 9 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... period begins, or after another time as provided for by the postcontract customer support arrangement. Unspecified upgrades or enhancements are postcontract customer support only if they are offered on a when-and-if-available basis. Postcontract customer support does not include any of the following: a. Installation or other services directly related to the initial license of the software b. Upgrade rights c. Rights to additional software products. Postcontract customer support may be included in the license fee or offered separately. Postcontract customer support generally is referred to in the software industry as maintenance. However, the term maintenance is not used in referring to postcontract customer support for the following reasons: a. It has taken on a broader meaning in the industry than the one described in Subtopic 985-20. b. It may be confused with hardware maintenance as it is used elsewhere in the Codification. c. Its meaning varies from entity to entity. The right to receive services and unspecified upgrades or enhancements provided under postcontract customer support generally is described by the postcontract customer support arrangement. Typical arrangements include services, such as telephone support and correction of errors (bug fixing or debugging), and unspecified product upgrades or enhancements developed by the vendor during the period in which the postcontract customer support is provided. Postcontract customer support arrangements include patterns of providing services or unspecified upgrades or enhancements to users or resellers, although the arrangements may not be evidenced by a written contract signed by the vendor and the customer. Product Master A completed version, ready for copying, of the computer software product, the documentation, and the training materials that are to be sold, leased, or otherwise marketed. Reseller An entity licensed by a software vendor to market the vendor's software to users or other resellers. Licensing agreements with resellers typically include arrangements to sublicense, reproduce, or distribute software. Resellers may be distributors of software, hardware, or turnkey systems, or they may be other entities that include software with the products or services they sell. Site License A license that permits a customer to use either specified or unlimited numbers of copies of a software product either throughout an entity or at a specified location. Upgrade An improvement to an existing product that is intended to extend the life or improve significantly the marketability of the original product through added functionality, enhanced performance, or both. The terms upgrade and enhancement are used interchangeably to describe improvements to software products; however, in different segments of the software industry, those terms may connote different levels of packaging or improvements. This definition does not include platform-transfer rights. Upgrade Right The right to receive one or more specific upgrades or enhancements that are to be sold separately. The upgrade right may be evidenced by a specific agreement, commitment, or the vendor's established practice. User The party that ultimately uses the software in an application. When-and-If-Available An arrangement whereby a vendor agrees to deliver software only when or if it becomes deliverable while the arrangement is in effect. When-and-if-available is an industry term that is commonly used to describe a broad range of contractual commitments. The use of the term when-and-if-available within an arrangement should not lead to a presumption that an obligation does not exist. 3/21/2012 5:31 PM Financial Accounting Standards Board 10 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... 985-605-25 Recognition General Note: The Recognition Section provides guidance on the required criteria, timing, and location (within the financial statements) for recording a particular item in the financial statements. Disclosure is not recognition. General Note for Fair Value Option: Some of the items subject to the guidance in this Subtopic may qualify for application of the Fair Value Option Subsections of Subtopic 825-10. Those Subsections (see paragraph 825-10-05-5) address circumstances in which entities may choose, at specified election dates, to measure eligible items at fair value (the fair value option). See Section 825-10-15 for guidance on the scope of the Fair Value Option Subsections of the Financial Instruments Topic. General > Basic Principles 985-605-25-1 Software arrangements range from those that provide a license for a single software product to those that, in addition to the delivery of software or a software system, require significant production, modification, or customization of software. >> Software Requiring Significant Production, Modification, or Customization 985-605-25-2 If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement shall be accounted for in conformity with Subtopic 605-35, using the relevant guidance in paragraphs 985-605-25-88 through 25-107 on applying contract accounting to certain arrangements involving software. >> Software Not Requiring Significant Production, Modification, or Customization 985-605-25-3 If the arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of the following criteria are met: a. Persuasive evidence of an arrangement exists (see paragraphs 985-605-25-15 through 25-17). b. Delivery has occurred (see paragraphs 985-605-25-18 through 25-29). c. The vendor's fee is fixed or determinable (see paragraphs 985-605-25-30 through 25-40). d. Collectibility is probable (see paragraphs 985-605-25-13 through 25-14 and 985-605-25-30 through 25-40). 985-605-25-4 >> The term probable i s used in this Subtopic with the same definition as used in Topic 450. Multiple-Element Arrangements 985-605-25-5 Software arrangements may provide licenses for multiple software deliverables (for example, software products, upgrades or enhancements, postcontract customer support, or services), which are termed multiple elements. A number of the elements may be described in the arrangement as being deliverable only on a when-and-if-available basis. When-and-if-available deliverables shall be considered in determining whether an arrangement includes multiple elements. Accordingly, the requirements of this Subtopic with respect to arrangements that consist of multiple elements shall be applied to all additional products and services specified in the arrangement, including those described as being deliverable only on a when-and-if-available basis. 3/21/2012 5:31 PM Financial Accounting Standards Board 11 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... 985-605-25-6 If an arrangement includes multiple elements, the fee shall be allocated to the various elements based on vendor-specific objective evidence of fair value, regardless of any separate prices stated in the contract for each element. Vendor-specific objective evidence of fair value is limited to the following: a. The price charged when the same element is sold separately b. For an element not yet being sold separately, the price established by management having the relevant authority; it must be probable that the price, once established, will not change before the separate introduction of the element into the marketplace. 985-605-25-7 The amount allocated to undelivered elements is not subject to later adjustment. (This does not apply to changes in the estimated percentage of customers not expected to exercise an upgrade right. See paragraph 985-605-25-45.) However, if it becomes probable that the amount allocated to an undelivered element will result in a loss on that element of the arrangement, the loss shall be recognized pursuant to Topic 450. When a vendor's pricing is based on multiple factors such as the number of products and the number of users, the amount allocated to the same element when sold separately shall consider all the factors of the vendor's pricing structure. 985-605-25-8 If a discount is offered in a multiple-element arrangement, a proportionate amount of that discount shall be applied to each element included in the arrangement based on each element's fair value without regard to the discount. However, as discussed in paragraph 985-605-25-45, no portion of the discount shall be allocated to any upgrade rights. Moreover, to the extent that a discount exists, the residual method described in paragraphs 985-605-25-10 through 25-11 attributes that discount entirely to the delivered elements. 985-605-25-9 Except as provided in the following paragraph, if sufficient vendor-specific objective evidence does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement shall be deferred until the earlier of the point at which: a. Such sufficient vendor-specific objective evidence does exist. b. All elements of the arrangement have been delivered. 985-605-25-10 The following are exceptions to the guidance in the preceding paragraph: a. If the only undelivered element is postcontract customer support, the entire fee shall be recognized ratably (see paragraphs 985-605-25-66 through 25-75). b. If the only undelivered element is services that do not involve significant production, modification, or customization of software (for example, training or installation), the entire fee shall be recognized over the period during which the services are expected to be performed (see paragraphs 985-605-25-76 through 25-85). c. If the arrangement is in substance a subscription, the entire fee shall be recognized ratably (see paragraphs 985-605-25-58 through 25-59). d. If the fee is based on the number of copies, the arrangement shall be accounted for in conformity with paragraphs 985-605-25-52 through 25-57. e. There may be instances in which there is vendor-specific objective evidence of the fair values of all undelivered elements in an arrangement but vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement. In such instances, if both of the conditions in the following paragraph are met, the fee shall be recognized using the residual method as follows: 1. The total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred. 2. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. f. If an arrangement includes deliverables that are within the scope of this Subtopic (software deliverables) and deliverables that are not within the scope of this Subtopic (nonsoftware deliverables), a vendor shall allocate arrangement consideration to the nonsoftware deliverables, and to the software deliverables as a group, in accordance with paragraph 605-25-15-3A. The nonsoftware deliverables may include software deliverables that are considered essential to the functionality of a tangible product. If the arrangement includes 3/21/2012 5:31 PM Financial Accounting Standards Board 12 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... more than one software deliverable, the portion of the arrangement consideration allocated to the software deliverables as a group in accordance with the guidance in paragraph 605-25-15-3A would be further subject to the separation and allocation guidance of this Subtopic. If a tangible product contains software that is not essential to the product's functionality, that nonessential software and any other deliverables within the arrangement (other than the nonsoftware components of the tangible product) that relate to that nonessential software are within the scope of this Subtopic. If an undelivered element relates to a deliverable within the scope of this Subtopic and a deliverable excluded from the scope of this Subtopic, the undelivered element shall be bifurcated into a software deliverable and a nonsoftware deliverable. The software deliverable is within the scope of this Subtopic and the nonsoftware deliverable is not within the scope of this Subtopic. 985-605-25-11 The residual method described in (e) in the preceding paragraph shall be applied only if both of the following conditions are met: a. All other applicable revenue recognition criteria in this Subtopic are met. b. The fair value of all of the undelivered elements is less than the arrangement fee. 985-605-25-12 The portion of the fee allocated to an element shall be recognized as revenue when the criteria in paragraph 985-605-25-3 are met with respect to the element. In applying those criteria, the delivery of an element is considered not to have occurred if there are undelivered elements that are essential to the functionality of the delivered element, because the customer would not have the full use of the delivered element. 985-605-25-13 No portion of the fee (including amounts otherwise allocated to delivered elements) meets the criterion of collectibility if the portion of the fee allocable to delivered elements is subject to forfeiture, refund, or other concession if any of the undelivered elements are not delivered. For the revenue related to an arrangement to be considered not subject to forfeiture, refund, or other concession, management must intend not to provide refunds or concessions that are not required under the provisions of the arrangement. All available evidence shall be considered to determine whether the evidence persuasively indicates that the revenue is not subject to forfeiture, refund, or other concession. Although no single item of evidence may be persuasive, all of the following additional items shall be considered: a. Acknowledgment in the arrangement of products not currently available or not to be delivered currently b. Separate prices stipulated in the arrangement for each deliverable element c. Default and damage provisions as defined in the arrangement d. Enforceable payment obligations and due dates for the delivered elements that are not dependent on the delivery of the future deliverable elements, coupled with the intent of the vendor to enforce rights of payment e. Installation and use of the delivered software f. Support services, such as telephone support, related to the delivered software being provided currently by the vendor. 985-605-25-14 Regardless of the guidance in the preceding paragraph, the vendor's historical pattern of making refunds or other concessions that were not required under the original provisions (contractual or other) of other arrangements shall be considered more persuasive than terms included in the arrangement that indicate that no concessions are required. > Persuasive Evidence of an Arrangement Exists 985-605-25-15 Practice varies with respect to the use of written contracts. Although a number of sectors of the industry rely upon signed contracts to document arrangements, other sectors of the industry that license software (notably the packaged software sector) do not. 985-605-25-16 If the vendor operates in a manner that does not rely on signed contracts to document the elements and obligations of an arrangement, the vendor should have other forms of evidence to document the transaction (for example, a purchase order from a third party or online authorization). If the vendor has a customary business practice of using written contracts, evidence of the arrangement is provided only by a contract signed by both parties. 3/21/2012 5:31 PM Financial Accounting Standards Board 13 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... 985-605-25-17 Even if all other requirements set forth in this Subtopic for the recognition of revenue are met (including delivery), revenue shall not be recognized on any element of the arrangement unless persuasive evidence of an arrangement exists. > Delivery Has Occurred 985-605-25-18 The second criterion in paragraph 985-605-25-3 for revenue recognition is delivery. The principle of not recognizing revenue before delivery applies whether the customer is a user or a reseller. Except for arrangements in which the fee is a function of the number of copies, delivery is considered to have occurred upon the transfer of the product master or, if the product master is not to be delivered, upon the transfer of the first copy. For software that is delivered electronically, the delivery criterion in that paragraph is considered to have been met when either of the following has occurred: a. The customer has taken possession of the software via a download (that is, when the customer takes possession of the electronic data on its hardware). b. The customer has been provided with access codes that allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software. 985-605-25-19 In cases of electronic delivery such as described in the preceding paragraph, revenue shall be recognized if the other criteria in paragraph 985-605-25-3 have been satisfied. 985-605-25-20 The following guidance addresses various considerations related to delivery, specifically: a. Customer acceptance (see paragraph 985-605-25-21) b. Multiple copies of software products versus multiple licenses (see paragraphs 985-605-25-22 through 25-24) c. Delivery other than to the customer (see paragraph 985-605-25-25) d. Delivery agents (see paragraph 985-605-25-26) e. Authorization codes (see paragraphs 985-605-25-27 through 25-29). >> Customer Acceptance 985-605-25-21 After delivery, if uncertainty exists about customer acceptance of the software, license revenue shall not be recognized until acceptance occurs. >> Multiple Copies of Software Products versus Multiple Licenses 985-605-25-22 Arrangements to use multiple copies of a software product under site licenses with users and to market multiple copies of a software product under similar arrangements with resellers shall be distinguished from arrangements to use or market multiple single licenses of the same software. 985-605-25-23 In a multiple copy arrangement, duplication is incidental to the arrangement and the delivery criterion is met upon the delivery of the first copy or product master. The vendor may be obligated to furnish up to a specified number of copies of the software, but only if the copies are requested by the user. The licensing fee is payable even if no additional copies are requested by the user or reseller. If the other criteria in this Subtopic for revenue recognition are met, revenue shall be recognized upon delivery of the first copy or product master. The estimated costs of duplication shall be accrued at that time. 985-605-25-24 In a multiple license arrangement, the licensing fee is a function of the number of copies delivered to, made by, or deployed by the user or reseller. Delivery occurs and revenue shall be recognized as the copies are made by the user or sold by the reseller if the other criteria in this Subtopic for revenue recognition are met. >> Delivery Other than to the Customer 985-605-25-25 Delivery shall not be considered complete unless the destination to which the software is shipped 3/21/2012 5:31 PM Financial Accounting Standards Board 14 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... is the customer's place of business or another site specified by the customer. In addition, if a customer specifies an intermediate site but a substantial portion of the fee is not payable until the delivery by the vendor to another site specified by the customer, revenue shall not be recognized until the delivery is made to that other site. >> Delivery Agents 985-605-25-26 Vendors may engage agents, often referred to as fulfillment houses, either to duplicate and deliver or only to deliver software products to customers. Revenue from transactions involving delivery agents shall be recognized when the software is delivered to the customer. Transferring the fulfillment obligation to an agent of the vendor does not relieve the vendor of the responsibility for delivery. This is the case even if the vendor has no direct involvement in the actual delivery of the software product to the customer. >> Authorization Codes 985-605-25-27 In a number of software arrangements, vendors use authorization codes, commonly referred to as keys, to permit customer access to software that otherwise would be restricted. Keys are used in a variety of ways and may serve different purposes. For example, permanent keys may be used to control access to the software, or additional permanent keys may be necessary for the duplication of the software. Temporary keys may be used for the same purposes and also may be used to enhance the vendor's ability to collect payment or to control the use of software for demonstration purposes. 985-605-25-28 In software arrangements involving the use of keys, delivery of a key is not necessarily required to satisfy the vendor's delivery responsibility. The software vendor shall recognize revenue on delivery of the software if all other requirements for revenue recognition under this Subtopic and all of the following conditions are met: a. The customer has licensed the software and the vendor has delivered a version of the software that is fully functional except for the permanent key or the additional keys (if additional keys are used to control the reproduction of the software). b. The customer's obligation to pay for the software and the terms of payment, including the timing of payment, are not contingent on delivery of the permanent key or additional keys (if additional keys are used to control the reproduction of the software). c. The vendor will enforce and does not have a history of failing to enforce its right to collect payment under the terms of the original arrangement. 985-605-25-29 In addition, if a temporary key is used to enhance the vendor's ability to collect payment, the delivery of additional keys, whether temporary or permanent, is not required to satisfy the vendor's delivery responsibility if both of the following conditions are met: a. The conditions in the preceding paragraph are met. b. The use of a temporary key in such circumstances is a customary practice of the vendor. Selective issuance of temporary keys may indicate that collectibility is not probable or that the software is being used only for demonstration purposes. > The Vendor's Fee Is Fixed or Determinable and Collectibility Is Probable 985-605-25-30 The other prerequisite in paragraph 985-605-25-3 for revenue recognition is that both of the following conditions be met: a. The vendor's fee is fixed or determinable. b. Collectibility is probable. 985-605-25-31 A software licensing fee is not fixed or determinable if the amount is based on the number of units distributed or copied, or the expected number of users of the product. Revenue recognition for variable-pricing arrangements is discussed in paragraphs 985-605-25-52 through 25-57. Additionally, if an arrangement includes rights of return or rights to refunds without return of the software, Subtopic 605-15 requires that conditions that 3/21/2012 5:31 PM Financial Accounting Standards Board 15 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... must be met in order for the vendor to recognize revenue include that the amount of future returns or refunds can be reasonably estimated. >> Factors that Affect the Determination of Whether a Fee Is Fixed or Determinable and Collectible 985-605-25-32 The following guidance addresses various considerations related to whether a fee is fixed or determinable and collectible, specifically: a. Extended payment terms (see paragraphs 985-605-25-33 through 25-35) b. Reseller arrangements (see paragraph 985-605-25-36) c. Customer cancellation privileges (see paragraph 985-605-25-37) d. Fiscal funding clauses (see paragraphs 985-605-25-38 through 25-40). >>> Extended Payment Terms 985-605-25-33 A number of arrangements that call for fixed or determinable payments, including minimum royalties or license fees from resellers, specify a payment period that is short in relation to the period during which the customer is expected to use or market the related products. Other arrangements have payment terms that extend over a substantial portion of the period during which the customer is expected to use or market the related products. Because a product's continuing value may be reduced due to the subsequent introduction of enhanced products by the vendor or its competitors, the possibility that the vendor still may provide a refund or concession to a creditworthy customer to liquidate outstanding amounts due under the original terms of the arrangement increases as payment terms become longer. 985-605-25-34 For the reason cited in the preceding paragraph, any extended payment terms in a software licensing arrangement may indicate that the fee is not fixed or determinable. Further, if payment of a significant portion of the software licensing fee is not due until after expiration of the license or more than 12 months after delivery, the licensing fee shall be presumed not to be fixed or determinable. However, this presumption may be overcome by evidence that the vendor has a standard business practice of using long-term or installment contracts and a history of successfully collecting under the original payment terms without making concessions. In such a situation, a vendor shall consider such fees fixed or determinable and shall recognize revenue upon delivery of the software, provided all other conditions for revenue recognition in this Subtopic have been satisfied. 985-605-25-35 If it cannot be concluded that a fee is fixed or determinable at the outset of an arrangement, revenue shall be recognized as payments from customers become due (assuming all other conditions for revenue recognition in this Subtopic have been satisfied). >>> Reseller Arrangements 985-605-25-36 For reseller arrangements, if any of the following factors or conditions exist, they also shall be considered in evaluating whether the fixed or determinable fee and collectibility criteria for revenue recognition are met: a. Business practices, the reseller's operating history, competitive pressures, informal communications, or other factors indicate that payment is substantially contingent on the reseller's success in distributing individual units of the product. Contractual arrangements under which the reseller is obligated to pay only as and if sales are made to users shall be accounted for as consignments. b. Resellers are new, undercapitalized, or in financial difficulty and may not demonstrate an ability to honor a commitment to make fixed or determinable payments until they collect cash from their customers. c. Uncertainties about the potential number of copies to be sold by the reseller may indicate that the amount of future returns cannot be reasonably estimated on delivery. Examples of such factors include the newness of the product or marketing channel, competitive products, or dependence on the market potential of another product offered (or anticipated to be offered) by the reseller. d. Distribution arrangements with resellers require the vendor to rebate or credit a portion of the original fee if the vendor subsequently reduces its price for a product and the reseller still has rights with respect to that product (sometimes referred to as price protection). If a vendor is unable to reasonably estimate future price 3/21/2012 5:31 PM Financial Accounting Standards Board 16 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... changes in light of competitive conditions, or if significant uncertainties exist about the vendor's ability to maintain its price, the arrangement fee is not fixed or determinable. In such circumstances, revenue from the arrangement shall be deferred until the vendor is able to reasonably estimate the effects of future price changes and the other conditions in this Subtopic have been satisfied. >>> Customer Cancellation Privileges 985-605-25-37 Fees from licenses cancelable by customers are neither fixed nor determinable until the cancellation privileges lapse. Fees from licenses with cancellation privileges expiring ratably over the license period are considered to become determinable ratably over the license period as the cancellation privileges lapse. In applying the provisions of this paragraph, obligations related to warranties for defective software, including warranties that are routine, short-term, and relatively minor, shall be accounted for in conformity with Topic 450. Additionally, short-term rights of return, such as 30-day money-back guarantees, shall not be considered cancellation privileges; the related returns shall be accounted for in conformity with that Topic. >>> Fiscal Funding Clauses 985-605-25-38 Fiscal funding clauses sometimes are found in software license arrangements in which the licensees are governmental units. Such clauses generally provide that the license is cancelable if the legislature or funding authority does not appropriate the funds necessary for the governmental unit to fulfill its obligations under the licensing arrangement. 985-605-25-39 Consistent with paragraph 840-10-25-3, a software licensing arrangement with a governmental unit containing a fiscal funding clause shall be evaluated to determine whether the uncertainty of a possible license arrangement cancellation is a remote contingency. The evaluation of whether the level of uncertainty of possible cancellation is remote shall be consistent with Topic 450, which defines remote as relating to conditions in which the chance of the future event or events occurring is slight. 985-605-25-40 If the likelihood is assessed as remote, the software licensing arrangement shall be considered noncancelable. Such an assessment shall include the factors discussed in paragraphs 985-605-25-33 through 25-34. If the likelihood is assessed as other than remote, the license shall be considered cancelable, thus precluding revenue recognition. A fiscal funding clause with a customer other than a governmental unit that is required to include such a clause creates a contingency that precludes revenue recognition until the requirements of the clause and all other provisions of this Subtopic have been satisfied. > Multiple-Element Arrangements 985-605-25-41 As discussed in paragraph 985-605-25-5, multiple-element arrangements to which contract accounting does not apply may include customer rights to any combination of additional software deliverables, services, or postcontract customer support. If contract accounting does not apply, individual elements in such arrangements shall be accounted for in accordance with paragraphs 985-605-25-3 through 25-14. 985-605-25-42 The following guidance addresses various considerations related to multiple-element arrangements, specifically: a. Additional software deliverables and rights to exchange or return software (see paragraphs 985-605-25-43 through 25-65), including: 1. Upgrades or enhancements (see paragraphs 985-605-25-44 through 25-46) 2. Additional software products (see paragraphs 985-605-25-47 through 25-59) 3. Rights to exchange or return software (see paragraphs 985-605-25-60 through 25-65). b. Postcontract customer support (see paragraphs 985-605-25-66 through 25-75), including: 1. Postdelivery telephone support at no additional charge (see paragraph 985-605-25-74) 2. Postcontract customer support granted to resellers (see paragraph 985-605-25-75). c. Services (see paragraphs 985-605-25-76 through 25-87), including: 3/21/2012 5:31 PM Financial Accounting Standards Board 17 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... 1. Funded software-development arrangements (see paragraphs 985-605-25-86 through 25-87). >> Additional Software Deliverables and Rights to Exchange or Return Software 985-605-25-43 As part of a multiple-element arrangement, a vendor may agree to deliver software currently and to deliver additional software in the future. The additional deliverables may include upgrades, enhancements, or additional software products. Additionally, a vendor may provide the customer with the right to exchange or return software, including the right to transfer software from one hardware platform or operating system to one or more other platforms or operating systems (a platform-transfer right). >>> Upgrades or Enhancements 985-605-25-44 As part of a multiple-element arrangement, a vendor may agree to deliver software currently and provide the customer with an upgrade right for a specified upgrade or enhancement. The upgrade right may be evidenced by a specific agreement, commitment, or the vendor's established practice. (Rights to receive unspecified upgrades or enhancements on a when-and-if-available basis are postcontract customer support.) The upgrade right shall be accounted for as a separate element in accordance with paragraphs 985-605-25-3 through 25-14. Guidance on the application of those paragraphs to multiple-element software arrangements that include upgrade rights is in paragraphs 985-605-25-45 through 25-46. 985-605-25-45 If a multiple-element arrangement includes an upgrade right, the fee shall be allocated between the elements based on vendor-specific objective evidence of fair value. The fee allocated to the upgrade right is the price for the upgrade or enhancement that would be charged to existing users of the software product being updated. If the upgrade right is included in a multiple-element arrangement on which a discount has been offered (see paragraph 985-605-25-8), no portion of the discount shall be allocated to the upgrade right. If sufficient vendor-specific evidence exists to reasonably estimate the percentage of customers that are not expected to exercise the upgrade right, the fee allocated to the upgrade right shall be reduced to reflect that percentage. This estimated percentage shall be reviewed periodically. The effect of any change in that percentage shall be accounted for as a change in accounting estimate. 985-605-25-46 The amount of the fee allocated to the upgrade right shall be recognized as revenue when the conditions in paragraphs 985-605-25-3 through 25-14 are met. If sufficient vendor-specific objective evidence does not exist for the allocation of the fee to the upgrade right, revenue from the arrangement shall be deferred until the earlier of either: a. The point at which such sufficient vendor-specific objective evidence does exist. b. The point at which all elements of the arrangement have been delivered. >>> Additional Software Products 985-605-25-47 As part of a multiple-element arrangement, a vendor may agree to deliver software currently and deliver specified additional software products in the future. The rights to these additional products may be included either in the terms of a postcontract customer support arrangement or in a separate agreement. Even if the rights to the additional software products are included in a postcontract customer support arrangement, the revenue allocable to the additional software products shall be accounted for separately from the postcontract customer support arrangement as an element of a multiple-element arrangement. 985-605-25-48 Multiple-element arrangements that include rights to undelivered additional software products that are not subscriptions (see paragraphs 985-605-25-58 through 25-59) shall be accounted for in accordance with paragraphs 985-605-25-3 through 25-14. Guidance on the application of those paragraphs to such arrangements is provided in paragraphs 985-605-25-49 through 25-57. 985-605-25-49 The fee from the arrangement shall be allocated among the products based on vendor-specific objective evidence of fair value. The allocation shall be based on the relative sales prices of the products, determined pursuant to paragraphs 985-605-25-6 through 25-8. If vendor-specific objective evidence of fair value does not exist, paragraph 985-605-25-9 requires that all revenue from the arrangement be deferred until the earlier of either: a. The point at which such sufficient vendor-specific objective evidence does exist. b. The point at which all elements of the arrangement have been delivered. 3/21/2012 5:31 PM Financial Accounting Standards Board 18 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... 985-605-25-50 The fee allocated to the additional software products shall not be reduced by the percentage of any customers that are not expected to exercise the right to receive additional software products. 985-605-25-51 If the arrangement is based on a price per product (not a price per copy), the portion of the fee allocated to a product shall be recognized as revenue when the product is delivered, assuming all other provisions of paragraph 985-605-25-3 through 25-14 are met. 985-605-25-52 Some fixed fee l icense or reseller arrangements provide customers with the right to reproduce or obtain copies at a specified price per copy (rather than per product) of two or more software products up to the total amount of the fixed fee. A number of the products covered by the arrangement may not be deliverable or specified at the inception of the arrangement. Although the price per copy is fixed at the inception of the arrangement, an allocation of the arrangement fee to the individual products generally cannot be made, because the total revenue allocable to each software product is unknown and depends on the choices to be made by the customer and, sometimes, future development activity while the arrangement is in effect. Nevertheless, as discussed in paragraph 985-605-25-56, in certain situations, revenue can be allocated to the products that are undeliverable or not specified at the inception of the arrangement. 985-605-25-53 In arrangements in which no allocation can be made, until the first copy or product master of each product covered by the arrangement has been delivered to the customer assuming the provisions of paragraphs 985-605-25-3 through 25-14 are met, revenue shall be recognized as copies of delivered products either: a. Are reproduced by the customer. b. Are furnished to the customer if the vendor is duplicating the software. 985-605-25-54 Once the vendor has delivered the product master or the first copy of all products covered by the arrangement, any licensing fees not previously recognized shall be recognized. (At that point, only duplication of the software is required to satisfy the vendor's delivery requirement. As discussed in paragraphs 985-605-25-22 through 25-24, duplication of the software is incidental to the arrangement, and delivery is deemed to have occurred upon delivery of the product master or first copy.) When the arrangement terminates, the vendor shall recognize any licensing fees not previously recognized. 985-605-25-55 The revenue from the kind of arrangements discussed in the preceding two paragraphs shall not be recognized fully until either of the following conditions is met: a. Delivery is complete for all products covered by the arrangement. b. The aggregate revenue attributable to all copies of the software products delivered is equal to the fixed fee, provided that the vendor is not obligated to deliver additional software products under the arrangement. 985-605-25-56 Nevertheless, certain arrangements that include products that are not deliverable at the inception impose a maximum number of copies of the undeliverable product(s) to which the customer is entitled. In such arrangements, a portion of the arrangement fee shall be allocated to the undeliverable product(s). This allocation shall be made assuming that the customer will elect to receive the maximum number of copies of the undeliverable product(s). 985-605-25-57 The revenue allocated to the delivered products shall be recognized when the product master or first copy is delivered. If, during the term of the arrangement, the customer reproduces or receives enough copies of these delivered products so that revenue allocable to the delivered products exceeds the revenue previously recognized, such additional revenue shall be recognized as the copies are reproduced or delivered. The revenue allocated to the undeliverable product(s) shall be reduced by a corresponding amount. 985-605-25-58 As part of a multiple-element arrangement with a user, a vendor may agree to deliver software currently and to deliver unspecified additional software products in the future (including unspecified platform transfer rights that do not qualify for exchange accounting as described in paragraphs 985-605-25-60 through 25-65). For example, the vendor may agree to deliver all new products to be introduced in a family of products over the next two years. These arrangements are similar to arrangements that include postcontract customer support in that future deliverables are unspecified. Nevertheless, they are distinguished from arrangements that include postcontract customer support because the future deliverables are products, not unspecified upgrades or enhancements. 3/21/2012 5:31 PM Financial Accounting Standards Board 19 of 62 https://asc.fasb.org/print&rendercmd=subtopic&trid=2197878&nav_type... 985-605-25-59 The software elements of the kinds of arrangements discussed in paragraph 985-605-25-58 shall be accounted for as subscriptions. No allocation of revenue shall be made among any of the software products, and all software product-related revenue from the arrangement shall be recognized ratably over the term of the arrangement beginning with delivery of the first product. If the term of the arrangement is not stated, the revenue shall be recognized ratably over the estimated economic life of the products covered by the arrangement, beginning with delivery of the first product. An intent on the part of the vendor not to develop new products during the term of the arrangement does not relieve the vendor of the requirement to recognize revenue ratably over the term of the arrangement, beginning with the delivery of the first product. >>> Rights to Exchange or Return Software 985-605-25-60 As part of an arrangement, a software vendor may provide the customer with the right to return software or to exchange software for products with no more than minimal differences in price, functionality, or features. The accounting for returns is significantly different from the accounting for exchanges. Although it is sometimes difficult to determine whether a transaction is a return or exchange of software, the fact that the software is not returned physically does not preclude accounting for the transaction as either an exchange or as a return. If the software is not returned physically and the customer contractually is entitled to continue to use the previously delivered software, the arrangement shall be accounted for in the manner prescribed in paragraphs 985-605-25-47 through 25-59. If the software is not returned physically and the customer contractually is not entitl