Agency Discovers Revenue Standard to Significantly Impact Software Companies

November 17, 2017

Moody’s Investor Service says the Financial Accounting Standards Board’s (“FASB”) long-awaited revenue recognition standard will have a significant impact on the software industry. In a report issued on November 14, the credit rating agency found that the FASB’s standard will allow for faster recognition of revenue for numerous software companies. The result, according to Moody’s Vice President and Senior Accounting Analyst David Gonzales, is a drastic shift in revenue.

Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606), introduces a streamlined method wherein most companies must disclose the top line in their financial statements. This method replaces several industry-specific requirements concerning revenue, such as the vendor specific objective evidence (“VSOE”) requirement.

Directly affecting the software industry, the VSOE requirement called for software companies to postpone recognizing revenue until it is evident that the contract has been met. Per ASU No. 2014-09, however, software suppliers must estimate the relative selling value of contract components and disclose them when the customer controls the components. Moody’s believes this will likely result in multi-year software and service packages having front-loaded revenue recognition.

Sixteen software companies were analyzed as part of Moody’s report. Ten of those companies said the new standard will speed up how revenue from licenses is recognized, which will cause revenues to be recorded at the date the software is delivered to the customer instead of during the span of the contract. Two companies are still reviewing how the standard would impact their accounting. Their fiscal years end on September 30, however, and will not report financial results reflecting the new accounting guidance until October 2018.