Software Industry Accounting

Software Industry Accounting......Page 0
Contents......Page 16
Acknowledgments......Page 28
Preface......Page 30
About the CD-Rom......Page 32
1.1 A General Industry Perspective......Page 34
b) Early Computers and Software Technology......Page 35
d) Splitting Off of the Software Industry......Page 36
a) Growing Importance of the Software Industry......Page 37
b) Economic Impact of the Software Industry......Page 38
c) Role of the Internet......Page 39
d) Intranets: Ease of the Internet Brought In-House......Page 40
1.4 Key Terms Used in the Software Industry......Page 41
b) Six Phases of the Software Development Process......Page 42
c) Channels of Distribution for Software Licenses......Page 48
e) Providing Software in Projects that Combine Software with Hardware or Services or Both......Page 50
h) Providing Services Using Software......Page 51
Appendix 1-A Software Industry Glossary of Terms......Page 52
b) FASB Statement No. 2......Page 84
c) ADAPSO Exposure Draft......Page 85
a) Acceleration of Addressing the Capitalization Issue......Page 86
c) Issues Paper on Capitalization of Software Development Costs......Page 87
e) Response to the FASB Exposure Draft......Page 88
g) Retrospective......Page 89
a) Issues Paper on Software Revenue Recognition......Page 90
b) FASB Reaction to the Issues Paper......Page 91
c) Preparation of Statement of Position No. 91-1......Page 92
d) FASB Review of the Draft Proposed SOP......Page 93
e) Exposure Draft of the Software Revenue SOP......Page 94
f) Issuance of SOP 91-1 and Effective Date......Page 95
b) Industry Changes......Page 96
2.5 Issues Addressed......Page 97
a) Delivery Issues......Page 98
b) Contract Accounting Issues......Page 105
c) Service Transactions Issues......Page 109
d) Postcontract Customer Support Issues......Page 111
2.6 Conclusion......Page 114
3.1 Organization of the Securities and Exchange Commission......Page 116
a) Historical Perspective......Page 118
b) SEC Views on Implementation of FASB Statement No. 86......Page 119
a) SEC Staff Accounting Bulletin No. 101 (“SAB 101”):
 Revenue Recognition in Financial Statements......Page 120
b) SEC Views on Certain Revenue Matters......Page 122
a) Business Combinations......Page 130
c) Management’s Discussion and Analysis......Page 133
d) Quarterly Adjustments......Page 134
e) Initial Public Offerings......Page 135
f) Foreign Marketing Entities......Page 137
a) Comment Letters......Page 138
b) Enforcement Actions......Page 139
3.6 Conclusion......Page 141
Appendix 3-A SEC Accounting and Auditing Enforcement Release
 No. 271......Page 144
Appendix 3-B SEC Accounting and Auditing Enforcement Release No. 351......Page 146
Appendix 3-C SEC Accounting and Auditing Enforcement Release
 No. 494......Page 148
Appendix 3-D SEC Accounting and Auditing Enforcement Release No. 495......Page 150
Appendix 3-E SEC Accounting and Auditing Enforcement Release No. 730......Page 152
a) General......Page 164
b) History of the Development of Current Revenue Recogntion Rules for the Software Industry......Page 165
a) General......Page 166
c) Nonapplicability Where Software Is Incidental......Page 167
b) Persuasive Evidence of an Arrangement......Page 168
c) Delivery......Page 169
d) Fixed or Determinable Fees and Collectibility......Page 173
e) Cancellation Privileges......Page 184
g) Forfeiture or Refund Clauses......Page 186
h) Customer Acceptance Clauses......Page 188
a) General......Page 189
c) Revenue Recognition for Multiple-Element Arrangements......Page 190
d) Vendor Specific Objective Evidence of Fair Value......Page 191
e) Upgrades......Page 195
f) Additional Products......Page 199
a) General......Page 204
c) Determining VSOE for PCS Arrangements......Page 206
d) Explicit and Implied PCS Arrangements......Page 207
f) PCS Revenue Recognizable with Initial License Fee......Page 209
g) PCS Provided During Warranty Period at No Additional Charge......Page 210
i) PCS Bundled with Contract Accounting Arrangement......Page 211
j) PCS Bundled with Term Licenses......Page 212
b) Determining Whether a Discount is Significant......Page 214
c) Multiple-Element Arrangements with VSOE Known for All Elements......Page 215
e) Multiple-Element Arrangements Involving an Upgrade Right......Page 216
f) Discounts on Future Products......Page 217
h) Discounts in PCS Arrangements......Page 219
a) General......Page 222
b) Returns......Page 224
c) Exchange and Platform-Transfer Rights......Page 229
4.8 Software Licensed to Resellers......Page 234
a) General......Page 233
d) Fixed or Determinable Fees and Collectibility......Page 235
e) Rights of Return or Exchange and Price Protection......Page 239
f) Implied PCS Arrangements......Page 241
4.9 Funded Development Arrangements......Page 244
a) General......Page 246
b) Determining if Services Can Be Accounted for Separately......Page 247
c) Impact of PCS and Other Services......Page 249
d) Accounting for Installation Services......Page 250
a) Marketing and Promotional......Page 251
b) Barter Transactions......Page 252
Appendix 4-A Comparison of Old and New GAAP......Page 256
a) Percentage-of-completion Method and the Completed-Contract
 Method......Page 262
b) Circumstances in Which to Use the Percentage-of-Completion
 Method......Page 263
b) Segmentation......Page 264
c) Single-Cost-Center Contracts......Page 268
e) Cost-to-Cost Measures of Progress-to-Completion......Page 270
f) Input Hours-to-Hours Measures of Progress-to-Completion......Page 271
g) Output Value-Added Measures......Page 273
i) Separately Enforceable Obligation for Software Accounted for Using Value-Added Output Measures and Other Implementation Qu......Page 279
j) Income Determination: Revenue Elements......Page 280
5.3 Precontract Costs......Page 282
b) Software Products......Page 284
c) Computer Software Research and Development Costs......Page 286
e) Determination of Technological Feasibility If a Detail Program Design Is Used......Page 287
f) Technological Feasibility If a Detail Program Design Is Not
 Prepared......Page 289
h) Determination of Market Feasibility......Page 290
i) Aggregating the Direct Labor Component......Page 291
k) Other Direct Costs......Page 292
n) Availability for General Market Release-Cessation of
 Capitalization......Page 295
o) Enhancements......Page 296
p) Capitalization of Funded Development Costs......Page 297
b) Straight-Line Amortization......Page 298
e) Amortization of Enhanced Products......Page 299
a) Net Realizable Value Testing in General......Page 301
c) Estimating Costs of Disposal and Costs to Complete......Page 302
d) Effects of Assuming Enhancement and Not Assuming Enhancements in Revenue and Cost Projections......Page 303
g) Net Realizable Value Writedown Establishing New Cost Basis......Page 304
b) Discount Rates......Page 309
c) Allocation of Acquisition Cost to Incomplete Research and Development......Page 310
6.5 Cost of Software Developed or Obtained for Internal Use......Page 312
Appendix 6-A Questionnaire for Compiling Information to Support Capitalization of Software Development Costs......Page 322
Appendix 6-B Software Release Request......Page 328
Appendix 6-C Statement of Financial Accounting Standards, No. 86, Accounting for the Costs of Computer Software to Be Sold, L......Page 330
Appendix 6-D Q&As on FASB Statement No. 86......Page 338
7.1 General Considerations: Characteristics of the Industry......Page 346
b) Assessing Significance of Capitalized Software Development Costs......Page 347
d) Auditing Determination of Technological Feasibility......Page 348
f) Auditing Accumulation of Capitalized Hours, Direct Costs, and Overhead Rates......Page 349
h) Representation Letter......Page 350
a) Unique Aspects of Auditing Software Revenue......Page 351
c) Auditing Contract Accounting Revenues and Costs......Page 352
a) Industry and Company Characteristics......Page 353
b) Going Concern Audit Procedures......Page 354
7.7 Conclusion: A Challenging Industry for Auditors......Page 356
Appendix 7-A Audit Program for Audits of Software Companies......Page 358
Appendix 7-B Checklist for Documentation of Technological Feasibility......Page 364
Appendix 7-C High-Technology Industry Developments—
 2000/01......Page 370
Appendix 7-D Audit Issues in Revenue Recognition......Page 416
a) Research and Development Arrangements in Which Funds Are Provided by Others......Page 464
a) FASB Statement No. 68......Page 465
a) Explicit Contractual Liability to Repay......Page 466
b) Substantive Liability to Repay......Page 467
8.4 Accounting If There Is a Liability to Repay......Page 468
8.5 Accounting If There Is No Liability to Repay......Page 470
8.6 Liability to Repay a Portion of Funds Provided......Page 471
b) If There Is an Obligation to Repay......Page 472
c) If There Is No Obligation to Repay......Page 473
a) If There Is an Obligation to Repay......Page 474
b) If There Is an Obligation to Repay But No Repayment Is Made......Page 475
a) Assumptions......Page 476
c) Accounting by ABC Software Company......Page 477
Appendix 8-A Statement of Financial Accounting Standards No. 68......Page 482
Appendix 8-B SEC Staff Accounting Bulletin No. 63......Page 488
a) Computation of Taxable Income......Page 490
9.1 Introduction......Page 24
b) Brief Overview of Methods of Accounting......Page 491
c) Revenue Recognition: In General......Page 492
e) Postcontract Customer Support......Page 493
f) Characterization of Revenue from Software Transactions......Page 496
a) In General......Page 498
b) Software-Specific Rules......Page 499
c) Limitations on Revenue Procedure 69-21......Page 500
d) Capitalization of Software Development Costs......Page 501
e) IRS Attempts to Define Deductible Software Development Costs......Page 502
g) Research Credit......Page 506
a) Acquisitions of Less than All Substantial Rights......Page 509
b) Acquisitions Involving All Substantial Rights......Page 510
a) Introduction......Page 511
b) Foreign Withholding Taxes......Page 512
c) Foreign Sales Corporations......Page 513
d) Establishing a Presence Overseas......Page 514
e) U.S. Tax Considerations of the Foreign Operation......Page 515
9.6 Conclusion......Page 516
a) Nature of a Copyright......Page 518
c) Material that Can Be Copyrighted......Page 519
e) Obtaining a Copyright......Page 520
h) Copyright Notice......Page 521
a) General......Page 522
d) Geographic Scope of Exclusive Rights......Page 523
e) Appropriate Items for Trademarks in the United States......Page 524
g) Ownership......Page 525
i) Trademarks that Cannot Be Federally Registered......Page 526
j) Requirements of Filing for Federal Registration......Page 527
n) Registered Trademarks......Page 528
r) Trademark Infringement......Page 529
u) Guidelines for Usage of a Trademark......Page 530
c) Inventions that Can Be Patented......Page 531
e) Ownership of a Patent......Page 532
i) Patent Protection in Foreign Countries......Page 533
c) Eligibility for Trade Secret Protection......Page 534
e) Obtaining Trade Secret Protection......Page 535
i) Trade Secret Violations......Page 536
b) Software Development Agreements......Page 537
c) License Agreements......Page 538
e) Maintenance Agreements......Page 539
f) Software Escrow Agreements......Page 540
c) Infringement......Page 541
b) Copyright Exception......Page 542
d) Semiconductor Chip Exception......Page 543
e) Contractual Exception......Page 544
Appendix 10-A Illustrative Software License Agreement......Page 546
Appendix 10-B Illustrative Shrink-Wrap Software License Agreement......Page 554
Appendix 10-C Illustrative Software Escrow Agreement......Page 558
Appendix 10-D Illustrative Software Maintenance Agreement......Page 564
Appendix 10-E Illustrative Software Development Agreement......Page 570
a) Early History......Page 580
b) Activities of Industry Associations......Page 581
11.2 Software Industry Associations in General......Page 582
c) Special Characteristics......Page 583
d) Information about BSA......Page 584
b) Organizational Structure......Page 585
d) Information about ITAA......Page 586
c) Special Characteristics......Page 588
d) Information about the Software Committee of AEA......Page 589
b) Organizational Structure......Page 590
d) Information about SPA......Page 591
a) Start of Regionals......Page 592
b) Notes on Selected Regionals......Page 593
b) Formation of the World Information Technology and Services Alliance (WITSA) and Current Activities......Page 594
Appendix 11-A National Software Industry Associations......Page 596
Appendix 11-B Regional Software Industry Associations......Page 602
Appendix 11-C Members of World Information Technology and Services Alliance (WITSA)......Page 608
Index......Page 614