Structuring Software Sales Transactions for Optimal Revenue Recognition
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Confidential
Structuring Software Sales Transactions for Optimal Revenue Recognition
Jeffrey Werner, Werner Consulting Group
April 22, 2014
© 2014 Tensoft All Rights Reserved. 1
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Confidential
Welcome to Today’s Event
Caprice Murray, Tensoft
© 2014 Tensoft All Rights Reserved. 2
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3Confidential
• Submit questions any time using the “Question and Answer” pane.
• CPE certificates will be emailed to everyone who is eligible by end of business on Friday 4/25.
• Submit questions after the webcast to Jeffrey Werner, [email protected], or to Caprice Murray, [email protected].
Webcast
Briefing
© 2014 Tensoft All Rights Reserved.
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4Confidential
Tensoft, Inc.
●Business software solutions provider
●Focus on technology companies
●Software for revenue management (RCM)
Tensoft RCM Product Line
●Complete revenue management suite
●Billing management for contracts
●Business model transaction flow support
●Visibility, Productivity, Compliance
About Tensoft
© 2014 Tensoft All Rights Reserved.
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Confidential
Tensoft RCM Revenue Management
Sales Transaction
• Generated based on Go-To-Market Model
Revenue Agreement
• Workflow / policy for document type
• Revenue fair value allocation
• Revenue Rules
Revenue Recognition and Analysis Processes
Sponsored by Tensoft, Inc. www.tensoft.com
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Confidential
Tensoft RDM Process Flow
© 2014 Tensoft All Rights Reserved.
RevenueRevenueRevenueRevenueEngineEngineEngineEngine
Reporting and Analytics
Revenue Rules
DeterminedValuation
SalesTransaction
DocumentFlow
RevenueSub-Ledger
RCM Contract
ERP Document
Website or CRM
To ERP
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Confidential
Today’s Presenter:Jeffrey Werner, Werner Consulting Group
© 2014 Tensoft All Rights Reserved. 7
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Introduction to Werner Consulting Group
Jeffrey Werner
Werner Consulting Group
Revenue Recognition Consulting
Since 2001
Background
• Senior Manager KPMG 1987 - 1998
• VP Finance TelePost 1998 - 2000
• CFO Antrim Design 2000 - 2001
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Introduction to Werner Consulting Group
Revenue Recognition Services Include: • Pre-Contract Negotiations and Deal Structuring
• Post-Contract Review, Analysis and Accounting
• Best Practices Implementation• VSOE Studies and Analysis
• Customized Training Classes
• Revenue Recognition Technical Research and Whitepapers• Revenue Recognition Policy Implementation and Improvement
• Peak Demand Contract Review
• Revenue Management Outsourcing• Audit Assistance
• Revenue Management Software Implementation
• New Revenue Standard Impact Analysis and Training
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Revenue Recognition Class
Revenue Recognition for Technology
Companies Webcast
Tuesday May 13 Part One
9 am – 12:30 pm PDT
Thursday May 15 Part Two
9 am – 12:30 pm PDT
CPE Credit
Pay per attendance
Registration and details soon
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Revenue Recognition Class
Revenue Recognition
Agenda Day One
• General Principles of Revenue Recognition
• Multiple Element Arrangements
• VSOE
• Software Revenue Recognition
• Services and Contract Accounting
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Revenue Recognition Class
Revenue Recognition
Agenda Day Two
• Review - General Principles
• Services Contract Accounting
• Relative Selling Price Method (EITF 08-1)
• Cloud Computing (SaaS)
• FASB IASB Revenue Project
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Software Sales Outline
• Introduction
• Optimal Revenue Recognition
• Business Model and Desired Outcomes
• Software Revenue Recognition Residual Method
• Importance of VSOE
• Significant Contract Terms
• Troublesome Terms and Issues
• Services and Software
• Software in Combination with Other Elements
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What is Optimal Revenue Recognition?
Different Objectives and Business Models
• Maximum upfront Revenue Recognition
• Ratable Revenue Recognition
• Flexibility
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Best Practices
Best Business Practices
• Knowledgeable Revenue and Sales Teams
• Standard Contracts
• Revenue Deal Desk for Pre-Deal Review
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Software Business Models
• Perpetual Licenses with Support and Services
• Term Licenses
• Subscriptions
• Cloud Software – SaaS -Software as a Service
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What To Do / What to Avoid
First Step
• Determine if the transaction or business model is
under software revenue recognition or services
(SaaS and Cloud)
• Software – license and deliver software
– Residual Method of Revenue Recognition
• SaaS / Cloud – provide access to the software as a
service
– Relative Selling Price Method
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What To Do / What to Avoid
What To Do
• Clear Understandable Contract Terms
• Clear Pricing
• Consistent Pricing for VSOE
• Establish and Maintain VSOE
• Price Support as % of Net License Fee
• Understand Revenue Recognition
• Deal Review before Signing
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What To Do / What to Avoid
What To Avoid
• UnClear Contract Terms
• UnClear Pricing
• Variable Pricing
• Lack of VSOE
• Price Support as % of List
• Future Obligations without VSOE
• Troublesome Terms and Issues
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General Principles of Revenue Recognition
All Four Principles must be met to recognize revenue
• Persuasive Evidence of an arrangement exists
• Delivery or Performance has occurred
• The fee is fixed and determinable
• Collectability is probable
• Easy to Remember – C D E F
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Residual Method
Residual Method
– Defer the full value of undelivered elements using Vendor Specific Objective Evidence (VSOE)
– Allocate the remaining value or residual to the delivered elements
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Residual Method
Residual Method
– Applies all discount to delivered elements• Generally backloads revenue
– Without VSOE • Revenue recognition is ratable
or
• Revenue Deferred until elements without VSOE are delivered
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Importance of VSOE
Vendor Specific Objective Evidence
VSOE is the value of an element when sold separately
The contract value may not be VSOE
VSOE Established by Analysis of Historical Stand Alone Transactions
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Importance of VSOE
VSOE is critical in multiple element arrangements
Lack of VSOE results in deferral of revenue until the last element is delivered or ratable recognition over a period of time
Discounts applied to delivered elements
Undelivered elements deferred at full VSOE
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Importance of VSOE
– A software license sold with maintenance is
considered two elements and therefore not sold separately
– Few software companies are able to
demonstrate enough consistent software
transactions sold separately to have VSOE for
software
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Importance of VSOE
VSOE - the value of an element sold separately
– Services are often times sold independently of
a product or software license – allowing us to
determine our ‘fair value’ of those services.
– Maintenance/Support VSOE can be
established by a stated renewal rate in the
contract as long as it is substantive and
generally consistent with overall maintenance pricing
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Contract Terms
Importance of Clear and Comprehensive Contracts
All Terms Defined and Considered
Don’t’ leave out Anything Necessary to do the Accounting or enhance revenue
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Contract Terms
General License Terms - basics– Contract Date / Effective Date
– Signature date
– Pricing of Elements
– Payment Terms
– Intellectual Property
– Indemnification
– Page #s
– Definitions
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Contract Terms
License Contract Terms– Name and nature of software
– License Fees
– Delivery Method and Terms
– Contract Date / Effective Date
– Future discounts and pricing
– Future Obligations
– Clear Pricing and Calculation of Fees
– Discounts – specific items vs invoice
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Contract Terms
Support Contract Terms– Support Fees
– Support Terms
– Support Start and End Dates
– Support Levels – 24 x 7, 5 x 8, Worldwide
– Support Renewal Process
– Support Pricing – % of Net License Fee
– Discounts – specific items vs invoice
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Troublesome Terms and Issues
– Elements without VSOE
– Undelivered Elements
– Specified Deliverables
– Unclear Terms / Conflicting Terms
– Variable pricing
– Rebates and Credits
– “Free” items
– Concessions
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Troublesome Terms and Issues
– Lapsed Support
– Service Levels and Other Penalties
– Acceptance
– Future Obligations
– Linked Contracts
– Sunset Provisions
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Linked Contracts
• Linked Contracts - Multiple transactions with a Customer in a short time period
– Can be considered one contract for accounting
– An element without VSOE in one contract can effect other contracts with same customer
– All related contracts must be complete and signed for any revenue to be recognized
– Services SOW referenced or negotiated or being negotiated within the similar timeframe as the license could be considered a related contract
– All related contracts must be executed for any to be valid
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Linked Contracts
• The negotiations are conducted jointly for a single project.
• The separate contracts require delivery of the same product(s) or service(s)
• The separate contracts relate to the delivery of the same product(s) or service(s) to multiple customer locations
• The contracts were negotiated in contemplation of one another
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Linked Contracts
• The contracts are negotiated or executed within a short time frame
• The elements are closely interrelated or interdependent
• The fee for one or more contracts or agreements is related to another
• One or more elements are essential to the functionality of another contract
• Payment terms under one contract coincide with performance criteria of another
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Services And Software
Service Contract Issues
• Time and Materials
• Fixed Fees
• Statements of Work (SOWs)
• Essential to Functionality
• Funded Research & Development
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Multiple Element Arrangements
Multiple Element Arrangements (MEA) - more than one element in a single transaction
– Software
– Tangible Product
– Support and Maintenance
– Installation
– Services Training and Consulting
– Future discounts and pricing
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Software and Other Elements
• With only Software Related Elements
• With Tangible Elements
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Software and Other Elements
With only Software Related Elements
• Apply Residual Method
• VSOE
• Carve-outs
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Software and Other Elements
With Tangible Elements
– Use Relative Selling Price Method to Allocate
Revenue
– Follow Software Revenue Recognition
– Still need VSOE for software undelivered
elements
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Cloud or SaaS
Cloud and SaaS Arrangements without Software Licenses
– Use Relative Selling Price Method to Allocate
Revenue
– Individual Elements Need Stand Alone Value
– ESP instead of VSOE
– Essential and Non-Essential Elements
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New Revenue Standard
The Future of Revenue Recognition and the Revenue Recognition of the Future
– New standard from FASB & IASB
– Changes basic principles of revenue
recognition
– Applicable to all revenue contracts
– Becomes effective in 2017 but requires two or
three year presentation in first year
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Conclusion
• Introduction
• Optimal Revenue Recognition
• Business Model and Desired Outcomes
• Software Revenue Recognition Residual Method
• Importance of VSOE
• Significant Contract Terms
• Troublesome Terms and Issues
• Services and Software
• Software in Combination with Other Elements
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Revenue Recognition Class
Revenue Recognition for Technology
Companies Webcast
Tuesday May 13 Part One
9 am – 12:30 pm PDT
Thursday May 15 Part Two
9 am – 12:30 pm PDT
CPE Credit
Pay per attendance
Registration and details soon
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Revenue Recognition Class
Revenue Recognition
Agenda Day One
• General Principles of Revenue Recognition
• Multiple Element Arrangements
• VSOE
• Software Revenue Recognition
• Services and Contract Accounting
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Revenue Recognition Class
Revenue Recognition
Agenda Day Two
• Review - General Principles
• Services Contract Accounting
• Relative Selling Price Method (EITF 08-1)
• Cloud Computing (SaaS)
• Other Rev Rec Issues
• FASB IASB Revenue Project
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Additional questions or comments?
Please contact:
Jeffrey Werner
Email [email protected]
Werner Consulting Group
Revenue Recognition Consultant
Sponsored by Tensoft, Inc. www.tensoft.com
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Structuring Software Sales Transactions for Optimal Revenue Recognition
Thanks for Joining Us today
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