What are Concessions?

- By Dave Wood, Contributing Writer

If a company gives something beyond what was defined in the original contract, it is probably a concession. If a determination is made that a company has a business practice of providing concessions to customers or partners, then they may:

• Lose the ability to recognize software revenue at contract inception going forward,

• Be forced into an amortization method of recognizing revenues,

• Be forced to restate the financials,

• or, some combination of any of these.

Technical Practice Aids 56 and 57 supplement paragraphs 27 and 28 of SOP 97-2, going into great detail regarding what may be considered a concession. To help illustrate how concessions arise, here are some examples of seemingly harmless situations that result in concessions:

Concession Examples

Extending Services
You have a three year term software license with a customer that begins on July 1, 2005. The revenue was recognized in July 2005 because the arrangement met the requirements to recognize revenue at that time. However, the customer has made an issue of the fact they were not live on the software until September, 2005, demanding an additional 3 months of term to make up for the delay. By granting the additional time without any further compensation, this would be a concession.

Expanding Licensing
Your contract with a customer clearly states they are allowed to utilize their software license in Canada only. At the time of execution, the arrangement met all of the requirements to recognize revenue. After using the software for six months, the customer now wants to extend the use to include a relatively minor location in the United States. None of this was brought up in the original negotiations so the customer is upset, even though the contract stipulates Canada only. A concession results by expanding the license rights to include territory outside of Canada, without compensation.

In both of these situations, if the vendor does as the customer asks, they have conceded something to the customer well after the revenue was recognized that was not included in the original arrangement, not priced, and certainly not included in the accounting.

Other examples of concessions that can come about include:

• Delay of the customer’s PCS (maintenance) start after revenue has been recognized. In order to recognize an arrangement, the elements and the value of those elements need to be determinable, which includes free maintenance.

• An additional delivery of software that is required because the incorrect product was initially delivered or incomplete.

• Providing free services or training to a customer that was not initially agreed.