We Made a Concession Anyway, so How Do We Account for It?

Establishing a Reserve?
In the software industry, establishing a reserve simply to charge things that might otherwise be a concession does not work in today’s environment. Our accounting rules require that we must determine our accounting method for a contract at the outset of the arrangement. If elements such as future software are subsequently introduced, then we cannot state that we had met delivery requirements in the beginning. Additionally, due to the nature of the software, it is unlikely that we would have known its value up front, undermining the position of having delivered the software and determining if our fee was fixed and determinable.

The same is true of free services added at a later point in time. The accounting rules require that we must defer the future items of an arrangement at fair value. Not knowing about the services prevents this deferral.

These examples are both things that may support a reserve approach in a business sense, but the same arguments undermine the ability to recognize the software revenue according to SOP 97-2 and accompanying literature.

Selling additional products or services

One option to resolve a potential concession situation would be to simply include the element in question as part of a new, additional product or services agreement. This would need to be a standalone arrangement for the new elements but at the same time you would include the potential concession item. The key is that the overall value of this second deal needs to include not only the fair value of the added piece, but also be priced competitively and separately from the first transaction.

We’d like to avoid that, so where do we start?

Beginning with solid, established policies and providing empowerment to the right people in the process through effective training and support, you should be able to eliminate or minimize the impact of concessions. Additionally, through education at all levels of the company, the team can help instill the sense of urgency required to prevent the problems in the first place. Effective communication both internally and externally is critical to prevent these problems or to work through them if you find yourself heading down the wrong path.

About the Author
Dave Wood is the founder and principal of RevOps Consulting, LLC and has over 18 years experience working with revenue recognition as a revenue policy and compliance director, quote-to-cash process owner, shared services director and consultant to various software companies. Dave’s primary expertise is in process and policy development, training, and working with the sales force to help a company independently achieve a solid revenue recognition system. A basic software revenue recognition training program is available for no charge through RevOps Consulting, LLC at www.revops.net.