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Revenue Recognition For Sales Of Software [Electronic Delivery, Keys, and Authorization Codes]



Back on the Christmas eve 2008, I received an interesting e-mail from Janet [a junior accountant in Canada]. She concerns about revenue recognition of software sales delivered electronically. She desperately want to know about revenue recognition for such sales.

Sometimes software is available to customers electronically and on demand. In these cases, delivery is considered to have occurred when the customer takes possession of the software by download or the customer is provided with access codes that allow immediate possession of the software.


In some circumstances, delivery of software that requires the use of authorization codes (or software keys) may not constitute delivery for purposes of revenue recognition unless the software “keys” are delivered as well. However, failure by the vendor to deliver a permanent key does not preclude revenue recognition if all other criteria prescribed by SOP 97-2 are met. Although keys provide the customer with access to the software, delivery of a key is not necessarily required in order for the vendor to recognize revenue.

In addition to the other requirements of SOP 97-2, paragraph 25 outlines the requirements for revenue recognition for arrangements involving the delivery of keys or authorization codes and indicates the following conditions that must be met:

  1. The customer has licensed the software, and the vendor has delivered a version of the software that is fully functional except for the permanent key or the additional keys (if additional keys are used to control the reproduction of the software).
  2. The customer’s obligation to pay for the software and the terms of payment, including the timing of payment, are not contingent on delivery of the permanent key or additional keys (if additional keys are used to control the reproduction of the software).
  3. The vendor will enforce, and does not have a history of failing to enforce, its right to collect payment under the terms of the original arrangement.


Vendors often ship temporary keys that expire or can be turned off as a means of collecting fees. These situations require an evaluation of the vendor’s business purpose and intent of the vendor with regard to the use of a temporary key. The vendor should have a customary business practice of using temporary keys for this purpose.

Paragraph 25 of SOP 97-2 states that if a temporary key is used to enhance the vendor’s ability to collect payment, the delivery of additional keys, whether temporary or permanent, is not required to satisfy the vendor’s delivery responsibility provided that the conditions described above are met and use of a temporary key in such circumstances is a customary practice of the vendor.


The risk associated with the use of keys is that the fee under the arrangement may not be collectible at the date of the delivery of the software because the delivered software is under evaluation by the customer. In these cases, revenue recognition would be precluded. Selective issuance of temporary keys might indicate that collection is not probable or that software is being used only for demonstration purposes. If the vendor has a customary business practice of using temporary keys, delivery of the permanent key is not required to recognize the license fee, as long as the above criteria are met.

To make it become a practical guide, here are some illustrations:


Electronic Delivery Of Software Sales

Revenue recognition is appropriate when the customer has full access to the software if all other revenue recognition criteria have been metIllustration: Assume that a software vendor enters into an arrangement with a customer to license a product on June 29 and the vendor electronically transfers a fully functional version of the product to the customer on that date. The customer is traveling on business on June 29 and returns on July 1. The delivery criterion has been met on June 29 because the customer had full access to the software on that date. The fact that the customer did not utilize such access does not affect revenue recognition. The vendor has done everything in its control to transfer full use to the customer.


Authorization Keys

Illustration: Assume that a software vendor makes a call and reaches an agreement for the sale of a product. The vendor agrees to leave with the customer one fully functional copy of the product, including one permanent key that allows the customer to use the software. On March 31, the customer sends the vendor a purchase order for 5,000 copies of the product (which is the vendor’s only documentation requirement). The vendor e-mails the remaining permanent keys to the customer on April 2 that allows the customer to make copies of the product. Because the customer already has a fully functional version of the product on March 31, delivery of the software occurred on that date if all the other requirements of SOP 97-2 are met.


Delivery to Other than the Customer

Vendors may engage agents, often referred to as fulfillment houses, to duplicate or deliver software products to customers. Revenue from transactions involving delivery agents should be recognized when the software is delivered to the customer. Transferring the fulfillment obligation to an agent of the vendor does not relieve the vendor of the responsibility for delivery. This is the case even if the vendor has no direct involvement in the actual delivery of the software product to the customer.


Shipping Terms

SAB 101 drew increased attention to shipping terms and their impact on revenue recognition for public software vendors. In response to SAB 101, TPA 5100.69 was issued to reiterate the relevance of shipping terms to all software sales. In short, software arrangements that include FOB destination terms do not meet the delivery criterion of SOP 97-2 until the customer receives the software. TPA 5100.69 further states that the delivery criterion is affected by shipping terms even for license arrangements in which title to the software is retained by the vendor.


Hope this post helps accounting people who concern [or questions] about revenue recognition for sale of software.

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