E-book: Software Industry Accounting

Acknowledgments xxviii Preface xxx About the Cd-Rom xxxi General Industry Perspective 1(1) Edward S. Wittman A General Industry perpective 1(1) Roots of the Computer Software Industry 2(2) Origins of the Computer Industry 2(1) Early Computers and Software Technology 2(1) Acceleration of Computer and Software Development 3(1) Splitting Off of the Software Industry 3(1) Software Industry Today 4(4) Growing Importance of the Software Industry 4(1) Economic Impact of the Software Industry 5(1) Role of the Internet 6(1) Intranets: Ease of the Internet Brought In-House 7(1) Mainframe Market 8(1) Key Terms used in the Software Industry 8(1) Software Development Process 9(6) Distiguishing Between Research and Development Activities 9(1) Six Phases of the Software Development Process 9(6) Marketing and Distribution of Software Products 15 How Software Companies Derive Revenues 15(1) Software Licenses 15(1) Channels of Distribution for Software Licenses 15(2) Postcontract Customer Support (Maintenance) 17(1) Providing Software in Projects that Combine Software with Hardware or Services or Both 17(1) Providing Software Development Services 18(1) Providing Services that Accompany Software Products 18(1) Providing Services Using Software 18 Software Industry Glossary of Terms 1(1) The AICPA Task Force on Accounting for the Development and Sale of Computer Software 1(1) Francis J. OBrien Introduction 1(2) Historical Perspective 1(1) FASB Statement No.2 1(1) ADAPSO Exposure Draft 2(1) Formation of the AICPA Task Force 3(1) Capitalization of Software Development Costs 3(4) Acceleration of Addressing the Capitalization Issue 3(1) SEC Moratorium on Capitalization of Software Development Costs 4(1) Issues Paper on Capitalization of Software Development Costs 4(1) Exposure Draft of the FASB Statement 5(1) Response to the FASB Exposure Draft 5(1) Issuance of FASB Statement No. 86 6(1) Retrospective 6(1) Software Revenue Recognition 7(6) Issues Paper on Software Revenue Recognition 7(1) FASB Reaction to the Issues Paper 8(1) Preparation of Statement of Position No. 91-1 9(1) FASB Review of the Draft Proposed SOP 10(1) Exposure Draft of the Software Revenue SOP 11(1) Issuance of SOP 91-1 and Effective Date 12(1) Further Guidance on Revenue Recognition 13(1) Project to Develop Further Revenue Recognition Guidance 13(1) Industry Changes 13(1) Broad Implementation Issues 14(1) Issues Addressed 14(17) Delivery Issues 15(7) Contract Accounting Issues 22(4) Service Transactions issues 26(2) Postcontract Customer Support Issues 28(3) Transition 31(1) Conclusion 31 The Securities and Exchange Commission 1(1) Organization of the Securities and Exchange Commission 1(2) Capitalization of Software Development Costs 3(2) Historical Perspective 3(1) SEC Views on Implementation of FASB Statement No. 86 4(1) Amortization of Capitalized Software Costs 4(1) Revenue Recognition 5(10) SEC Staff Accounting Bulletin No. 101 (``SAB 101): Revenue Recognition in Financial Statements 5(2) SEC Views on Certain Revenue Matters 7(8) Other SEC Financial Reporting Matters 15(8) Business Combinations 15(3) Income Statement Captions 18(1) Managements Discussion and Analysis 18(1) Quarterly Adjustments 19(1) Initial Public Offerings 20(2) Foreign Marketing Entities 22(1) SEC Comment Letters and Enforcement Actions 23(3) Comment Letters 23(1) Enforcement Actions 24(2) Conclusion 26 SEC Accounting and Auditing Enforcement Release No. 271 1(2) SEC Accounting and Auditing Enforcement Release No. 351 3(2) SEC Accounting and Auditing Enforcement Release No. 494 5(2) SEC Accounting and Auditing Enforcement Release No. 495 7(2) SEC Accounting and Auditing Enforcement Release No. 730 9 Software Revenue Recognition 1(1) Donald P. Keller Dean A. Martinez Background 1(2) General 1(1) History of the Development of Current Revenue Recogntion Rules for the Software Industry 2(1) Scope and Applicability 3(2) General 3(1) Applicability Where Software Is Not Incidental 4(1) Nonapplicability Where Software Is Incidental 4(1) Basic Principles 5(21) General 5(1) Persuasive Evidence of an Arrangement 5(1) Delivery 6(4) Fixed or Determinable Fees and Collectibility 10(11) Cancellation Privileges 21(2) Fiscal Funding Clauses 23(1) Forfeiture or Refund Clauses 23(2) Customer Acceptance Clauses 25(1) Multiple-Element Arrangements 26(15) General 26(1) Combining Closely Related Contracts 27(1) Revenue Recognition for Multiple-Element Arrangements 27(1) Vendor Specific Objective Evidence of Fair Value 28(4) Upgrades 32(4) Additional Products 36(5) Other Services in a Multiple-Element Arrangement 41(1) Postcontract Customer Support 41(10) General 41(2) Overall Guidelines for PCS Revenue Recognition 43(1) Determining VSOE for PCS Arrangements 43(1) Explicit and Implied PCS Arrangements 44(2) PCS Is the Only Undelivered Element and VSOE Does Not Exist 46(1) PCS Revenue Recognizable with Initial License Fee 46(1) PCS Provided During Warranty Period at No Additional Charge 47(1) Implied PCS Arrangements for Correction of Errors Necessary to Maintain Compliance with Published Specifications During Warranty Period 48(1) PCS Bundled with Contract Accounting Arrangement 48(1) PCS Bundled with Term Licenses 49(2) Discounts 51(8) General 51(1) Determining Whether a Discount is Significant 51(1) Multiple-Element Arrangements with VSOE Only for Undelivered Elements 52(1) Multiple-Element Arrangements Involving an Upgrade Right 53(1) Discounts on Future Products 54(2) Discounts on Additional Copies of Delivered Software 56(1) Discounts in PCS Arrangements 56(3) Exchange and Return Rights 59(12) General 59(2) Returns 61(5) Exchange and Platform-Transfer Rights 66(5) Decision Chart on Accounting for Exchanges and Returns 71(1) Software Licensed to Resellers 71(10) General 71(1) Persuasive Evidence of an Arrangements 72(1) Delivery 72(1) Fixed or Determinable Fees and Collectibility 72(4) Rights of Return or Exchange and Price Protection 76(2) Implied PCS Arrangements 78(3) Nonrefundable Prepaid Royalties 81(1) Funded Development Arrangements 81(2) Accounting for Services 83(5) General 83(1) Determining if Services Can Be Accounted for Separately 84(2) Impact of PCS and Other Services 86(1) Accounting for Installation Services 87(1) Miscellaneous Revenue Matters 88 Marketing and Promotional 88(1) Barter Transactions 89 Comparison of Old and New GAAP 1(1) Contracts for Software Combined with Hardware or Services or Both 1(1) James N. Brendel Methods of Contract Accounting 1(2) Percentage-of-completion Method and the Completed-Contract Method 1(1) Circumstances in Which to Use the Percentage-of-Completion Method 2(1) Circumstances in Which to Use the Completed-Contract Method 2(1) Application of the Percentage-of-Completion Method 3(18) Key Aspects of Applying Percentage-of-Completion Method 3(1) Segmentation 3(4) Single-Cost-Center Contracts 7(2) Measuring Progress-to-Completion 9(1) Cost-to-Cost Measures of Progress-to-Completion 9(1) Input Hours-to-Hours Measures of Progress-to-Completion 10(2) Output Value-Added Measures 12(6) Output Value-Added Measures for Core Software 18(1) Separately Enforceable Obligation for Software Accounted for Using Value-Added Output Measures and Other Implementation Questions 18(1) Income Determination: Revenue Elements 19(2) Revised Estimates 21(1) Precontract Costs 21 Capitalization, Amortization, and Net Realizable Value Testing of Software Costs 1(1) Paul Munter Capitalization 1(14) Broad Applicability of FASB Statement No. 86 1(1) Software Products 1(2) Computer Software Research and Development Costs 3(1) Determination of Technological Feasibility in General 4(1) Determination of Technological Feasibility If a Detail Program Design Is Used 4(2) Technological Feasibility If a Detail Program Design Is Not Prepared 6(1) Projects That Do Not Precisely Employ Either a Detail Program Design or a Working Model Approach 7(1) Determination of Market Feasibility 7(1) Aggregating the Direct Labor Component 8(1) Overhead Rates 9(1) Other Direct Costs 9(3) Capitalization of Interest 12(1) Recapitulation of Costs to Be Capitalized 12(1) Availability for General Market Release-Cessation of Capitalization 12(1) Enhancements 13(1) Capitalization of Funded Development Costs 14(1) Amortization 15(3) Amortization in General 15(1) Straight-Line Amortization 15(1) Revenue-Based Amortization 16(1) Combined Work Sheet for Straight-Line and Revenue-Based Amortization 16(1) Amortization of Enhanced Products 16(2) Reporting Amortization in Interim Periuods 18(1) Net Realizable Value Testing 18(8) Net Realizable Value Testing in General 18(1) Estimating the Future Revenue Stream 19(1) Estimating Costs of Disposal and Costs to Complete 19(1) Effects of Assuming Enhancement and Not Assuming Enhancements in Revenue and Cost Projections 20(1) Work Sheet for Net Realizable Value Testing 21(1) Recording a Net Realizable Value Writedown 21(1) Net Realizable Value Writedown Establishing New Cost Basis 21(5) Net Realizable Value Writedowns and Capitalization of Additional Development Costs 26(1) Software Acquired in a Purchase Business Combination 26(3) General 26(1) Discount Rates 26(1) Allocation of Acquisition Cost to Incomplete Research and Development 27(2) Cost of Software Developed or Obtained for Internal Use 29 General 29(2) Two Standards for Software Capitalization--Which to Use? 31(1) Stages of an Internal-Use Software Project 32(1) Preliminary Project Stage 32(1) Application Development Stage 33(1) Post-Implemention/Operation Stage 34(2) Reengineering 36(1) Y2K, ISO 9000, and Similar Costs 36 Questionnaire for Compling Information to Support Capitalization of Software Development Costs 1(6) Software Release Request 7(2) Statement of Financial Accounting Standards, No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Markted 9(8) Q&As on FASB Statement No. 86 17 Auditing Financial Statements of Software Companies 1(1) James N. Brendel General Considerations: Characteristics of the Industry 1(1) Auditing Capitalized Software Development Costs 2(4) Nature of Assets 2(1) Assessing Significance of Capitalized Software Development Costs 2(1) General Approach to Auditing 3(1) Auditing Determination of Technological Feasibility 3(1) Auditing Determination of Availability for General Market Release 4(1) Auditing Accumulation of Capitalized Hours, Direct Costs, and Overhead Rates 4(1) Auditing Amortization and Net Realizable Value 5(1) Representation Letter 5(1) Use of a Technical Specialist 6(1) Auditing Software Revenue 6(2) Unique Aspects of Auditing Software Revenue 6(1) Auditing Software License Revenue 7(1) Auditing Contract Accounting Revenues and Costs 7(1) Auditing Postcontract Customer Support Revenue 8(1) Going Concern Considerations 8(3) Industry and Company Characteristics 8(1) Going Concern Audit Procedures 9(2) Audit Risk Alerts 11(1) AICPA ``Audit Issues in Revenue Recognition 11(1) Conclusion: A Challenging Industry for Auditors 11 Audit Program for Audits of Software Companies 1(6) Checklist for Documentation of Technological Feasibility 7(6) High-Technology Industry Developments---2000/01 13(46) Audit Issues in Revenue Recognition 59 Accounting for Research and Development Arrangements 1(1) General 1(1) Research and Development Arrangements in Which Funds Are Provided by Others 1(1) Accounting Principles for Research and Development Arrangements 2(1) FASB Statement No. 68 2(1) Arrangements Covered by FASB Statement No. 68 3(1) Determining Whether a Liability to Repay Exists 3(2) Explicit Contractual Liability to Repay 3(1) Substantive Liability to Repay 4(1) Related Parties in Research and Development Arrangements 5(1) Accounting If There Is a Liability to Repay 5(2) Accounting If There Is No Liability to Repay 7(1) Liability to Repay a Portion of Funds Provided 8(1) Special Considerations for Issuance of Securities in Connection with a Research and Development Arrangement 9(2) General 9(1) If There Is an Obligation to Repay 9(1) If There Is No Obligation to Repay 10(1) Financial Reporting for Research and Development Arrangements 11(2) If There Is an Obligation to Repay 11(1) If There Is an Obligation to Repay But No Repayment Is Made 12(1) Contracts to Perform Research and Development for Others 13(1) Illustration of Accounting for a Research and Development Arrangement with a Liability to Repay 13 Assumptions 13(1) Accounting by the Partnership 14(1) Accounting by ABC Software Company 14 Statement of Financial Accounting Standards No. 68 1(6) SEC Staff Accounting Bulletin No. 63 7 Taxation of Computer Software Companies 1(1) James R. Shanahan, Jr. Mark B. Singer Katrina L. Salem Brad I. Silver Alicia M. Wilkinson Introduction 1(1) Taxation of Revenue 1(8) Computation of Taxable Income 1(1) Brief Overview of Methods of Accounting 2(1) Revenue Recognition: In General 3(1) Tax Ramifications of Implementations of SOP 97-2: In General 4(1) Postcontract Customer Support 4(3) Characterization of Revenue from Software Transactions 7(2) Tax Treatment of Research and Development Costs 9(11) In General 9(1) Software-Specific Rules 10(1) Limitations on Revenue Procedure 69-21 11(1) Capitalization of Software Development Costs 12(1) IRS Attempts to Define Deductible Software Development Costs 13(4) Deductible Contract Research Costs 17(1) Research Credit 17(3) Tax Treatment of Costs to Acquire Software 20(2) Acquisitions of Less than All Substantial Rights 20(1) Acquisitions Involving All Substantial Rights 21(1) Payments for the Right to Use Software 22(1) Tax Planning for Foreign Operations 22(5) Introduction 22(1) Foreign Withholding Taxes 23(1) Foreign Sales Corporations 24(1) Establishing a Presence Overseas 25(1) U.S. Tax Considerations of the Foreign Operation 26(1) Internet Taxation 27(1) Conclusion 27 Legal Aspects of Software 1 David A. Weinstein General 1(1) Copyrights 1(4) Nature of a Copyright 1(1) Control Given by a Copyright 2(1) Material that Can Be Copyrighted 2(1) Protection that a Copyright Does Not Provide 3(1) Obtaining a Copyright 3(1) Term of a Copyright 4(1) Registered Copyrights 4(1) Copyright Notice 4(1) Copyright Protection in Foreign Countries 5(1) Copyright Infringement 5(1) Trademarks 5(9) General 5(1) Nature of a Trademark 6(1) Legal Rights to Trademarks in the United States 6(1) Geographic Scope of Exclusive Rights 6(1) Appropriate Items for Trademarks in the United States 7(1) Acquiring Ownership, Beginning, and Duration 8(1) Ownership 8(1) Federal Registration 9(1) Trademarks that Cannot Be Federally Registered 9(1) Requirements of Filing for Federal Registration 10(1) Registration Approval, Opposition, and Cancellation 11(1) What to Do Before Filing Application for Federal Registration 11(1) Rights to Prevent Others from Using a Trademark 11(1) Registered Trademarks 11(1) Advantages of Registering a Trademark 12(1) Timing of Eligibility for Registration 12(1) Use of a Particular Symbol with a Trademark 12(1) Trademark Infringement 12(1) Preventing Imports that Infringe 13(1) Trademark Protection in Foreign Countries 13(1) Guidelines for Usage of a Trademark 13(1) Patents 14(3) General 14(1) Nature of a Patent 14(1) Inventions that Can Be Patented 14(1) Obtaining a Patent 15(1) Ownership of a Patent 15(1) Term of Patent Protection 16(1) Patent Notice 16(1) Patent Infringement 16(1) Patent Protection in Foreign Countries 16(1) Protection of Trade Secrets 17(3) Overview 17(1) Nature of a Trade Secret 17(1) Eligibility for Trade Secret Protection 17(1) Nature of Trade Secret Protection 18(1) Obtaining Trade Secret Protection 18(1) Term of Trade Secret Protection 19(1) Unvailability of Trade Secret Protection for Information 19(1) Use of Notice or Agreement to Protect Information 19(1) Trade Secret Violations 19(1) Software Agreements 20(4) General 20(1) Software Development Agreements 20(1) License Agreements 21(1) Distribution Agreement 22(1) Maintenance Agreements 22(1) Software Escrow Agreements 23(1) Software Liability Issues 24(1) General 24(1) Warranties and Representations 24(1) Infringement 24(1) Remedies and Penalties 25(1) Reverse Engineering 25 General 25(1) Copyright Exception 26(1) Trade Secret Exception 26(1) Semiconductor Chip Exception 26(1) Contractual Exception 27 Illustrative Software License Agreement 1(8) Illustrative Shrink-Wrap Software License Agreement 9(4) Illustrative Software Escrow Agreement 13(6) Illustrative Software Maintenance Agreement 19(6) Illustrative Software Development Agreement 25 Software Industry Associations 1(1) Douglas C. Jerger Industry Associations in General 1(2) Early History 1(1) Activities of Industry Associations 2(1) Software Industry Associations in General 3(1) Business Software Alliance (BSA) 4(2) Mission 4(1) Organizational Structure 4(1) Special Characteristics 5(1) Information about BSA 5(1) Information Technology Association of America (ITAA) 6(3) Mission 6(1) Organizational Structure 6(1) Special Characteristics 7(1) Information about ITAA 8(1) Software Committee of American Electronics Association (AEA) 9(2) Mission 9(1) Organizational Structure 9(1) Special Characteristics 9(1) Information about the Software Committee of AEA 10(1) Software and Information Industry Association (SIIA) 11(2) Mission 11(1) Organization Structure 11(1) Special Characteristics 12(1) Information about SPA 12(1) Regional Software Industry Associations 13(2) Start of Regionals 13(1) Notes on Selected Regionals 14(1) International Software Industry Associations 15 Responses to the International Nature of Software 15(1) Formation of the World Information Technology and Services Alliance (WITSA) and Current Activities 15 National Software Industry Associations 1(6) Regional Software Industry Associations 7(6) Members of World Information Technology and Services Alliance (WITSA) 13 Index 1