There is nothing easy about running a software company. First, there is the difficulty in finding the right programmer. According to an analysis of job posting, there are thousands of programming positions that are unfulfilled. Second, there is the need to generate or find capital, in order to keep programmers full of soda and snacks while they are writing code. Last, and usually least, is software accounting rules.


Unless Accounting Rules are followed, Disaster can Strike

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Although usually these rules are the last thing on a Senior Manager’s mind, they maybe shouldn’t be. When it comes to dealing with software revenue recognition rules like vendor specific objective evidence of fair value, mistakes can be costly. Below are two examples of companies that underestimated the complications of software revenue recognition rules and the price they paid for it:


Autonomy Corporate was a large multinational software company founded in Cambridge, England, in 1996. The company sold both hardware and software.  It maintained accounting books according to IFRS accounting rules. However, it also was listed on the NASDAQ so it complied with GAAP accounting rules like Vendor Specific Objective Evidence rules. To this end, it had regular audits conducted by Deloitte.

In 2011, HP announced that they intended to purchase Autonomy for just over $10 billion. Unfortunately, a little over 1 year after the purchase, HP announced that they were writing off $8.8 billion in of Autonomy’s value due to “serious accounting improprieties.”

Although the company has never officially stated what these improprieties were, accounting experts believe that Autonomy had established and complied with the accounting rules regarding Vendor Specific Objective Evidence, but HP had not.

As an independent company, Autonomy was able to recognize certain sales upfront because they complied with the rules. However, HP had not established vendor specific objective evidence and had to defer revenues until delivery of all products were completed. Once the two companies merged accounting functions, Autonomy probably had to restate some of their revenue and defer it until all the elements have been delivered, thus requiring a write down.

Ernst & Young

Although one of the big four accounting firms and originator of numerous documents regarding software revenue recognition rules, E&Y still managed to mess up vendor specific objective evidence of fair value rules.

This was discovered during a 2009 Public Company Accounting Oversight Board (PCAOB) review of audits conducted by E&Y. The PCAOB claimed that E&Y didn’t test a client’s vendor specific objective evidence compliance calculations and that it hadn’t reviewed the software revenue contracts as well.

The end result of this review was the loss of trust by the market in the ability of E&Y to audit software revenue recognition.  However, the monetary ramifications are difficult to quantify it.

If EY has trouble with VSOE, we all need to be more careful!

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Whether you are Software Company or an Audit Firm, software revenue recognition rules can trip you up. Of course, at Bi101, we believe that there is an alternative. NetSuite ERP provides advance revenue recognition features to help software companies gain and keep vendor specific objective evidence compliance. If you are struggling with revenue recognition rules, please contact us.