From EITF 00-21 to EITF 08-01 >> from residual value to relative selling method, valuing only undelivered element to all elements. Could pose a situation to accelerate rev recog of SaaS license if can demonstrate stand-alone value of implementation services. (Hypothetically, can another vendor provide the offering?)
Key reminders: VSOE, TPE, BESP hierarchy of selling price. Separate (versus different) unit of accounting.
Excerpts of WorkDay S-1 below. Company filed at projected $240MM rev, chronological yoy growth rates of 170%, 60%, 120%.
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Multiple Deliverable Arrangements
For arrangements
with multiple deliverables, we evaluate whether the individual deliverables
qualify as separate units of accounting. In order to treat deliverables in a
multiple deliverable arrangement as separate units of accounting, the
deliverables must have standalone value upon delivery. If the deliverables have
standalone value upon delivery, we account for each deliverable separately and
revenue is recognized for the respective deliverables as they are delivered. If
one or more of the deliverables do not have standalone value upon delivery, the
deliverables that do not have standalone value are generally combined with the
final deliverable within the arrangement and treated as a single unit of
accounting. Revenue for arrangements treated as a single unit of accounting is
generally recognized over the period commencing upon delivery of the final
deliverable and over the term of that deliverable.
Subscription
contracts have standalone value as we sell the subscriptions separately. In
determining whether professional services can be accounted for separately from
subscription services, we consider the availability of the professional
services from other vendors, the nature of our professional services and
whether we sell our cloud-based applications to new customers without
professional services. As of January 31, 2012, we did not have standalone
value for the professional services related to the deployment of our financial
management cloud-based application. This was because we had historically performed
the majority of these services to support our customers’ deployment of this
application. In the three months ended April 30, 2012, we determined that
we had established standalone value for the deployment services related to our
financial management cloud-based application. This was primarily because of the
growing number of third party consultants that were trained and certified to
perform these deployment services, the successful completion of a significant
deployment engagement by a firm in our professional services ecosystem and the
sale of several financial management cloud-based application subscription
arrangements to customers without our deployment services. Because we
established standalone value for our deployment services related to our financial
management cloud-based application in the six months ended July 31, 2012,
such service arrangements entered into after February 1, 2012 are being
accounted for separately from subscription services.
When multiple
deliverables included in an arrangement are separable into different units of
accounting, the arrangement consideration is allocated to the identified
separate units of accounting based on their relative selling price. Multiple
deliverable arrangement accounting guidance provides a hierarchy to use when
determining the relative selling price for each unit of accounting.
Vendor-specific objective evidence (VSOE) of selling price, based on the price
at which the item is regularly sold by the vendor on a standalone basis, should
be used if it exists. If VSOE of selling price is not available, third-party
evidence (TPE) of selling price is used to establish the selling price if it
exists. VSOE and TPE do not currently exist for any of our deliverables.
Accordingly, for arrangements with multiple deliverables that can be separated
into different units of accounting, we allocate the arrangement fee to the
separate units of accounting based on our best estimate of selling price. The
amount of arrangement fee allocated is limited by contingent revenues, if any.
We determine our
best estimate of selling price for our deliverables based on our overall
pricing objectives, taking into consideration market conditions and
entity-specific factors. We begin the evaluation of our best estimate of
selling price by reviewing historical data related to sales of our
deliverables, including comparing the percentages of our contract prices to our
list prices. We also consider several other data points in our evaluation,
including the size of our arrangements, the cloud applications sold, customer
demographics and the numbers and types of users within our arrangements
