VSOE for Dummies

According to Wikipedia … In accounting practices, vendor-specific objective evidence (VSOE) is a method of revenue recognition allowed by US GAAP that enables companies to recognize revenue on specific items on a multi-item sale based on evidence specific to a company that the product has been delivered.

In other words, VSOE is Fair Value for Software.

Although some industry analysts suggest that these rules can constrain the ways companies sell their products, chew up a lot of management time, and put off some investors – VSOE ‘typically’ means that at least 80 percent of sales prices should fall within 15 percent of the median price. Some CFOs are more conservative, but in different ways; deviations from the median at 10 percent or maybe, sticking with the 15 percent band, but applies it to 85 percent of your sales.

Found a helpful guide below – albeit is a little outdated – however as always, seek financial counsel before deciding YOUR approach.

How to Cope with VSOE

1. Keep careful records of the actual selling prices for products. Most experts say a price list is not enough.

2. Make sure the sales force is with you. Establishing VSOE precludes allowing salespeople to cut one-off deals or regularly offer customers special concessions.

3. Consider establishing multiple VSOEs, if pricing varies significantly by size of customer or by geographic region.

4. Don’t think you’re out of the woods just because you’re not in the software business. SOP 97-2 applies to any sale in which software is a “more than incidental” part.

5. Be prepared to explain to analysts how SOP 97-2 is affecting the revenue stream, and when portions of deferred revenue will hit the bottom line.