Vendor Specific Objective Evidence
When it comes to ERP software, most vendors like Sage and Acumatica sell multiple items bundled together in a contract – such as software, training, and support – that span a period of time. In accounting, this can present a unique challenge when it comes to revenue recognition. That’s why GAAP provides guidance referred to as Vendor Specific Objective Evidence, or VSOE. Let’s take a look at what VSOE means.
What is VSOE Accounting?
Introduced in 1997 by the AICPA, vendor specific objective evidence (VSOE) provides special accounting rules for how companies that license, sell, or lease software must recognize revenue. In particular, it governs how companies must recognize revenue from so-called “multiple-element arrangements” – bundles of software products and related services sold as a single unit, at a single price.
For example, let’s say a company purchases new software licenses along with ERP implementation services, training, consulting, and ongoing support that will span a contract period. The goal of VSOE would be to help the software vendor properly identify the value of the individual items and recognize the related partial revenue at the right time (often before the entire contract is fulfilled).
Or put another way, VSOE provides guidance on partial revenue recognition – for the various contract components sold as a single unit – as it’s actually earned.
What Does VSOE Mean?
VSOE stands for Vendor Specific Objective Evidence. It provides special accounting rules for how software companies must recognize revenue. In particular, it governs how companies must recognize revenue from so-called “multiple-element arrangements” – bundles of software products and related services – like implementation and training – sold as a single unit, at a single price.
How Do You Identify Software Revenue?
With VSOE, the definition of “earned” is key to revenue recognition. Before the revenue for any product or service can be recognized – regardless of whether the company has been paid or not – four tests must be met:
- There is evidence of an agreement
- The price is fixed and determinable
- Collectability is probable
- Delivery has occurred
NOTE: this article is for informational purposes only. It is not qualified accounting guidance. Please consult your CPA for help with your specific accounting requirements.