In this example, Smallsoft converted to the $10,000 service revenue levy that Would otherwise be charged by Smallsoft if it had applied its standard hourly rate. Under the new SOP, only $100,000 of the $110,000 royalty would be registered if PowerNT software is delivered to Insureco (provided all other basic criteria for revenue recognition are met). The remaining $10,000 of the licence fee is allocated to the service element and recognized on the course of the services provided. Avoid accounting for the contract as much as possible. As explained in Part 1 of this article, contractual accounting generally involves recording revenue over the life of a contract. In most cases, a software company, whose objective is to detect revenue as quickly as possible, will try to avoid contractual accounting. Contract accounting becomes primarily a problem in software agreements when a software company is licensed software that is significantly modified. As explained in the first part of this article, contractual accounting generally applies when software services involve a substantial production, modification or adaptation of the software`s legs or where software changes are essential for the functionality of the licensed software7. The following factors support the finding that the changes are not „significant” or „essential,” as noted above, and should therefore be highlighted in the agreement, if any, to support the software company`s argument that contractual accounting should not apply: while the benefits of the payment model to be used on what you-use are a key consideration , a sometimes less understood benefit of the subscription stems from the difference between accounting methods between the two options.
An EA expense is considered an investment effort and thus corresponds to the company`s balance sheet. As with any CAPEX, a company will then have to bear a fixed depreciation charge over the next few years, regardless of whether or not it operates its licences. What complicates matters further is how CAPEX server software can be depreciated when a company uses virtualization to deliver multiple applications on a single common server. On the other hand, the Enterprise subscription is an operational expense that is reflected only in the company`s profit and loss account. As an OPEX, business units are often exempt from submitting their applications to the CFO as long as they have the purchase budget and the accounting is simplified. For example, when a Fortune 1000 company was informed by its server storage software provider that its US$10 million was fully consumed for half of a 36-month agreement, the potential impact was considerable. The ELA has been around for a very long time for traditional software providers, but in recent times, a number of hardware manufacturers, including Dell, have EMC and Cisco have also begun to use this method. This reflects both the increasing amount of software in the portfolios of these companies and the market operators, which we will discuss in detail.
Equipment manufacturers have launched forward offers, unlike traditional indeterminate licensing structures, with the possibility of converting licences at the end of the indeterminate ELA for a fee. The main advantage of the EA subscription is the ability to reduce their order or „float down” during the annual full-up. The ability to add or subtract subscriptions to accommodate their workforce may be particularly attractive to companies that expect significant fluctuations in the workforce over the life of the agreement.
