Vendor Specific Objective Evidence (VSOE)
Revenue recognition is a principle prescribing that revenue is recognized when earned. It has two considerations - when to recognize revenue, and how much to recognize. Revenue recognition is relevant for companies to be able to adhere to legal compliance as per the US GAAP requirements. Improper revenue recognition increases the risk of financial restatement, and financial restatements negatively affect stock prices. Thus the cost of financial restatements is huge. [“between July 2002 and September 2005 - (companies announcing financial restatements lost) an estimated $36 billion when adjusted for overall market movements” source: GAO Report 2007, www.GAO.gov]
Why is Revenue Recognition important for ISVs?
ISVs often encounter complex customer arrangements involving software licensing, maintenance and services costs which might vary according to various reasons across customer segments per year. Complex accounting rules governing the recognition of revenues for Software products and services complicate the revenue cycle. Revenue for ISV's is typically divided into three categories: Software, Maintenance, and Services. Assuming that software customization is not required, revenue can be recognized when all of the following criteria are met:
- Evidence of an arrangement (SLA and/or PO)
- Delivery has occurred ( Physical Delivery/Electronic Delivery)
- Fixed and determinable fee
- Collectibility is probable
For ISVs, one area of revenue management commonly encountered in the early stages of the continuum is establishing Vendor Specific Objective Evidence (VSOE) of fair values. But it can be very difficult to determine how fair values have been determined. Based on VSOE for their products or services, companies can recognize revenue. VSOE must be established for a product such as a software license and also for each element of any multi-element scenario where each scenario brings a new complexity like bundled line items, multi-tier pricing, complex discounts, multiple billing methods, long-term support and maintenance agreements, etc.
- Order and Contract do not reflect the actual amounts of License and Maintenance
- VSOE has to be applied manually on the Purchase Order to get the breakdown for Order Entry
- Dual entry for Quote, and Order & Contract
- Revenue Allocation is manual or customized outside the system
- Desktop Invoice has to be created
HCL's VSOE solution is helping companies control VSOE through business rules, automate revenue allocation and generate a system invoice, thereby enabling regulatory compliance, eliminating manual steps and providing better customer service with fewer mistakes.
VSOE Solution Benefits
- Reduces compliance process time by 40%
- Brings down revenue management costs by 30%
- Customization required in Oracle - 25%
- Reduces Days Sales Outstanding (DSO) by 50%
- Accurate financial reporting based on real-time data Standard
- Accelerated deployment of HCL solution customized to customer's business process by using HCL 'AAA' approach