Vendor Specific Objective Evidence (VSOE) is a form of revenue recognition utilized by companies in order to identify revenue received from particular items of a multi-item based sale. VSOE is in regulation with US GAAP, which aims to protect companies that sell software by ensuring that earnings are not stated before they have actually been acquired. Any company who licenses, sells, rents or in any other way markets software uses VSOE, and more and more companies are finding that is necessary for them to properly understand the terms and compliances of this type of revenue recognition. If you have any questions about VSOE or related issues please check out our main website.
How Does VSOE Work?
In accordance with SOP 97-2, Vendor Specific Objective Evidence requires the company to allocate relatively to a multi-item based product, splitting the overall cost between the various hardware and software elements of a single sale. The manufacturer of the product will establish the separate price of each item, which is then put together to form the actual cost price. As some of the elements in software or hardware packages (i.e. a one year maintenance contract), are not recognisable in regards to revenue until a certain date, VSOE ensures that the company selling the product are able to identify some revenue at the time of sale. It is an important part of this sector and it is used to ensure that both companies and the public are getting a fair deal.
To determine the VSOE price of a single element the company will generally establish it through the accumulation of a set of discrete sales in order to find out what the market believes to be a fair price for the product. This enables the company to work out what prices are acceptable for the individual elements, and it keeps these companies in line by making sure they are not overcharging for their multi-item based products. However, readers should note that VSOE is intended for use by companies based in the United States of America only, allowing such companies to maintain their GAAP compliance with the American Institute of Certified Public Accountants (AICPA), in respect to Statement of Position 97-2 (SOP 97-2) and SOP 98-9 (residual method). Remember to visit our website for further information regarding Vendor Specific Objective Evidence, and additional details regarding the SOPs can be found at www.aicpa.org.