Revenue Recognition in Software Delivery

Revenue recognition for software products can be a complex topic, but following these few simple guidelines will make consulting with your accountant a more pleasurable experience.

It’s all about accounting

A fundamental principle of revenue recognition states that money is considered revenue only if a product or service has been fully and completely delivered.

Software Product Revenue Recognition
Immediate Delivery

NitroPDF produces and sells software that creates and edits PDF files. A customer can submit payment and have the product fully delivered instantaneously. According to the AICPA Statement of Position (SOP) No. 97-2 on Software Revenue Recognition, this type of exchange deserves revenue recognition because:

  1. Two parties agreed to the exchange
  2. A price was set
  3. Payment was collected
  4. Delivery was completed

Levels of complexity

However, things become cloudier when differentiating between a product where payment and delivery are simultaneous and a product or service in which there is a lag between payment and delivery.

Software Revenue Recognition
Delivery Over Time

You will notice that Nitro also offers an upgrade service for 12 months. With this service, “delivery” can potentially occur anytime within the next 12 months.

Does this require the software manufacturer to amortize the revenue over a certain period of time?

You need to consult your own professional accountant, but based on our previous understanding that revenue recognition is dependent on complete fulfillment and the fact that Nitro collects money for a service whose performance is delayed, I suspect that the International Accounting Standards Board (IASB) probably would want this type of revenue amortized over the time period.

So what happens when I sell software that is fully delivered and a service whose delivery is delayed in the same transaction? Welcome to alligator infested waters, mate!

The topic is too complex to treat fully in one post, but it’s important to note that when products and services are sold together, it results in changes to revenue recognition requirements. Here are some types of sales that you need to coordinate with your accounting department on:

  • Subscriptions
  • SaaS products
  • Software and customization (if significant enough, even non-refundable up-front payments for the software license do not allow up-front revenue recognition)
  • Software and services (installation, training, customization and modification)
  • Software and physical products

Handling revenue recognition in ecommerce

From a practical standpoint, revenue recognition in ecommerce abides by the same rules as sales made through other channels. Finance leads the project to decide how a company wants to apply the revenue recognition rules to the products sold.

Generally, an external auditing firm is consulted for advice before any decisions are made. Within the company’s accounting system, the products are configured with the necessary revenue recognition values. As orders are submitted from the field, the accounting system should sync with the transaction information.

From an ecommerce perspective, the important part is to ensure that the products in the ecommerce system are configured properly so that when a sale is made the transaction is reported back to the accounting system with the correct link.


Guidance from your accounting team is required for correct revenue recognition in ecommerce transactions. Ensure that your ecommerce system is integrated tightly and correctly with your accounting system so that you don’t have a nasty surprise from auditors later.

What is your advice to others about handling revenue recognition in ecommerce transactions? Are there any gotchas that you’ve learned?


    1. Craig Vodnik

      Hi Clint,

      Thanks for the information about Zuora and NetSuite. I think that a lot of companies need both the subscription management and revenue recognition capabilities to manage a subscription business. I’m sure that there are many ways to skin a cat (no offense to cat lovers), but a top tier accounting system is the foundation and a flexible subscription/e-commerce platform must work hand-in-hand to handle revenue recognition correctly.



  1. Clint Wilson

    Agree Craig, as the accounting system is core to building “both the subscription management and revenue recognition capabilities to manage a subscription business.”

    Looking forward to seeing more of Cleverbridge fans in our SyncApps subscriber base soon:)


  2. Bob Scarborough

    This is a nice introduction to revenue recognition and the sources of revenue recognition complexity. Another general guideline that can help define requirements is to consider these three variables:

    1) Billing. How does your company go to market (eCommerce? enterprise agreement? channel model?) – and look for a billing system or a billing support system that matches your go to market model.
    2) Revenue Recognition. The general rules are above for software industry revenue recognition. For the basics you will need a sub-ledger for deferred and recognized revenue analysis and appropriate methods and models to support your revenue recognition.
    3) Revenue Compliance. Could be part of the above – but is often a sub-set that not everyone needs. No easy way to describe this – but if you have a sales process with multiple related elements in it (like software plus maintenance) and there are different recognition periods for the elements you are most likely subject to more complex accounting guideslines.

    Our company (Tensoft) also provides software that supports both the billing requirements as well as the software revenue recognition.

    1. Craig Vodnik - Post Author

      Hi Bob,

      Thanks for your thoughtful insight. The application of revenue recognition in the software market is a very complex topic and thankfully there are companies out there that have solutions to help businesses solve the problem at an affordable(?) rate. When thinking about the software market, what percentage of the companies that use your solution previously had:

      1. no automated solution (i.e. consultants/finance providing rev rec guidance)
      2. had an alternate solution
      3. some mixture of 1 & 2

      We always love hearing some real market feedback on topics like this so feel free to offer up additional information that you think is relevant.



      1. Bob Scarborough

        Thanks for your question Craig.

        We have replaced competitive solutions – but most commonly our clients are moving from a ‘work around’ based or Excel based solution.

        The vast majority of companies still approach significant portions of this requirement with a manual or custom system approach – something they continue until the pain is too great to continue.

        If you have more questions please do write.

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