What Is SOP 98-9 in Accounting and Why Was It Superseded?

Statement of Position (SOP) 98-9 was accounting guidance from the American Institute of Certified Public Accountants (AICPA) that amended the rules for software revenue recognition found in SOP 97-2. It addressed how to account for sales that bundled multiple products and services, like a software license sold with technical support. SOP 98-9 is historical guidance that has been entirely superseded by a more comprehensive standard and is no longer in use for financial reporting.

Core Principles of Software Revenue Recognition

The foundation of the guidance under SOP 98-9 was Vendor-Specific Objective Evidence (VSOE), defined as the price a company charged for a product or service when it was sold separately. To recognize revenue on delivered items within a bundle, a company first had to establish VSOE for any undelivered items. This was a strict, evidence-based requirement that created a high hurdle for revenue recognition.

To prove VSOE, a company needed a consistent history of selling the undelivered item on its own. The guidance required a substantial concentration of these standalone transactions, often described using a “bell-shaped curve” analogy where the majority of sales fell within a narrow price range. Without this verifiable evidence for the undelivered portions of a contract, all revenue from the arrangement had to be deferred, even for software already delivered to the customer.

Accounting for Multiple-Element Arrangements

Companies applied VSOE to bundled contracts using the “residual method” to allocate a contract’s total price. This method required companies to first determine the fair value of any undelivered items using the strict VSOE criteria. This amount was then subtracted from the total contract fee to find the value of the delivered items.

For example, a business sells a perpetual software license and one year of post-contract support (PCS) for a single, bundled price of $50,000. The license is delivered immediately, but the PCS is an obligation that will be fulfilled over the next year. Before recognizing any revenue for the delivered software, the company had to establish VSOE for the undelivered PCS.

If the company could prove through its sales history that it regularly sold the one-year PCS plan alone for $5,000, it would have the necessary VSOE. Under the residual method, the company would subtract the $5,000 fair value of the undelivered PCS from the total $50,000 contract price. The remaining “residual” amount, $45,000, could then be recognized as revenue for the software license at the time of its delivery. The $5,000 for the PCS would be recognized ratably over the one-year service period.

The Transition to Current Standards

The VSOE model was often criticized for its rigidity. Companies, particularly those with new or unique service offerings, found it difficult to meet the strict evidence requirements for standalone sales. This meant a company could deliver a valuable software product but be barred from recognizing revenue, an outcome that often failed to reflect the transaction’s true economic substance.

These limitations led the Financial Accounting Standards Board (FASB) to introduce a new, comprehensive standard: Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Effective for most companies after December 15, 2017, ASC 606 replaced all previous industry-specific revenue guidance, including SOP 98-9. This created a single, principles-based framework for all industries, moving away from prescriptive rules.

ASC 606 uses a five-step model for recognizing revenue as goods or services are transferred to customers. The steps are:

• Identifying the contract
• Identifying the separate performance obligations
• Determining the transaction price
• Allocating that price to the obligations
• Recognizing revenue as each obligation is satisfied

Instead of rigid VSOE, ASC 606 allows more judgment in estimating a standalone selling price when it is not sold separately, permitting methods like adjusted market assessment or expected cost plus a margin. This flexible framework aims to better represent the transfer of value to the customer.