The Big Five firm conducted a survey of all 41 publicly listed software companies on the FTSE and found that three out of five had not implemented SOP 97-2.
The lack of a UK standard for reporting revenue generated from the sale of software products and servies has led to a variety of accounting methods being used, making it near impossible for financial analysts to compare one software company with another or against an industry standard.
Some companies book sales as soon as contracts are signed, even though revenues might not be generated until software has been delivered or services performed, while others only account for revenues at a later stage.
E&Y said it considered SOP 97-2 to be ‘conservative’, but best practice in the absence of a UK standard and recommended all software companies in the UK adopt its methods.
SOP 97-2 specifies four criteria that must be met prior to recognising revenue: persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable and collectibility is probable.
Benefits include increased transparency and making the company a more attractive candidate for funding, securing partnerships and strategic alliances.
Geoff Knight, a partner in the firm’s technology, communications and entertainment practice said a move to US accounting methods would ‘build credibility’ for the sector amongst capital markets and analysts.
In addition, P/E ratios might improve, since uncertainty about how a company recognises revenue would be removed. Companies that adopted the US standard would also be at a competitive advantage when International Accounting Standards are introduces across the European Union in 2005.
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