Understanding Vendor Specific Objective Evidence [VSOE] in Legal Context
Definition & Meaning
Vendor specific objective evidence (VSOE) refers to a method used in accounting to determine the fair value of software and related services. This approach is recognized under U.S. Generally Accepted Accounting Principles (USGAAP) and allows businesses to recognize revenue from multi-item sales based on specific evidence that a product has been delivered. Essentially, VSOE provides a framework for companies to allocate revenue appropriately among various components of a sale.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A software company sells a software package that includes a license, installation, and one year of support. If the company has previously sold similar packages and can demonstrate the fair value of each component based on past transactions, it can use VSOE to recognize revenue for each part of the sale as they are delivered.
Example 2: A vendor sells a combination of hardware and software. If the vendor has established prices for the hardware and software separately through prior sales, they can apply VSOE to recognize revenue as the items are delivered to the customer. (hypothetical example)