Myth or Truth: Current Software Revenue Recognition Rules and Electronic Signature

We've recently received a question regarding adding electronic signature to the contract close process and how electronic signatures affect software revenue recognition. Ken Moyle, chief legal officer, shares his thoughts* in response to the following question.

Question: While legally binding, electronic signatures are not recognized as sufficient evidence of an arrangement under current software revenue recognition rules. Does DocuSign have any information on any anticipated changes to those rules?

Answer, from Ken Moyle, DocuSign's Chief Legal Officer:

Please ask your accounting advisers or auditors to produce the accounting rule or bulletin that supports the statement that “current software revenue recognition rules do not recognize electronic signatures as sufficient evidence of an arrangement.” There are some very large software companies that would be very interested to hear that their click-through and click-wrap agreements, while enforceable worldwide, are somehow not adequate to recognize revenue!

If the statement is based on the likely fact that the revenue recognition rules do not affirmatively deal with electronic signatures, it is incorrect in its assumption that such treatment is required in order for electronic records to be recognized as providing evidence of an arrangement.

Even before passage of the ESIGN Act ten years ago, it has been clear that a signed contract is not necessary to establish evidence of an arrangement. See SAB No. 101, which states in part:

Customary business practices and processes for documenting sales transactions vary among companies and industries. Business practices and processes may also vary within individual companies (e.g., based on the class of customer, nature of product or service, or other distinguishable factors). If a company does not have a standard or customary business practice of relying on written contracts to document a sales arrangement, it usually would be expected to have other forms of written or electronic evidence to document the transaction. For example, a company may not use written contracts but instead may rely on binding purchase orders from third parties or on-line authorizations that include the terms of the sale and that are binding on the customer. In that situation, that documentation could represent persuasive evidence of an arrangement.

But with the passage of ESIGN in 2000 the underlying legal foundation for entering into written contracts electronically has been firmly established. A contract or signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form”. This simple statement provides that electronic signatures and records are just as good as their paper equivalents, and therefore subject to the same legal scrutiny of authenticity that applies to paper documents. To the extent that evaluating the evidentiary value of a signature on a contract is in the purview of an independent auditor (if it is at all), the weight of an electronic signature should be afforded the same presumptions of authenticity as a handwritten signature. The evidentiary value of an electronically signed contract will, by virtue of its audit trail, often be far higher than anything produced via the typical manual signature process.

In short, there is no accounting rule that precludes electronically signed contracts, and DocuSign would be willing to deliver to your company any necessary assistance in demonstrating the veracity of the process behind the formation of these binding arrangements.

*Ken's thoughts are shared in accordance with DocuSign's Blog Disclaimer