IFRS 15 Software industry obligations

IFRS 15 Software industry obligations – This is an example in a small series for illustrating the concepts in What is a good or service that is distinct?

Scenario A IFRS 15 Software industry obligations

A vendor enters into a contract with a customer to supply a license for a standard ‘off the shelf’ software package, install the software, and to provide unspecified software updates and technical support for a period of two years. The vendor sells the license and technical support separately, and the installation service is routinely provided by a number of other unrelated vendors. The software will remain functional without the software updates and technical support. IFRS 15 Software industry obligations

The software is delivered separately from the other goods or services, can be installed by a different third party vendor, and remains functional without the IFRS 15 Software industry obligationssoftware updates and technical support. Therefore, it is concluded that the customer can benefit from each of the goods or services either on their own or together with other goods or services that are readily available. IFRS 15 Software industry obligations

In addition, each of the promises to transfer goods or services is separately identifiable; because the installation services does not significantly modify or customise the software, the installation and software are separate outputs promised by the vendor, and not one overall combined output. The following distinct goods or services are identified:

  • Software license; IFRS 15 Software industry obligations
  • Installation service; IFRS 15 Software industry obligations
  • Software updates; IFRS 15 Software industry obligations
  • Technical support. IFRS 15 Software industry obligations

Scenario B 

New information in addition to scenario A: The vendor’s contract with its customer is the same as in scenario A, except that as part of the installation service the software is to be substantially customised in order to add significant new functionality to enable the software to interface with other software already being used by the customer.

The customised installation service can be provided by a number of unrelated vendors. In this case, although the installation service could be provided by other entities, the analysis required by IFRS 15 indicates that within the context of its contract with the customer, the promise to transfer the license is not separately identifiable from the customised installation service. In contrast, and as before, the software updates and technical updates are separately identifiable.

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The following distinct goods or services are identified:Consolidation exceptions and exemptions

  • Software license and customised installation service;  IFRS 15 Software industry obligations
  • Software updates; IFRS 15 Software industry obligations
  • Technical support. IFRS 15 Software industry obligations

Scenario C

The vendor’s contract with its customer is the same as in scenario B, except that: IFRS 15 Software industry obligations

  • The vendor is the only supplier that is capable of carrying out the customised installation service;
  • The software updates and technical support are essential to ensure that the software continues to operate satisfactorily, and the customer’s employees continue to be able to operate the related IT systems. No other entity is capable of providing the software updates or the technical support.

In this case, the analysis indicates that in the context of its contract with the customer, the promise is to transfer a combined service.

This combined service is identified as the single performance obligation. IFRS 15 Software industry obligations

Scenario D 1Loan receivable classification and measurement

A vendor enters into a contract with a customer to supply them with a 3-year licence for tax software for the upcoming tax year along with software updates for the next 3 years to be provided in December of each year. The software updates are to provide tips and news on tax legislation each year. The vendor routinely sells the licence and updates together and the software remains functional during the licence period regardless of the software updates. The functionality of the software will only allow the single tax year to be filed (i.e. the updates will not allow subsequent years in the licence period to be filed using the software). IFRS 15 Software industry obligations

The customer can benefit from the software licence on its own without the software updates, as it has standalone functionality, therefore, the licence and the software updates are capable of being distinct. The licence and the software updates are also distinct in the context of the contract as the software remains functional without the updates and the updates do not significantly modify or customise the software. Therefore, two performance obligations are identified: a software licence and software updates.

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Scenario D 2

Same factor pattern as Scenario D 1, except the software updates will allow the customer to file tax returns in any of the years covered by the 3-year licence, as well as receive monthly updates for changes in tax legislation and regulation. IFRS 15 Software industry obligations

The customer can benefit from the software licence on its own without the software updates, as it has standalone functionality, therefore, the licence and the software updates are capable of being distinct. However, the licence and the software updates are not distinct in the context of the contract as the benefit a customer would obtain from the licence is significantly limited without the software updates.

That is because the updates are necessary for the second and third years in the licence period to be functional, since changes for legislation and tax regulation would need to be updated in the software. The monthly updates for changes in tax legislation and regulation also limit the benefits obtained otherwise. Therefore, one performance obligation is identified in the contract.

Distinct goods or services

Determining a distinct good or service is part of identifying separate performance obligations. An important item to look at is whether a ‘promise to’ in a contract (established to be a contract for accounting purposes in Step 1) is a distinct good or service, and as a result thereof is a performance obligation. Here is the context:

Determining when promises are performance obligations

After identifying the promised goods and services in a contract, an entity determines which of those promises will be treated as performance obligations. At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either (IFRS 15 22):

a good or service (or a bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

Therefore promises to transfer goods or services are performance obligations if the goods or services are:

distinct (including as part of a bundle); or
part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer

If a promised good or service is not distinct, an entity should combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In some cases, this would result in accounting for all the goods or services promised in a contract as a single performance obligation (IFRS 15 30).

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A good or service (or bundle of goods and services) is distinct if the customer can benefit from the good or service on its own or together with other readily available resources (i.e., the good or service is capable of being distinct) and the good or service is separately identifiable from other promises in the contract (i.e., the good or service is distinct within the context of the contract). A promised good or service that an entity determines is not distinct is combined with other goods or services until a distinct performance obligation is formed.

Examples non-distinct

Examples of licenses that are not distinct from other goods or services promised in the contract include the following: IFRS 15 Software industry obligations

  • A license that forms a component of a tangible good and that is integral to the functionality of the good IFRS 15 Software industry obligations
  • A license that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a license, the customer to access content). IFRS 15 Software industry obligations

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IFRS 15 Software industry obligations

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