Revenue from maintenance services

Revenue from maintenance services – Entities may provide maintenance services such as telephone support, bug fixes and unspecified upgrades or enhancements on software-enabled products.

Under earlier IFRS, these maintenance services were often treated as a single component (combined with other goods or services)1. These services are commonly referred to as post-contract support (PCS), and are not unique services contemplated or defined in IFRS 15. Revenue from maintenance services

As a result, entities must evaluate whether the individual services that comprise what is considered PCS under US GAAP are a separate performance obligations. For example, a technology entity may conclude that the promise to provide unspecified future upgrades and enhancements is a promised good or service in the contract and, therefore, is a revenue element.

The entity may also determine that bug fixes and telephone support are provided to ensure that the software is functioning as promised. As a result, those services are part of the assurance warranty coverage for the software and are not a revenue element (such warranties will be accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets).

Revenue from maintenance services

However, other entities may conclude that the promise to provide telephone support and bug fixes contains both an assurance warranty (non-revenue element) and service-type warranty (revenue element), as discussed further in Warranties. Revenue from maintenance services Revenue from maintenance services

Furthermore, when the contract includes the promise to provide unspecified future upgrades and enhancements, the entity must determine the nature of that promise. For example, an entity may conclude that it has established a clear pattern of only providing one significant upgrade or enhancement per year, and therefore, the obligation to provide ‘future upgrades and enhancements’ is actually an obligation to provide this single upgrade or enhancement. Alternatively, if the entity has a history of providing multiple upgrades each year with no clear pattern of timing as to when those upgrades are provided, the entity may conclude that obligation represents more of a ’stand-ready’ obligation. Revenue from maintenance services

Combined contracts

When the license is not distinct from those other goods or services , they are accounted for together as a single performance obligation. This would be the case, for example, when the license forms a component of a tangible good and is integral to the good’s functionality (for example, a software license which requires ongoing maintenance and upgrade services in order for it to continue to operate), or it is a license that the customer can benefit from only in conjunction with a related service (for example, a software hosting agreement on an internet site).

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When the license is distinct from the other promised goods or services, the license is accounted for as a separate performance obligation. Revenue is then recognised either at a point in time, or over time, depending on whether the nature of the vendor’s promise in transferring the license to the customer is to provide that customer with either:

  • Access to the vendor’s intellectual property as it exists at any given time throughout the license period (i.e. the vendor continues to be involved with its intellectual property); or
  • A right to use the vendor’s intellectual property as it exists at a point in time the license is granted. Revenue from maintenance services

Interaction with other standards

A contract with a customer may partially be in scope of IFRS 15 and partially within the scope of other Standards, e.g. a contract for the lease of an asset and maintenance of the leased equipment.
In such instances, an entity must first apply the other standards if those standards specify how to separate and/or initially measure one or more parts of the contract. The entity will then apply IFRS 15 to the remaining components of the contract (IFRS  15 7). Revenue from maintenance services

For example – If a contract includes a financial instrument (e.g. financial guarantee) and a revenue component, the fair value of the financial instrument is first measured under AASB 9 Financial Instruments and the balance contract consideration is allocated in accordance with IFRS 15. Revenue from maintenance services

Transactions that fall within the scope of multiple standards should be separated into components, so that each component can be accounted for under the relevant standards. This is demonstrated in the decision tree below: Revenue from maintenance services

Revenue from maintenance services

 

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Revenue from maintenance services

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