Technology reseller arrangements
IFRS 15 also changed practice for entities that sell their products through distributors or resellers (collectively referred to in this section as resellers). It is common in the technology industry for entities to provide resellers with greater rights than end-customers. For example, an entity may provide a reseller with price protection and extended rights of return.
Under IFRS 15, entities will need to first evaluate when control of the product transfers to the end-customer. To do this, first, entities may need to assess whether their contracts with resellers are consignment arrangements, under which control likely would not transfer until delivery to the end-customer (see Consignment arrangements). The standard provides three indicators that an arrangement is a consignment arrangement: Technology reseller arrangements
- The product is controlled by the entity until a specified event occurs (such as the sale of the product to a customer of the dealer) or until a specified period expires.
- The entity is able to require the return of the product or transfer the product to a third party (such as, another dealer).
- The dealer does not have an unconditional obligation to pay for the product (although, it may be required to pay a deposit).
An entity does not recognise revenue upon delivery of a product to a reseller if the delivered product is held on consignment because control of the product has not transferred. The entity would wait until the reseller sells the product to an end-customer to recognise revenue, which would be considered the point in time that the entity has transferred control of the product. The result would be similar to today’s practice of deferring revenue recognition until the reseller sells the product to an end-customer1.
If an entity concludes that its contract with a reseller is not a consignment arrangement, the reseller will likely be considered a customer of the entity. The entity is required to recognise revenue upon the transfer of control of the promised goods in an amount that reflects the amount to which the entity expects to be entitled. Technology reseller arrangements
In determining the amount to which it expects to be entitled, the entity will be required to consider whether it will provide resellers with explicit or implicit concessions (e.g., price protection, expanded return rights, stock rotation rights) that will make the transaction price variable. In these instances, the entity needs to estimate the transaction price and, considering the constraint, include only the amount for which the entity determines it is highly probable that a significant reversal will not occur. The entity needs to carefully consider whether it can include the variable consideration resulting from the concessions it offers to its reseller customer(s) in its transaction price. Technology reseller arrangements
IFRS 15 indicates that an entity that has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances as a factor that could increase the likelihood (or magnitude) of a revenue reversal. Entities need to assess the facts and circumstances of their contracts to determine whether practice changes under IFRS 15. Technology reseller arrangements
Example – Reseller rebates
Facts: Software Co. enters into a master reseller agreement on January 1, 20×1 with Reseller Co. (a software distributor) to license software at a price of $100,000 per license for Product A and $50,000 per annual post-contract customer support (PCS) contract for Product A.
If Reseller Co. reaches total annual purchases of $5,000,000 of license and annual PCS contracts (in any combination), Reseller Co. will receive a 10% cash rebate on total annual purchases. Software Co. expects Reseller Co. to reach the $5,000,000 purchase target. On January 31, 20×1, Reseller Co. places an order to purchase five licenses of Product A and an annual PCS contract for the five licenses. Total consideration is $750,000.
How will the rebate impact the transaction price?
Analysis: Payments to customers are considered a reduction of the transaction price unless the payment is in exchange for a distinct good or service. In this case, there is not a distinct good or service being provided by Reseller Co.; therefore, the estimated transaction price should be reduced by the expected rebate.
The expected rebate should then be allocated to all of the performance obligations in the arrangement based on their relative standalone selling prices. However, it may be appropriate in some instances to allocate the expected rebate to only one or more performance obligations in the arrangement, rather than to all performance obligations, if the specific criteria for allocating variable consideration are met.
Technology reseller arrangements
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