Transfer of control for distinct software licences

Transfer of control for distinct software licences – IFRS 15 provides additional application guidance to help entities determine when control transfers for distinct licences of intellectual property, based on the nature of the promise to the customer. This application guidance is applicable for both perpetual and term software licences.

 

IFRS 15 states that entities provide their customers with either:

Transfer of control for distinct software licences

 

If the licence does not meet all three criteria, the licence is a right to use by default and the entity would recognise revenue at the point in time when the licence is delivered.

The key determinant of whether a licence is a right to access is whether the entity is required to undertake activities that affect the licenced intellectual property (or the customer has a reasonable expectation that the entity will do so) and the customer is, therefore, exposed to positive or negative effects resulting from those changes.

These activities must not meet the definition of a performance obligation. However, the activities can be part of an entity’s ongoing and ordinary activities and customary business practices (i.e., they do not have to be activities the entity is undertaking specifically as a result of the contract with the customer). Furthermore, IFRS 15 notes that the existence of a shared economic interest between the parties (e.g., sales or usage-based royalties) may indicate that the customer has a reasonable expectation that the entity will undertake such activities.

When an entity is making this assessment (i.e., whether the licence is a promise to provide a right to access), it must exclude the effects of any other performance obligations in the arrangement. For example, assume an entity enters into a software arrangement with a customer for a software licence, with unspecified upgrades on a when-and-if available basis and telephone support.

Something else -   Licensing provides rights to a customer

The entity first determines whether the licence, telephone support and the promise to provide unspecified upgrades are separate performance obligations.

If the entity concludes that the telephone support is a warranty element, rather than a revenue element, the contract will include two revenue elements: the software licence and the unspecified upgrades. Furthermore, if the entity determines that a licence is distinct, the entity will apply the licence application guidance to determine whether control transfers over time or at a point in time. Transfer of control for distinct licences

A software licence that represents a right to use the software is recognised at a point in time if the entity has no contractual (explicit or implicit) obligation to undertake activities that will significantly affect the software licence during the licence period beyond any changes and activities associated with the unspecified future upgrade rights. In the example in the preceding paragraph, all three criteria for a right to access are not met, and the entity’s promise is a right to use the licence (and therefore revenue is recognised at a point in time).

See IFRS 15 IE 276 – IE 277 Transfer of control for distinct licences

Alternatively, a software licence that represents a right to access the software is recognised over the licence period if an entity concludes that there are activities that will significantly affect the software licence during the licence period beyond the unspecified future upgrades. That is, while the unspecified upgrades can directly change the intellectual property, other activities could also significantly affect it. Transfer of control for distinct licences

Software entities may find that many licences of software will represent rights to use the software and the related revenue will be recognised at a point in time. This is because the benefits from the entity’s activities in the contract (e.g., unspecified upgrade rights) are promises of service that are separate performance obligations and not contemplated in the assessment for determining the nature of the licence.

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BackgroundTransfer of control for distinct software licences

The technology industry comprises numerous subsectors, including, but not limited to, computers and networking, semiconductors, financial technology, software and internet, the internet of things, health technology, and clean technology. Each subsector has diverse product and service offerings and various revenue recognition issues. Determining how to allocate consideration among elements of an arrangement and when to recognize revenue can be extremely complex and, as a result, industry-specific revenue recognition models were previously developed. The new revenue standard replaces these multiple sets of guidance with a single revenue recognition model, regardless of industry.

While the new standards (ASC 606 and IFRS 15) include a number of specific factors to consider, they are principles–based standards. Accordingly, entities should ensure that revenue recognition is ultimately consistent with the substance of the arrangement.

Transfer of control for distinct software licences

Transfer of control for distinct software licences

Transfer of control for distinct software licences Transfer of control for distinct software licences Transfer of control for distinct software licences

Transfer of control for distinct software licences Transfer of control for distinct software licences Transfer of control for distinct software licences

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