First, youll need to determine whether the software license is. A licence is usually capable of being distinct, but sometimes a customer benefits only from a combined entitys output and therefore a license forms a part of wider performance obligation. Revenue from contracts with customers, global edition. And, if there was no change for 2 years, then theres no need to update for 2 years and the 2-year old post is still valid. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. means a type of license for a Software Product which allows the User to use the Software Product in perpetuity so long as the User does not otherwise violate the terms of the EULA. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. It says that you can sell two types of licenses: IFRS 15 provides a clear guidance on whether you deal with one or another type. They have determined that the updates are a distinct deliverable under the contract, as each individual component (software plus future updates) provides value to the customer. If not margin is fine. We expect that the outcome of applying the two standards will be similar; however, there will be fact patterns for which outcomes could differ. [IFRS 15:99], Further useful implementation guidance in relation to applying IFRS 15. IFRS 15 became mandatory for accounting periods beginning on or after 1 January 2018. Very thoughtful response. FASB-IASB Joint Transition Resource Group for Revenue Recognition Paper topic Licenses - Specific Application Issues About Restrictions and Renewals CONTACT(S) Scott A. Muir samuir@fasb.org +1 203 956 3478 Raghava Tirumala rtirumala@ifrs.org +44 207 246 6953 The global body for professional accountants, Can't find your location/region listed? Too many newsletters that you move to read later folder, but later never comes? But lets go step by step and Ill tell you about the specifics when we get there: Step n. 1 is to identify the contract with the customer nothing to be worried about, thats clear in this case. IAS 38 These include, but are not limited to: [IFRS 15:31-33], An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35], If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Would not it be better if the date of each such post/Q&A is also mentioned? Are you good to go? Subscribe to receive Roadmap series publications via e-mail. No problem, you have the contract and you quote your selling price clearly. You must first assess whether your license that you sell is distinct from 1-year support and updates. The following example can help illustrate and summarize how a subtle change in the situation changes the revenue recognition landscape: Company A is a SaaS company that sells ERP software licenses. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. an operating system installed in a smartphone); a licence that the customer can benefit from only in conjunction with a related service. Step 1: Identify the contract with the customer, A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met: [IFRS 15:9], If a contract with a customer does not yet meet all of the above criteria, the entity will continue to re-assess the contract going forward to determine whether it subsequently meets the above criteria. Please reach out to, Effective dates of FASB standards - non PBEs, Business combinations and noncontrolling interests, Equity method investments and joint ventures, IFRS and US GAAP: Similarities and differences, Insurance contracts for insurance entities (post ASU 2018-12), Insurance contracts for insurance entities (pre ASU 2018-12), Investments in debt and equity securities (pre ASU 2016-13), Loans and investments (post ASU 2016-13 and ASC 326), Revenue from contracts with customers (ASC 606), Transfers and servicing of financial assets, Compliance and Disclosure Interpretations (C&DIs), Securities Act and Exchange Act Industry Guides, Corporate Finance Disclosure Guidance Topics, Center for Audit Quality Meeting Highlights, Insurance contracts by insurance and reinsurance entities, IFRS and US GAAP: similarities and differences, {{favoriteList.country}} {{favoriteList.content}}. Follow along as we demonstrate how to use the site. If your entity receiving total amounts from Customer & transferring to other party, yes you need to fully recognize the revenue. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. [IFRS 15:74] If a standalone selling price is not directly observable, the entity will need to estimate it. In order to achieve the disclosure objective stated above, the Standard introduces a number of new disclosure requirements. the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and, Performance obligations satisfied over time, Methods for measuring progress towards complete satisfaction of a performance obligation, Customer options for additional goods or services, the significant judgments, and changes in the judgments, made in applying the guidance to those contracts; and. Do not delete! Its well worth the investment to seek out your professional accounting advisors who can make the most prudent and defensible recommendations to ensure you obtain and retain compliance. If not, it will be accounted for by modifying the accounting for the current contract with the customer. Management should assess each arrangement where licenses are sold with other goods or services to conclude whether the license is distinct and therefore a separate performance obligation. A receivable is recognised when the entitys right to consideration is unconditional except for the passage of time. An entity that chooses to apply IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant financial statements. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 11 September 2015. Any questions or comments? Most users can work without updates and frankly speaking, thats what I often do on my website ifrsbox.com. Contract can have a written and non-written form or be implied (contract may not be limited to goods or services explicitly mentioned in a contract, but also include those expected to be delivered due to business practices or statements made), Should be approved by parties, and have a commercial basis, Should create enforceable rights and obligations between parties, Should have a consideration established taking into account ability and intention to pay, Could result in retrospective or prospective adjustments to an existing contract, creation of a new contract alongside the old contract, or a termination of the original contract and creation of a new contract. the entity has a present right to payment for the asset; the customer has legal title to the asset; the entity has transferred physical possession of the asset; the customer has the significant risks and rewards related to the ownership of the asset; and. Paragraphs IFRS 15.B52-B63 cover licensing of intellectual property such as (IFRS 15.B52): The main challenges in this area relate to determination whether licensing of intellectual property constitutes a distinct good or service and if so, whether related performance obligation is satisfied over time or at a point in time. To the extent that each of the performance obligations has been satisfied. Nonpublic entities can elect not to provide certain disclosures, and the disclosure requirements for interim periods are significantly reduced in scope from the illustration below. In this case servicing and warranties are performance obligations that are distinct and revenue relating to them needs to be recognised separately from the goods or services promised on the contract to which they relate. Regardless of the licensing, Post Contract Services (PCS) such as maintenance and updates are typically lumped together with the portion of the contract fee allocated to PCS and recognized monthly over the period that the services are supplied. IFRS 16 Leases - IAS Plus These words serve as exceptions. retain prior period figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period). Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. By clicking "Accept" you agree to the categories of cookies you have selected. How to account for intercompany loans under IFRS. 2017 KPMG IFRG Limited, a UK company limited by guarantee. The standard should be applied in an entitys IFRS financial statements for annual reporting periods beginning on or after 1 January 2018. Check your inbox or spam folder now to confirm your subscription. So if this is the case, then the license is distinct. This message will not be visible when page is In the handouts prepared for the Boards July 2021 and September 2022 meetings, the FASB staff noted that stakeholder feedback on the revenue standard was positive overall, particularly from users of financial statements since the standard results in more useful and transparent information, improved disclosures, and comparability across entities and industries. How to account for the sale of these programs? Thank you very much, Got a job interview tomorrow with a fintech company, and i was looking for some illustration on how to recognize the revenue from a software sale, your article came to the rescue, much easier to get the picture than reading the IFRS it self, thanks a lot, Hello Silvia Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment. Certain services may not be available to attest clients under the rules and regulations of public accounting. IFRS 15 does not contain this specific guidance; therefore, entities applying IFRS might reach a different conclusion regarding when to recognize license renewals. Urgent preparation for the change may be needed, partly because companies that plan to do a full retrospective transition may need to have systems in place to capture data for dual reporting as soon as the beginning . Thankyou Silvia! The amendments do not change the underlying principles of the standard, just clarify and offer some additional transition relief. This box/component contains JavaScript that is needed on this page. This box/component contains code STUDIO DEVELOPMENT TEAM +++, Telecommunications, Media & Entertainment. a right to access the entitys intellectual property as it exists throughout the licence period; or. [IFRS 16:1] Scope [IFRS 15:105], A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer. We dont bill that separately. 12 April 2016. We develop various technical software programs and sell them to the clients together with 1-year of updates. The following examples of licences that are not distinct are given in IFRS 15 (IFRS 15.B54): If a licence is distinct, it can provide a customer with either (IFRS 15.B56): Overwhelmed by constant stream of IFRS updates? Please advise. Ravi Its completely depends on the control & situation. We recognize the full amount of 200 in P&L in November instead of deferring 120 over subsequent 12 months. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. [IFRS 15:63], Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation, Revenue is recognised as control is passed, either over time or at a point in time. [IFRS 15:60] A practical expedient is available where the interval between transfer of the promised goods or services and payment by the customer is expected to be less than 12 months. She provides consultations to clients and audit practitioners on complex financia More, Chris is a managing director in Deloittes National Office Accounting and Reporting Services Group. PwC. But what about a software term licence, which is something in the middle? The implementation of IFRS 15 in the software industry is proving to be a challenge, as expected. Recognition of revenue Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria: it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and (for example, to assess if the seller required to make changes in the study materials, syllabus and training guides etc). Step n. 5 is to recognize revenue when or as the performance obligation is satisfied. IFRS 15: Revenue: IFRS reporting: Audit & assurance: Services: PwC Further details on accounting for contract modifications can be found in the Standard. As you can see, ASC 606 will require SaaS companies to make more judgment calls than they may be used to making. Specifically, variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved.