Principal versus agent and variable consideration under IFRS 15
CloudBridge Ltd resells a cloud-based HR platform. In January 20X5 it signed a three-year contract with a client for total consideration of $1,200,000, payable annually in advance. The contract includes: (i) access to the platform, hosted by a third-party provider, for which CloudBridge pays the provider $300,000 over three years; (ii) a perpetual on-premise licence to CloudBridge's own payroll module, priced at $750,000; (iii) implementation services, priced at $150,000, performed in the first two months. The client receives a 10% rebate on the total fee if platform uptime falls below 99.5% in any year; CloudBridge assesses this as possible but not probable. CloudBridge is responsible for the service, sets the price, and has discretion over the hosting provider. It cannot separately sell the licence without implementation. CloudBridge has no other significant obligations. How should revenue be recognised?
1. Determine whether CloudBridge is principal or agent for the hosting service and identify the performance obligations. Allocate the transaction price.
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Principal versus agent: CloudBridge is principal for the hosting service. It controls the service before it is transferred to the client: it is responsible for the service, sets the price, chooses the hosting provider and bears the provider cost of $300,000. Revenue is therefore recognised gross, with the $300,000 provider cost as cost of sales, not netted.
Performance obligations: The hosting access is a series of distinct services transferred over time; revenue is recognised over the three years. The licence and implementation are not distinct from each other. The implementation is essential to make the licence functional and CloudBridge cannot sell the licence without it; the two promises are highly interdependent. They form one combined performance obligation.
Allocation: Transaction price = $1,200,000. Stand-alone selling prices are hosting $300,000 and combined licence/implementation $900,000 ($750,000 + $150,000). Allocate $300,000 to hosting and $900,000 to the combined obligation. Recognise the $900,000 when implementation is complete and the licence is transferred (point in time), and the $300,000 over three years (about $100,000 per year).
2. Explain how the uptime rebate should be treated at contract inception and at each year-end, and state when revenue for the licence and implementation should be recognised.
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The 10% uptime rebate is variable consideration. At inception, CloudBridge estimates it using the most likely amount: $120,000 if the rebate is triggered. IFRS 15 constrains variable consideration to the amount for which it is highly probable that no significant reversal will occur. 'Possible but not probable' does not meet that threshold, so the rebate is not included in the transaction price at inception. No refund liability is recognised then; the contingency is disclosed.
At each year-end, reassess. If uptime falls below 99.5% and the rebate becomes probable, recognise a refund liability and reduce revenue by the expected $120,000 (or the portion earned). If it remains possible but not probable, continue to exclude it. The licence/implementation revenue is recognised when the combined obligation is satisfied; the hosting revenue is recognised over time. The rebate, if triggered, reduces the transaction price and is allocated to the performance obligations to which it relates.