Licence, Implementation and Mid-Term Modification
Northline Software Ltd (NSL) is a private Canadian software company with a December 31 year-end and reports under IFRS. On January 1, 20X5, NSL signed a contract with a customer for an on-premise licence, a six-month implementation, and three years of post-contract support (PCS). Total consideration is $1,200,000, billed as $700,000 for the licence, $300,000 for implementation, and $200,000 for PCS. The implementation significantly customizes the software, and the licence has no stand-alone functionality without it. NSL's stand-alone selling prices are $650,000 for the licence, $400,000 for implementation, and $250,000 for PCS. The customer paid $500,000 on signing. On July 1, 20X5, after implementation was complete, the parties modified the contract to add 200 named-user licences for $180,000; NSL normally sells those licences for $220,000. The modification adds no implementation or PCS. NSL has never had a contract with this customer before. Management wants to know how much revenue to recognize in 20X5.
1. Identify the performance obligations in the original contract and allocate the $1,200,000 transaction price. Explain why the licence and implementation are or are not distinct.
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Performance obligations
- The licence and implementation are not distinct. The implementation significantly customizes the software, and the customer cannot benefit from the licence without it. IFRS 15 requires combining them into one performance obligation. The PCS is distinct because the customer can benefit from support with the other resources and it is separately identifiable.
Allocation
SSP of combined licence and implementation = $650,000 + $400,000 = $1,050,000. SSP of PCS = $250,000. Total SSP = $1,300,000. Allocation of $1,200,000:
- Combined: $1,200,000 x 1,050/1,300 = $969,231
- PCS: $1,200,000 x 250/1,300 = $230,769
Recognition
If the combined obligation is satisfied over the six-month implementation period, NSL recognizes $969,231 in 20X5 because implementation is complete by July 1. PCS is recognized straight-line over three years: $230,769 / 3 = $76,923 in 20X5. Total 20X5 revenue before the modification = $1,046,154. The $500,000 cash receipt does not determine revenue.
2. Determine whether the July 1 modification is a separate contract under IFRS 15. If it is not, calculate the revenue allocated to the added licences and the remaining PCS, and state the 20X5 revenue impact.
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Is the modification separate?
The added licences are distinct, but the price of $180,000 is not the stand-alone selling price of $220,000. Under IFRS 15, a modification is a separate contract only if it adds distinct goods or services and the price increases by an amount that reflects their stand-alone selling prices. This fails the second condition, so NSL does not account for it as a separate contract.
Accounting treatment
Because the remaining goods are distinct from the goods already transferred, NSL allocates the remaining consideration to the remaining performance obligations. At July 1, 20X5, unrecognized original PCS = $230,769 x 2.5/3 = $192,308. Add the modification consideration of $180,000 = $372,308. Remaining SSP: PCS = $250,000 x 2.5/3 = $208,333; added licences = $220,000; total = $428,333. Allocation:
- PCS: $372,308 x 208,333/428,333 = $181,090
- Added licences: $372,308 x 220,000/428,333 = $191,218
20X5 revenue
- Combined licence and implementation: $969,231
- PCS: first half $38,462 + second half $36,218 = $74,680
- Added licences recognized at July 1: $191,218 Total = $1,235,129. Remaining PCS liability at December 31, 20X5 = $181,090 - $36,218 = $144,872; total consideration recognized and remaining = $1,380,000, which agrees to original $1,200,000 plus modification $180,000.