Sable Analytics: allocating a bundled software contract (IFRS 15)
Sable Analytics Ltd sells a data-analytics platform to a large insurer. The contract, signed on 1 November 20X4, has a total transaction price of £4,500,000. It covers a perpetual software licence, delivered and accepted on 1 December 20X4; configuration and implementation services running from November 20X4 to January 20X5, which do not modify the underlying code (two of the three months are complete at the 31 December year end); and three years of support, starting when the platform goes live on 1 February 20X5. Standalone selling prices are £2,400,000 for the licence, £900,000 for implementation and £1,800,000 for support. The contract also promises an annual bonus of £300,000 if platform uptime exceeds 99.9%; Sable has reached that level in only three of the last ten quarters. The customer paid £3,000,000 on 15 December 20X4. In January 20X5, before the accounts were approved, the customer added 200 user seats for £400,000; the standalone price of those seats is £450,000.
1. Allocate the transaction price to the performance obligations and state the revenue and contract liability to be reported at 31 December 20X4.
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Step 1 – identify the performance obligations. Three promises are capable of being distinct: the perpetual licence, the configuration/implementation service, and the three years of support. Implementation is distinct because it does not significantly modify or customise the software, other integrators provide it, and the customer can benefit from the licence together with other resources.
Step 2 – allocate on relative standalone selling price. The £0.6m discount is not observable against any specific obligation, so it is spread pro rata:
| Obligation | SSP £ | % | Allocated £ |
|---|---|---|---|
| Licence | 2,400,000 | 47.06% | 2,117,647 |
| Implementation | 900,000 | 17.65% | 794,118 |
| Support | 1,800,000 | 35.29% | 1,588,235 |
| Total | 5,100,000 | 100% | 4,500,000 |
Step 3 – timing of satisfaction. The licence is a right to use, transferred at a point in time on 1 December 20X4: £2,117,647. Implementation is a service satisfied over time, measured by an input method; two of three months are complete, so £794,118 × 2/3 = £529,412. Support is stand-ready and recognised straight-line over 36 months from 1 February 20X5, so nil in 20X4.
Result. Revenue in 20X4 = 2,117,647 + 529,412 = £2,647,059. Cash received is £3,000,000, so a contract liability of £352,941 is presented, released against the implementation and support obligations in 20X5 as they are satisfied.
2. Explain how the uptime bonus should be treated at 31 December 20X4 and subsequently.
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The bonus is variable consideration. It is a single binary outcome for each year, so the most likely amount is the appropriate estimate rather than an expected value.
IAS 15's constraint applies: revenue is included only to the extent that it is highly probable that there will not be a significant reversal when the uncertainty is resolved. Three factors point to full constraint to nil: (i) the outcome is binary – either the whole £300,000 is earned or nothing; (ii) the evidence base is weak – success in only three of ten quarters implies a historical rate around 30%; (iii) part of the uptime depends on the customer's own infrastructure, which Sable cannot control. A 70% probability is nowhere near 'highly probable'.
A defensible answer therefore recognises nil variable consideration in 20X4, with disclosure of the constraint and the judgement. Because the bonus relates to uptime during the support period, any amount that becomes recognisable would be allocated to the support performance obligation and released over the relevant year, not to the licence. The estimate is reassessed at each reporting date and at each change in facts (for example, six consecutive compliant quarters), at which point part of the bonus may be released prospectively.
3. How should the January 20X5 addition of 200 seats for £400,000 be accounted for?
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Test the two IFRS 15 modification conditions. The extra seats are distinct – the customer can benefit from them on their own, and they are readily available separately – so the first condition (distinct goods/services) is met. The second condition fails: the price of £400,000 is roughly 11% below the £450,000 standalone selling price, so it is not 'an amount of consideration that reflects the entity's stand-alone selling prices'.
Because the additional services are distinct but not priced at standalone selling price, the modification is not a separate contract. It is treated as a modification of the existing contract: Sable terminates the old contract and creates a new one, allocating the total of (i) the consideration not yet recognised on the original contract and (ii) the £400,000 new consideration across the performance obligations that remain unsatisfied at the modification date (the remaining implementation and support, plus the seats). The remaining licence consideration has already been recognised and is not revisited.
Practically, this means the new total is spread over the remaining support period rather than recognised on signature. The modification date is January 20X5, so the adjustment falls into 20X5 and later periods, not 20X4. Had the seats been sold at £450,000, they would have been a separate contract recognised on delivery with no effect on the original allocation.