Revenue recognition for a software licence, customisation and support bundle
Orion Tech Solutions Ltd signs a ₹12 crore contract with a customer on 1 April 2024. The contract covers three deliverables: an on-premise software licence, implementation and customisation services, and three years of post-contract support. The company normally sells the licence for ₹8 crore, implementation for ₹3 crore and three-year support for ₹3 crore. The customer's legacy systems are incompatible with the software, and without substantial customisation the licence has no stand-alone value to the customer. The contract promises a ₹1 crore bonus if implementation is completed by 31 March 2025; the company estimates a 60% chance of achieving this and has no evidence from similar contracts. A ₹50 lakh penalty applies if implementation is delayed beyond 30 June 2025. By 31 March 2025, implementation costs of ₹1 crore have been incurred against an estimated total of ₹4 crore, and the company can measure progress reliably. Support begins only after implementation is accepted.
1. Identify the performance obligations in the contract and allocate the ₹12 crore transaction price.
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Performance obligations
The licence and implementation are not distinct. The software is not functional without substantial customisation for the customer's legacy systems; the customer cannot benefit from the licence without the implementation, and the two inputs are highly integrated. They form a single combined performance obligation. The support is distinct: the customer can benefit from support together with the software, and support is separately identifiable (routine, not integration).
Allocation
| Performance obligation | SSP (₹ crore) | Allocation of ₹12 crore |
|---|---|---|
| Licence + implementation | 11 | 12 x 11/14 = 9.4286 |
| Three-year support | 3 | 12 x 3/14 = 2.5714 |
| Total | 14 | 12.0000 |
The ₹2 crore discount is allocated pro rata because there is no evidence that it relates only to one deliverable.
2. Discuss the treatment of the ₹1 crore completion bonus and the ₹50 lakh delay penalty.
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Variable consideration
The ₹1 crore bonus is variable consideration. With a binary outcome, the most likely amount is used. The company estimates 60% probability, but it can include the bonus only to the extent that it is highly probable that a significant reversal will not occur when the uncertainty is resolved. A 60% chance is not 'highly probable'; the bonus is therefore constrained to nil. The absence of similar contracts also weakens the evidence for inclusion. The transaction price remains ₹12 crore.
The ₹50 lakh delay penalty is also variable consideration, but it reduces the price. At inception, if delay beyond 30 June 2025 is not expected, no reduction is made. The company must reassess at each reporting date; if a delay becomes probable, it recognises the expected penalty as a reduction of the transaction price and allocates it to the combined performance obligation. The bonus and penalty should not be double-counted.
3. Compute the revenue to be recognised for the year ended 31 March 2025, and explain the treatment of contract costs and support.
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Revenue to 31 March 2025
The combined licence-plus-implementation performance obligation is recognised over time: the customer receives the benefit of the customisation as it is performed, and the work creates an asset that the company cannot readily redirect. Progress is reliably measured on a cost-to-cost basis: ₹1 crore incurred / ₹4 crore total estimated cost = 25%.
Revenue on the combined obligation = 25% x ₹9.4286 crore = ₹2.3571 crore. Cost incurred = ₹1 crore. The contract is in an asset position if billing is lower; otherwise a contract liability. The ₹2.5714 crore allocated to support is not recognised yet because support begins only after acceptance; it is deferred and recognised over the three-year support period. No bonus is included because it is constrained.
Contract costs: implementation costs are expensed as the related service is performed. If any cost to fulfil meets the capitalisation criteria and is not within another standard, it is capitalised and amortised on a systematic basis; no such cost is identified here. Incremental costs of obtaining the contract would be capitalised if recoverable, but none are given.