ERP contract: combining licence and customization under IFRS 15
Hanul Systems Co. signs a ₩3,000 million contract with a retailer to deliver an ERP software licence, perform configuration and customization, and provide three years of post-implementation support. The licence can be used without the customization, but the customization significantly affects the software's functionality. Standalone selling prices are ₩1,800 million for the licence, ₩900 million for customization, and ₩600 million for support. Hanul also promises a ₩200 million bonus if the system goes live by 31 December; its history with similar projects indicates a 70% chance of meeting the date, and it uses the most likely amount for similar bonuses. The customer pays ₩1,000 million on signing, with the balance due over two years. Hanul concludes that the financing component is not significant. During the project, the customer asks Hanul to add a new warehouse module for ₩150 million; the module is not part of the original scope and its price approximates standalone selling price. At year-end, customization is 60% complete, support has not begun, and the licence has been transferred.
1. Identify the performance obligations in the original contract and allocate the transaction price, including the bonus. Explain why the customization is or is not distinct from the licence.
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Distinct goods or services. The licence and customization are not separately identifiable. Although the licence can be used without customization, the customization significantly changes the software's functionality and the two promises are highly interrelated. They are combined into one performance obligation. Support is distinct because the customer can benefit from it with the software and it is not highly integrated.
Variable consideration. The ₩200m bonus is variable. The most likely amount is ₩200m because 70% is more likely than not. However, the constraint prevents inclusion unless it is highly probable that no significant reversal will occur. A 70% probability is not sufficiently high, so include ₩0 in the transaction price.
Allocation. Transaction price = ₩3,000m. SSPs: combined licence/customization = ₩2,700m; support = ₩600m; total = ₩3,300m. Allocate: combined = 3,000 × 2,700/3,300 = ₩2,454.55m; support = 3,000 × 600/3,300 = ₩545.45m. If the bonus later becomes highly probable, update the transaction price and allocate to remaining performance obligations, with cumulative catch-up where appropriate.
2. How should the ₩150 million warehouse module be accounted for?
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Assess the change under the IFRS 15 contract modification guidance. The module adds a distinct good or service, and the promised price of ₩150m approximates its standalone selling price. Therefore, account for it as a separate contract. Do not adjust the ₩3,000m transaction price or the allocation to the original performance obligations. Recognize revenue for the module when control of the module transfers to the customer. If the module were not distinct, Hanul would instead account for the modification as a termination of the old contract and creation of a new one, or as a cumulative catch-up adjustment, depending on whether remaining goods/services are distinct.
3. Determine revenue recognized at year-end for the original contract assuming Hanul concludes the combined licence/customization performance obligation is satisfied over time and uses an input method based on costs incurred.
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The combined licence/customization performance obligation is 60% complete. Revenue for that obligation = 60% × ₩2,454.55m = ₩1,472.73m. Support revenue is ₩0 because support has not begun. The ₩200m bonus remains constrained and is not recognized. Total revenue on the original contract at year-end is therefore ₩1,472.7m. The transfer of the licence does not trigger separate revenue because the licence is part of the combined performance obligation; revenue follows progress on the combined promise. The warehouse module is a separate contract and is recognized only when its control transfers.