KazCloud Systems LLP - Implementation Fees and a Mid-Term Contract Modification under IFRS 15
KazCloud Systems LLP (Almaty) signed a three-year contract on 1 January 2025 to supply a hosted HR platform to a mining group. The stated price is KZT 8,000,000 per year (total KZT 24,000,000), billed annually in advance. KazCloud also charged a one-off implementation fee of KZT 6,000,000, invoiced and collected in January. Implementation takes ten weeks and covers data migration, configuration of payroll rules and integration with the client's ERP. Without it the client cannot operate the platform, and the configuration has no standalone use. KazCloud capitalised KZT 4,500,000 of direct implementation payroll and travel costs and expects the client to renew for at least two further three-year terms. On 1 July 2025 the client added a 12-month extension plus a new analytics module, paying a combined KZT 9,000,000. The analytics module's standalone selling price is KZT 9,000,000; the extension carries no separate charge. There is no right of cancellation or refund.
1. How should the KZT 6,000,000 implementation fee be recognised in the year ended 31 December 2025? Justify the treatment by reference to the IFRS 15 distinctness criteria and compute the revenue.
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Assessment of distinctness (IFRS 15.27). A promised service is distinct only if (a) the customer can benefit from it on its own or with readily available resources and (b) it is separately identifiable within the contract.
- (a) fails: the configured platform has no use to the client without the hosted SaaS, and vice versa.
- (b) fails: the configuration significantly customises and integrates the SaaS into the client's payroll and ERP environment rather than being a separate output.
Conclusion. The implementation activity does not transfer a distinct service; it is an fulfilment/set-up activity. The implementation fee and the SaaS subscriptions form a single performance obligation, which is a series of distinct daily services transferred over time (IFRS 15.22–23). Revenue is recognised over the 36-month contract term, not on invoicing or collection.
Computation
- Transaction price: 24,000,000 + 6,000,000 = KZT 30,000,000
- Monthly revenue: 30,000,000 ÷ 36 = KZT 833,333
- Revenue for 2025 (12 months): KZT 10,000,000
- The KZT 6,000,000 collected in January is a contract liability at inception, released over the term.
Recognising the KZT 6,000,000 at implementation would overstate 2025 revenue by KZT 6,000,000 and understate the contract liability by the same amount.
2. How should the KZT 4,500,000 of capitalised implementation costs be treated, and what judgement determines the amortisation period?
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Capitalisation (IFRS 15.95). Costs to fulfil a contract are capitalised only if they are not within the scope of another standard, relate directly to the contract, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. The payroll and travel costs are directly attributable, generate the configured platform used to deliver future SaaS, and are recoverable from a three-year contract with an expected nine-year relationship - so capitalisation is appropriate. Incremental costs of obtaining the contract would be dealt with separately under IFRS 15.91.
Amortisation (IFRS 15.99). The asset is amortised on a systematic basis consistent with the pattern of transfer of the services to which it relates. Because the costs generate resources used in satisfying future obligations over the expected customer relationship, including expected renewals, the amortisation period should reflect that relationship.
- If renewals are substantively assured (high switching costs, integrated payroll configuration, board-approved renewal expectation): 4,500,000 ÷ 9 years = KZT 500,000 amortisation for 2025, leaving KZT 4,000,000.
- If renewal evidence is weak, amortise over the non-cancellable three years: 4,500,000 ÷ 3 = KZT 1,500,000, of which KZT 750,000 would fall in 2025.
The longer period is only defensible with documented evidence; the shorter period is the more prudent default. The asset must also be tested for impairment under IAS 36 whenever indicators exist (for example, if the SaaS contract becomes loss-making).
3. How should the 1 July 2025 modification be accounted for, and what revenue does KazCloud recognise for 2025 in total?
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Step 1 - is it a separate contract (IFRS 15.20)? A modification is treated as a separate contract only if both the scope increases with distinct goods or services and the price increases by an amount commensurate with standalone selling price. The analytics module is distinct, but the combined price of KZT 9,000,000 equals only the module's SSP and attributes nothing to the 12-month extension. The second criterion therefore fails; the modification is not a separate contract.
Step 2 - which route under IFRS 15.21? The remaining services (continued SaaS access plus the module) are distinct from the services transferred before 1 July 2025. Accordingly IFRS 15.21(b) applies: terminate the old contract and create a new one. No cumulative catch-up is recorded against prior periods.
Step 3 - reallocation
- Unrecognised consideration at 30 June 2025: 30,000,000 − (6 × 833,333) = KZT 25,000,000
- Add consideration for the modification: KZT 9,000,000 → KZT 34,000,000
- Remaining months: 30 (original) + 12 (extension) = 42
- Monthly revenue: 34,000,000 ÷ 42 = KZT 809,524
2025 revenue
- 1 Jan – 30 Jun: 6 × 833,333 = KZT 5,000,000
- 1 Jul – 31 Dec: 6 × 809,524 = KZT 4,857,144
- Total: KZT 9,857,144
Cash received in 2025 of KZT 39,000,000 less revenue of KZT 9,857,144 leaves a contract liability of about KZT 29,142,856, adjusted for the billing profile of the extension.