Revenue cut-off and principal-versus-agent at a Colombo IT reseller
LankaCloud (Pvt) Ltd, a Colombo-based IT reseller, signed a contract on 15 March 2025 with a listed commercial bank for a branch refresh. The total contract price is LKR 96 million, but the bank is entitled to a LKR 4 million early-signing discount, so the agreed consideration is LKR 92 million. The contract covers: 400 rugged tablets, which LankaCloud buys from a foreign OEM and controls before delivery; a three-year teller software licence from a local developer, which LankaCloud resells; implementation services performed by LankaCloud's engineers; and three years of post-implementation support, subcontracted to the developer but sold by LankaCloud as its own obligation. Standalone selling prices are tablets LKR 48 million, licence LKR 24 million, implementation LKR 12 million and support LKR 12 million. Tablets were delivered and accepted on 5 April 2025, implementation was completed on 30 June 2025, and support began on 1 July 2025. The bank paid a 20% advance in March 2025 and will pay 70% on acceptance and 10% after twelve months; 5% is retained for defects. Year-end is 31 March 2026.
1. Identify the performance obligations in the LankaCloud contract and allocate the LKR 92 million transaction price. Calculate the revenue LankaCloud should recognise for the year ended 31 March 2026, stating your timing assumptions.
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The contract contains four distinct promises because the bank can benefit from each separately and they are not highly integrated: tablets, software licence, implementation and support. The LKR 4 million discount is allocated proportionately because there is no evidence that it relates only to one obligation. Total standalone selling price is LKR 96 million, so each obligation receives 92/96 of its standalone price:
- Tablets: 48 x 92/96 = LKR 46.0 million
- Licence: 24 x 92/96 = LKR 23.0 million
- Implementation: 12 x 92/96 = LKR 11.5 million
- Support: 12 x 92/96 = LKR 11.5 million
Timing: tablets transfer at delivery and acceptance on 5 April 2025, so LKR 46.0 million is recognised in the year to 31 March 2026. The licence is a right to use the developer's software; assuming it is made available with the tablets, LKR 23.0 million is recognised on 5 April 2025. Implementation is a distinct service transferred when completed on 30 June 2025, so LKR 11.5 million is recognised in full. Support is a stand-ready obligation over 36 months from 1 July 2025; nine months fall in the year, giving 11.5 x 9/36 = LKR 2.875 million.
Total revenue for the year ended 31 March 2026 is 46.0 + 23.0 + 11.5 + 2.875 = LKR 83.375 million. The remaining support revenue of LKR 8.625 million is a contract liability at year-end. If the licence is not made available until acceptance, the same total arises, but the split between licence and implementation timing would need revisiting.
2. Assess whether LankaCloud is principal or agent for the tablets and for the three-year support. Explain the effect on revenue and on the amounts presented in the financial statements.
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For the tablets, LankaCloud is almost certainly principal. It purchases the tablets from the OEM, controls them before transfer, bears inventory and credit risk, sets the price to the bank and is responsible for delivering conforming goods. It should recognise gross revenue of LKR 46.0 million and cost of sales for the tablets, not a net commission.
For support, the analysis turns on control of the service before it is transferred. The fact that the developer performs the work does not by itself make LankaCloud an agent. Indicators pointing to principal are that LankaCloud contracts with the bank as the sole obligor, sells support as its own obligation, sets the price and remains responsible if the developer fails. If LankaCloud can direct the developer, bears the risk of poor performance and has discretion over pricing, it controls the service before transfer and should recognise gross support revenue of LKR 11.5 million and subcontractor cost. If, instead, the developer is primarily responsible to the bank, LankaCloud cannot direct the developer and earns only a fixed commission, LankaCloud is agent and recognises only the net commission.
The distinction affects revenue, cost of sales and gross profit, but not profit before tax if accounting is otherwise correct. It also affects key ratios and may be a fraud risk if gross revenue is inflated to meet targets. The contract, developer agreement and evidence of responsibility should be documented.
3. Explain the treatment of the 5% retention and the 20% advance, and whether the contract contains a significant financing component under SLFRS 15.
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The 5% retention is a payment term, not automatically a reduction in the transaction price. It secures defects liability and remains receivable from the bank if LankaCloud performs. Revenue should not be reduced merely because cash is withheld; the retention is a receivable unless it represents a genuine price concession or a expected penalty. If the retention is expected to be forfeited, that would be variable consideration and would be estimated and constrained.
The 20% advance creates a contract liability, not revenue, because LankaCloud has not yet transferred goods or services. It is not a discount. When the related performance obligations are satisfied, the contract liability is released to revenue.
SLFRS 15 requires an assessment of whether the timing of payments provides financing to either party. The period from the March 2025 advance to final settlement after twelve months from acceptance is more than one year, but the amount, purpose and commercial logic matter. If the advance and retention are normal industry payment terms protecting the customer, and the period between transfer and payment is not significant, no adjustment is needed. If the financing benefit is significant, LankaCloud should adjust the transaction price for the time value of money, recognise interest expense or income and remeasure the contract liability. The practical test is whether the difference between the cash price and the deferred price would be material to the contract.