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4 Recognising revenue
Publication date: 16 Dec 2022
GX Revenue Recognition : An IFRS 15 Guide for Software and SaaS sellers
4.1 When is the nature of a licence to provide a right to use IP?
Reference to standard: IFRS 15 App B para B61, IFRS 15 para IE 277
Reference to standing text: 11.258
Industry: Software
Entity F provides a fixed-term software licence to entity G. The terms of the arrangement allow entity G to download the
software by using a unique digital key provided by entity F. Entity G can use the software on its own server. The software
is functional when it transfers to entity G. Entity G also purchases PCS with the software licence. There is no expectation
for entity F to undertake any activities other than the PCS. The licence and PCS are distinct, as entity G can benefit from
the licence on its own, and the licence is separable from the PCS.
Question
What is the nature of the licence in this arrangement?
Answer
A software licence is usually considered a licence that provides a right to use IP. This is because it has standalone
functionality and the customer can use the IP as it exists at a point in time. This is consistent with Example 54 in IFRS 15,
which cites software as an example of right to use IP.
PCS is not considered an ‘activity’ that affects the IP because it is a separate performance obligation. The IP has
significant stand-alone functionality and entity F is not expected to perform any activities that affect that functionality.
Therefore, entity F does not perform activities that significantly affect the IP to which the customer has rights. The three
criteria required for a right to access IP over time are not met.
Entity F would recognise revenue at a point in time when entity G is able to use and benefit from the licence (no earlier
than the beginning of the licence term). PCS is a separate performance obligation in this arrangement and does not impact
the assessment of the nature of the licence.
4.2 Does the timing of revenue recognition differ for a distinct perpetual
software licence and a term software licence?
Reference to standard: IFRS 15 App B para B61
Reference to standing text: 11.258
Industry: Software
Question
Is the timing of revenue recognition different for a perpetual software licence and a term software licence when those
licences are separate performance obligations (that is, not bundled with other goods and services)?
Answer
No. Software is usually considered a right to use licence because it has stand-alone functionality and the customer can
use the IP as it exists at a point in time. This is consistent with Example 54 in IFRS 15, which cites software as an example
of right to use IP. As such, revenue allocated to a distinct software licence is usually recognised at the point in time control
is transferred to the customer. In accordance with para B61 of IFRS 15, this is typically at the beginning of the licence
term, regardless of whether the software licence has a stated term or is perpetual. The term of the licence could however
affect the estimate of its SSP and therefore, the allocation of transaction price to the licence, and other performance
obligations in the contract.
For licences that are not distinct and are bundled with other goods or services, an entity should apply judgement to
assess the nature of the combined item and determine whether the combined performance obligation is satisfied at a
point in time or over time.
4.3 Does an entity have to deliver a software key or access code to
conclude control has transferred to the customer?
Reference to standard: IFRS 15 App B para B61
Reference to standing text: 11.255
Industry: Software
Question
Does an entity have to deliver a software key or access code to conclude control has transferred to the customer in a
software arrangement?
Answer
It depends. Appendix B paragraph B61 of IFRS 15 states that revenue cannot be recognised from a licence of IP before
“the beginning of the period during which the customer is able to use and benefit from the licence”. This period usually
begins when “an entity provides (or otherwise makes available)” the IP.
A software vendor might need to apply judgement to determine when it ‘makes available’ a copy of the software. This
assessment should consider all of the indicators to determine the point in time control transfers in paragraph 38 of IFRS
15.
If delivery of a software key or access code is not substantive, it would not impact the assessment of control transfer. For
example, delivery of a software key or access code would likely not be substantive in situations where (a) the customer
already has access to the software (such as through a hosting arrangement or from a prior licence period or use of a
temporary key) or (b) the vendor has made the software available for access by the customer upon demand and there is
minimal to no effort required by the vendor to transfer the software (that is, providing a key or access code is an
administrative task).
However, in other circumstances, the delivery of a software key or access code could be substantive, such as a situation
where payment terms or acceptance clauses (that are not a formality) are tied to delivery.
4.4 What factors should be considered in determining whether an
arrangement is a stand ready obligation versus a promise to deliver
specific goods or services?
Reference to standard: IFRS 15 App B para B18
Reference to standing text: 11.185
Industry: Software
Distinction between a promise to stand ready and a promise to deliver specific goods or services
Judgement is required. For example, a promise to provide one or more specified upgrades to a software licence is not a
stand-ready performance obligation. A contract to deliver unspecified upgrades on a when-and-if-available basis,
however, would typically be a stand-ready performance obligation. This is because the customer benefits evenly
throughout the contract period from the guarantee that any updates or upgrades developed by the entity during the period
will be made available. Refer to the Revenue Recognition Transition Resource Group (“TRG”) memo no. 16 and the related
meeting minutes in Revenue TRG memo no. 25 for further discussion of this topic.
Applicability of time-based method
A measure of progress based on delivery or usage (rather than a time-based method) will best reflect the entity’s
performance in some instances. For example, a promise to provide a fixed quantity of a good or service(when the quantity
of remaining goods or services to be provided diminishes with customer usage) is typically a promise to deliver the
underlying good or service rather than a promise to stand ready. In contrast, a contract that contains a promise to deliver
an unlimited quantity of a good or service might be a stand-ready obligation for which a time-based measure of progress
is appropriate.
4.5 How should an entity recognise revenue for a stand ready obligation
to provide unlimited support services?
Reference to standard: IFRS 15 App B para B18
Reference to standing text: 11.185
Industry: Software
Entity H enters into a contract with a customer to provide a software licence and unlimited access to its call centre for a
one-year period. Entity H determines that the software licence and support services are separate performance obligations.
Customers typically utilise the call centre throughout the one-year term of the contract.
Question
How should entity H recognise revenue for the unlimited support services?
Answer
Entity H would conclude that its promise to the customer is a stand-ready obligation to provide unlimited access to its call
centre. Entity H would then determine a measure of progress that best reflects its performance in satisfying this obligation.
Assuming a time-based measure, entity H would recognise revenue for the support services on a straight-line basis over
the one-year service period.
4.6 How should an entity recognise revenue for a specified quantity of
services?
Reference to standard: IFRS 15 App B para B15 and B18
Reference to standing text: 11.185
Industry: Software
Entity H enters into a contract with a customer to provide a software licence and 100 hours of call centre support for a
one-year period. Entity H determines that the software licence and support services are separate performance obligations.
Entity H monitors customer usage of support hours to determine when the hours have been utilised. Customers are
charged an additional fee for call centre usage beyond 100 hours. Customers frequently use more than 100 hours of
support.
Question
How should entity H recognise revenue for the 100 hours of support services?
Answer
Entity H would conclude that its promise to the customer is to provide 100 hours of call centre support. Assuming a
conclusion that hours of service provided best reflects its efforts in satisfying the performance obligation, revenue would
be recognised based on the customer’s usage of the support services.
4.7 How should an entity recognise revenue allocated to a promise to
provide PCS?
Reference to standard: IFRS 15 App B para B18
Reference to standing text: 11.185
Industry: Software
Question
Should revenue allocated to a promise to provide PCS be recognised using a time-based measure of progress (that is,
ratably) over the contract period?
Answer
For PCS arrangements that are a promise to stand ready to provide unspecified when-and-if available updates and
upgrades once developed by the vendor, revenue is typically recognised using a time-based measure (that is, ratably) over
the contract term. This is because the customer benefits evenly throughout the contract period from the guarantee that
any updates or upgrades developed by the software vendor during the period will be made available. However, there
might be some limited circumstances where judgement will be required to determine an appropriate measure of progress
because the customer does not benefit evenly throughout the contract period.
In contrast, a promise to provide a specified update or upgrade is not a stand-ready obligation. For example, if the
software vendor has provided a development roadmap to the customer, the vendor may have implicitly promised to
provide the specified updates or upgrades on the roadmap. An implied promise exists if, at the time of entering into the
contract, the customer has a valid expectation that the vendor will transfer a specified update or upgrade. Specified
updates or upgrades are likely to be distinct from unspecified when-and-if available updates and upgrades even if both
are provided pursuant to the same PCS arrangement. The entity therefore must determine the relative SSP of that
specified update or upgrade and recognise the amount allocated to a specified update or upgrade as revenue as and
when the update or upgrade is delivered.
4.8 How should an entity determine the appropriate measure of
progress for a SaaS arrangement?
Reference to standard: IFRS 15 para B18
Reference to standing text: 11.185
Industry: Software
Question
What is the appropriate measure of progress for a SaaS arrangement?
Answer
To determine the appropriate measure of progress, the SaaS provider should assess whether the arrangement is (a) a
promise to provide access to the SaaS, or (b) a promise to provide a specified amount of services. This assessment might
require judgement.
Factors indicating that the promise is to provide access to the SaaS could include:
The SaaS provider offers unlimited access to (or usage on) the SaaS platform
during the contract term, or the contract includes a maximum usage that the
customer is not expected to exceed (that is, a non-substantive ‘cap’).
The customer primarily benefits from access to the SaaS platform over a contract
term, rather than specific usage or outputs such as processing transactions or
data.
The SaaS provider provides support services related to access to the SaaS
platform throughout the contract term.
The SaaS provider does not separately sell services on a usage-only basis (that
is, pay-as-you-go).
Factors indicating that the promise is to provide a specified amount of services could include:
The contract with the customer specifies a fixed amount of usage/transactions
and the customer needs to purchase more once the fixed amount is depleted.
The customer can rollover unused pre-purchased amounts to
subsequent periods.
The customer does not benefit significantly from access to the SaaS platform
alone without specific usage or outputs such as processing transactions or data.
The SaaS provider separately sells services on a usage-only basis (that is, pay-
as-you-go).
None of the above factors is individually determinative, and there might be other relevant facts and circumstances to
consider.
For SaaS arrangements that are a promise to provide access to the SaaS platform for a period of time, the appropriate
measure of progress is often a time-based measure.
For SaaS arrangements that are a promise to provide a specified amount of services, revenue is typically recognised as
the services are provided (that is, as the customer utilises the SaaS platform).
If variable fees exist, the SaaS provider will also need to consider the guidance on allocating variable consideration in
paragraphs 84–86 of IFRS 15.
4.9 How should revenue be recognised for an arrangement to provide
access to SaaS where the contract includes scheduled increases in the
fee on an annual basis?
Reference to standard: IFRS 15 App B para B18
Reference to standing text: 11.185
Industry: Software
Question
How should revenue be recognised for an arrangement to provide access to SaaS where the contract includes scheduled
increases in the fee on an annual basis?
Answer
When an arrangement is a promise to provide access to the SaaS, the appropriate measure of progress is often a time-
based measure. This is because the arrangement is a series of distinct goods or services. In an arrangement with
scheduled increase in annual fees, management should consider the business reasons for the escalating fees and
expected pricing of the services in future years when accounting for the arrangement. For example:
Where a scheduled increase in the annual fee is only a mechanism to achieve
deferred payment terms for the customer, revenue should be recognised ratably
over the contract. The SaaS vendor should also assess whether the payment
terms indicate that the arrangement includes a significant financing component.
Where increases in the fee are indexed to inflation or similar terms, these would
generally not be recognised ratably over the contract term as such price
increases correspond directly with the value to the customer of the entity’s
performance.
In all cases, if the SaaS arrangement term is cancellable (for example, the customer can terminate for convenience after
the first year), the SaaS vendor should only account for the non-cancellable term.
If the SaaS vendor is providing the customer with additional services each year (such as increased functionality or
increased user access), straight-line recognition might not be appropriate. In this case, the SaaS vendor should assess
whether the customer is receiving multiple distinct services that commence on different dates.
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