Question

What is the impact of the nre revenue standard IFRS 15 on the software industry?

Answer 1

If the various components of a software contract can not be unbundled – i.e. the software licence, associated hardware and professionals services require to implement it – the software provider would have to recognise these revenues and expenses over the period of the contract, regardless of how payments might be structured. Software companies that provide a mix of services and software may need a more detailed review of specific performance obligations to determine when to recognise revenue.

To recognise revenue under IFRS 15, an entity must apply the following five steps:

Step 1: Identify the contract(s) with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognise revenue when a performance obligation is satisfied

The introduction of IFRS 15 will require many software companies to reset their numbers. Those providers operating up-front licence models and with significant associated hardware and professional services revenue will feel the impact most, while cloud-based SaaS providers operating annual subscription models should be much less affected. IFRS 15 is effective for the first interim period within annual reporting periods beginning on or after January 1 2018, with early adoption permitted.

Today software companies might treat the development of software and delivery of maintenance services as a single revenue item.

However with IFRS15 companies that sell software licenses might need to track different performance obligations for Software and Maintenance. They might recognize revenue for software licenses immediately, while they will recognize revenue over time for maintenance.