Software revenue

recognition bootcamp
The new standard
IFRS 15

11 June 2019
Welcome and introductions
Agenda

1. Background and overview

2. The 5 Step Model:
Step 1 Identify the contract
Step 2 Identify performance obligations
Step 3 Determine the transaction price
Step 4 Allocate the transaction price
Step 5 Recognise revenue
1. Areas of judgement/hot topics
2. Hot topic Pricing Timetable:
3. Implementation experience Morning Break 11am, Lunch 12:30pm,
4. Questions and Closing Afternoon Break 2:45pm and Finish 4pm.

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Course objectives

At the end of today, you will be able to:

Understand the key steps Identify any changes to Have the answers to your Educate and entertain your
in the revenue recognition revenue recognition and revenue recognition colleagues back in the
model under IFRS 15 (US how that will impact questions office tomorrow!
GAAP reference - ASC your Company
606)

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Polling question

What is your role in Finance

your organisation?
A
B Sales, Commercial and operations

C Jack-of-all-trades

D None of the above

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Polling question

What is the nature of UK Listed

your company/parent
A
company?
B US Listed

C Privately held (including Private Equity owned)

D Other

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Polling question

Is your company A software company?

A
B A hardware or tangible products company?

C A services or data company?

D A combination of the above?

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Polling question

Is your software SaaS (software as a service)?

revenue from
A
B On premise?

C Per transaction?

D A combination of the above?

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Polling question

Which guidance did IFRS 15 (or ASC 606)

you apply for your last
A
B UK GAAP (FRS 102)

C
D IFRS (IAS 11 / IAS 18)

E Something else!

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Polling question

Have you attended the Yes

Revenue Recognition
A
Bootcamp before?
B No

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Polling question

How do you rate your Excellent. I have been studying the standard since inception and I should
knowledge of IFRS 15?
A teach this course!

B Good. I have read the standard and understand it well.

C Some understanding of key changes but a bit to learn.

D What is IFRS 15?

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Background and overview
Why a new standard?

One Model
Clear principles Robust Comparability Enhanced Revenue recognition
framework across disclosures depicts transfer of control
industries to the customer in an
amount that reflects
consideration to which an
entity expects to be
entitled

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What are Tech Companies saying
What Tech Companies have reported as the impact

Licence revenue recognition - Right of access

(over time) and Right to use (at a point in time)
Term licence now commonly recognised upfront
Principle vs Agent - Channel sales and integrator
arrangements
Capitalisation of sales commission and other
incremental costs
Tiered pricing
Early licence renewals
Extended payment terms
Set up fees

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The five-step model
Revenue recognition standard overview

Revenue

A contract has enforceable rights and obligations between two or more parties

A customer receives a good or service

Scope of the standard Specifically excluded

Contracts with customers of all entities and industries Lease contracts
within scope with only certain transactions excluded
Insurance contracts
Financial instruments
Guarantees (except warranties)
Certain nonmonetary exchanges
Contracts with other than customers (e.g. collaborations)

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How does it work?

Identify the contract Identify the Determine the Allocate the Recognise revenue
with the customer performance transaction price transaction price when (or as) each
obligations in the to separate performance
contract performance obligation is
obligations satisfied

1 2 3 4 5
Other considerations
Incremental costs of obtaining a
contract, fulfilment costs, principal vs.
agent implications and disclosures

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Licensing guidance

Account for bundle of licence

Is the licence distinct?
No and other goods/services

Yes

Determine the nature Right to access (Symbolic

of the licence IP under US GAAP) Over time recognition

Right to use (Functional SaaS / Service

IP under US GAAP] Franchise rights
Trademark/Brand/copyright
Software
Point in time recognition
Media content
(generally)
Drug formula

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Step Identify the contract
Step 1 Identify the contract with the customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations

Approved
Written, verbal, or implied in
customary business practice
Rights identified
Combined with another contract
A modification of another contract
Payment terms defined

Has commercial substance Termination clauses

Substantive termination
penalties
Collectibility is probable
Contract modification

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Step 1 Identify the contract
Contract term example

SAAS Co. enters into a five-year software-as-a-

service (SaaS) arrangement with a customer.
Contract pricing is for £2m a year with the price due
to increase for changes in CPI at the end of each
year. Revenue will be recognised on a straight-line
basis during the contract term.
The customer can terminate the contract at any time
by paying SAAS Co. a substantive compensation
amount that decreases over the contract term until it
reaches zero (or a non-substantive amount) at the
end of the fourth year of the contract.

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Polling question

What is the contract term 1 Year

for the purpose of
A
applying the new
revenue standard? B 4 Years

C 5 Years

D Other

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Step 1 Identify the contract Example
Contract term

A tech company enters into a 10-year What is the contract term for purposes of applying the new
term licence arrangement with a revenue standard?
customer. There are no other
performance obligations in the It is 10 years because the customer cannot cancel the contract without incurring a
arrangement. The customer makes an substantive termination penalty, being the obligation to transfer an asset to the
upfront non-refundable payment of tech company through the return of its exclusive rights to the licenced intellectual
C25 million and is obligated to pay an property without refund of amounts paid.
additional C1 million at the end of each
year throughout the stated term. .
The customer can cancel the contract
for convenience at any time, but must
return its rights to the licenced
intellectual property to the tech
company upon cancellation. The
customer does not receive any refund
of amounts previously paid upon
cancellation.

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Step 1 Identify the contract with the customer
Contract modification

No change to the modification until it is

Is the contract modification approved?
No approved

Does the modification add additional

Are the remaining goods or services distinct?
goods or services? No
Yes No Yes
Account for the modification through a
Are the additional goods or services distinct?
No cumulative catch-up adjustment
Yes
Does the contract price increase by an
Account for modification prospectively
amount that reflects the SSP?
No
Yes
Account for the modification as a
separate contract
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Common questions on step 1 Identify the contract

How does having a Master Services Agreement (MSA) impact my

1 identification of the contract?

How long is the contract term if the customer can terminate and give notice
2 before the end of the term?

-
3 from the customer to continue the services beyond the free-trial period?

4 How do I account for contract (Licence) renewals?

5 How are multiple party contracts considered?

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Step Identify performance obligations
Step 2 Identifying performance obligations

Customer can benefit from the good

Promise is separately identifiable
or service on its own or with other
from other promises in the contract
readily available resources

Factors that indicate promises are

not separately identifiable

Significant integration Significant modification Highly interdependent

service or customisation or highly interrelated

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Step 2 Identifying performance obligations
Software delivery models

How many performance obligations are

in your contracts? Hosting
services and
Are you really a SaaS (Software as a software
Service) business?

Software-
Subscription as-a-service

Hybrid cloud

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Step 2 Identify performance obligations
Example

A Company enters into a 2-year contract with customer for the following: (1) Software licence,
(2) Installation service and (3) Unspecified software updates and technical support.

Company sells the licence, installation service, and technical support separately.
As part of the installation service, the software will be substantially customised to add significant new functionality
to enable the software to interface with other customised software applications used by the customer.
The installation service is routinely performed by other entities.
The software remains functional without the updates and the technical support.

What are the distinct performance obligations?

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Step 2 Identify performance obligations

Discussion
Capable of being distinct: Customer Software licence Yes
can benefit from good or service on its
Installation services Yes
own or together with other resources
readily available Software updates Yes
Technical support Yes

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Step 2 Identify performance obligations

Discussion
Good or service is distinct within the Software licence No Software and installation services
context of the contract inputs to product combined output
Installation services No
Software updates Yes
Technical support Yes Significant customisation or
modification

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Step 2 Identifying performance obligations

Material rights
Options providing a customer
with free or discounted goods or
services in the future might be a
material right.
A material right is a promise
embedded in a current contract that
should be accounted for as a
separate performance obligation.
An option to purchase additional
goods or services at their
standalone selling prices is a
marketing offer and therefore not a
material right, unless prices are
expected to increase.

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Step 2 Identify performance obligations

Up front or set up fees

Do the set up fees represent a
separate performance obligation?
Up front fees that are not for
satisfying a separate performance
obligation are recognised as
revenue in the future when goods or
services are provided to the
customer

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Step 2 Identifying performance obligations
Software and SaaS example

Software Co. enters into a contract with a

customer to provide the right to use two
software products (A and B) for a three-
year term. The customer does not have
the right to take possession of Product A
at any time and will access the software

service. The customer will download the

software licence for Product B; however
this product is only used to access
Product A via the cloud-based service.

How many performance obligations

are included in the arrangement?

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Step 2 Identifying performance obligations
Software and SaaS example

How many performance obligations are included in the arrangement?

One, this is due to the following factors:

The customer does not have a The customer does not benefit from
contractual right to take possession
of Software A. only to access the SaaS platform
(Software A).

1 2

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Common questions on step 2 Identify the
performance obligations

1 When do I combine the licence and services as one performance obligation?

Do restrictions as to time, geography and/or use affect how many software

2 licences are promised to the customer in the contract?

When does a promise to transfer multiple copies of a software product

3 constitute a promise to transfer multiple licences?

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Step Determine the transaction price
Step 3 Determine the transaction price

Transaction price = Amount of consideration to which entity expects to be entitled in exchange for
transferring goods or services, excluding amounts collected on behalf of third parties

Variable consideration Significant financing Non-cash consideration Consideration payable

component to customers

1 2 3 4

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Step 3 Determine the transaction price
Variable consideration

Companies must estimate variable Methods for estimating variable

consideration consideration

May be explicit or implied based on Expected value

business practices Most likely amount

Performance bonuses Right of return

Rebates/Incentives Discounts

Volume discounts Price concessions

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Step 3 Determine the transaction price
Constraint on variable consideration

Included in the transaction price only if highly probable (US GAAP probable) that there will not be a

Uncertainty over long Limited experience with Susceptible to factors Broad range of outcomes
period of time similar contracts outside control

Key effects
Must recognise probable of not reversing
Reassessed at the end of each reporting period

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Step 3 Determine the transaction price
Performance bonus example

Assumptions Discussion: US GAAP/IFRS treatment

Company enters into a contract to provide Contingent amount is not recognised until
marketing services for a one-year period for the contingency is resolved
£100,000, with a performance bonus of

increase by more than 10% during the year

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Step 3 Determine the transaction price
Performance bonus example

Assumptions

Include the performance bonus in the

transaction price if it is probable that
including the £50,000 will not result in a
significant revenue reversal in the future
Performance bonus measured using
either a probability-weighted or most
likely outcome approach, whichever is
more predictive

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Forms of variable consideration

The royalty exception applies when the predominant item to which the royalty relates is a licence

IP Product
Product IP

Royalties are estimated as Do not estimate royalties

variable consideration

An entity would not split a sales-based or usage-based royalty into a portion subject to the guidance on sales-based and
usage-based royalties and a portion that is not subject to that guidance.

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Step 3 Determine the transaction price
Method of estimating transaction price

Is an entity required to use a single

method (expected value vs most likely
amount) to estimate the transaction
price consistently for all variable
payment terms in the same contract?

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Polling question

Can you use multiple Only a single method can be used to estimate all variability within a contract
methods or a single
A
method for estimating
variability within a B You can apply a multiple number of methods to the different variabilities
contract? within a contract

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Allocate the transaction price based on relative standalone selling prices (SSP)
Determination of SSP maximises use of observable inputs

Is an observable price for the performance obligation available?

Yes No

Use the observable price as SSP Estimate the SSP

Which approach maximises observable inputs?

Adjusted market Cost plus Residual

assessment approach margin approach approach

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Polling question

Which of the following If a company cannot reasonably estimate returns on sales to a reseller, even if
is true?
A there is a cap on the maximum returns, ALL revenue will be deferred until right of
return lapses

B If there is a cap on returns, a company will be able to recognize a minimum amount

of revenue, at least equal to revenue related to the goods that cannot be returned

C A company will always recognise revenue for all sales, without recording any
returns reserve; and only reverse revenue when customer returns occur

D A company can elect a sell-through policy and recognise revenue upon resale by
the reseller and not record a returns reserve

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Step 3 Determine the transaction price
Example Variable consideration or multiple licences

Example 1: Usage-based royalty

A software company licences software
to a customer that will be used by the
customer to process transactions. The
licence permits the customer to grant
an unlimited number of users access
to the software for no additional fee.
The contract consideration includes a
fixed upfront fee and a variable fee for
each transaction processed using
the software.

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Step 3 Determine the transaction price
Example Variable consideration or multiple licences

Question Answer:

How should the software company The software company should account for the variable fee as a usage-based
account for the variable fee? royalty. The incremental fees that the software company receives are based on
the usage of the software rights previously transferred to the customer. There are
1. Usage based royalty
no additional rights transferred to the customer, therefore the software company
2. Option to purchase additional should recognise the usage-based royalty in the period the usage occurs.
licences

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Step 3 Determine the transaction price
Example Variable consideration or multiple licences

Example 2: Usage-based royalty

On 1 January 20X7, a software
company licences to a customer the
right to use its software for five years
for a fixed price of C1 million for 1,000

the current stand-alone selling price for

the software. The customer can add
additional users during the term of the
contract at a price of C800 per user.
Management has concluded that each

obligation and, in substance, the

customer obtains an additional right
when a new user is added .

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Step 3 Determine the transaction price
Example Variable consideration or multiple licences

Question Answer:
The variable fee in this arrangement is an option to purchase additional rights to
On 1 January 20X8, the customer
use the software, because the rights for the additional users are incremental to the
adds 20 users and pays to the
rights transferred to the customer on 1 January 20x7. The software company will
software company an additional
need to assess whether the option provides a material right and, if so, allocate a
C16,000.
portion of the C1 million transaction price to the option. The amount allocated to
How should the software company the option would be deferred until the option is exercised or expires. In this fact
account for the variable fee? pattern, the discounted pricing of C800 per user, compared to the current pricing
of C1,000 per user, might indicate that the option provides a material right if the
1. Usage based royalty customer would not have received the discount without entering into the
2. Option to purchase additional
current contract.
licences The software company would recognise the C16,000 fee for the additional rights
when it transfers control of the additional licences. The software company would
also recognise amounts allocated to the related material right, if any, at the time
the right is exercised.

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Common questions on step 3 Determine the
transaction price

How do I recognise revenue on usage when there is also a

1 minimum guarantee?

How do service level agreements (SLAs) that could result in refunds or

2 credits to the customer affect the transaction price?

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Step Allocate the transaction price
Step 4 Comparison to existing guidance

Step 4: Allocate the transaction Key difference:

price to the performance
Change in level of evidence required to support relative fair value of
obligations in the contract
deliverables in software arrangements
Under IFRS: More evidence will be required to support SSP of maintenance
and/or other deliverables in software arrangements
Under US GAAP, the potential impact of not requiring VSOE:

Earlier revenue Changing Roadmaps and Less ratable

recognition business specified revenue
practice upgrades recognition

1 2 3 4

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Estimating and allocating standalone selling price

A single good or service can Use the residual approach in limited situations
have more than one stand-alone
selling price Can only be used if selling price is:
SSP could vary based, for example on
class of customer Highly variable Uncertain

SSP could be a narrow range for

similar customers if any price in the
range reflects reasonable price

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Residual approach use case Scenario

Background Can I use the

Ron Corporation sold a perpetual residual approach
licence for Potions software along with for my performance
one year of PCS (when and if available obligations that lack
unspecified updates) to Harry Inc. for observable SSPs?
£1,200,000.
PCS may be renewed annually for
25% of stated licence fee.
The stated licence fee is £1,200,000.
Historically, Ron provides a wide range
of discounts on Potions software, but
consistently renews annual PCS for
25% of the stated licence fee.

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Residual approach use case Accounting analysis

Key assumptions New standard implications

Performance obligations Performance obligations

Ron identifies two performance obligations: Ron must determine SSP for two separate
performance obligations.
Potions software licence
PCS for Potions software licence

Standalone selling prices Standalone selling prices

Ron has a history of observable one-year renewals Ron has an observable input to determine SSP for PCS to
of PCS for 25% of stated licence fee. be 25% of stated licence fee.
SSP of the licence is highly variable because Ron Ron may use the residual approach to determine SSP
provides a wide range of discounts of the licence.

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Residual approach use case
Accounting analysis (cont.)

Residual approach

Performance obligation SSP (£) Approach

PCS for one year 300,000 Observable

Perpetual licence 900,000 Residual approach

Total 1,200,000

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Step 4 Allocate the transaction price
Polling question

Can the stand-alone Yes

selling price of
A
maintenance be a
percentage of the B No
licence fee?

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Common questions on step 4 Allocate the transaction price
to separate performance obligations

1 How much evidence do I need to support my Stand-alone Selling Price (SSP) or fair value?

What happens if contractually stated renewal rates of PCS/maintenance expressed as

2 a percentage of a licence fee do not represent stand-alone selling price?

Would it be acceptable to use an entity-published price list as evidence to

3 estimate a stand-alone selling price?

How should an entity determine the stand-alone selling price for implied
4 updates, upgrades and enhancements during an installation period?

-
5 a change in the unit price under a time and materials (T&M) or transaction based contract?

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Step Recognise revenue
Step 5 When to recognise revenue?
Evaluating the transfer of control

Evaluate how the entity transfers each promised good or service to the customer

Does the customer simultaneously receive and consume benefits as the entity performs?
Yes

No

Yes the customer controls as the asset is created or enhanced?

Over time
No
Point in time

Does the entity have an enforceable Yes

right to payment for performance No
Yes asset with an alternative use to the entity?
completed to date?

No
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Control transfers over time

Customer simultaneously receives Customer controls asset as it is No alternative use and right to
and consumes the benefits created or enhanced payment for performance to date
Generally, straightforward Customer controls the work in Highly customised or specialised
assessment process assets that are difficult to redirect
to another customer
Another entity would not need to Example: Constructing a building
substantially re-perform the work
that has been completed to date indicates they have received
some benefits of performance
over time

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Step 5 Recognise revenue
Indicators for point in time

Indicators to determine the point in time that control transfers:

Customer has a Customer has Customer has Customer has risk Customer
present obligation legal title physical possession and rewards of acceptance
to pay ownership

1 2 3 4 5

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Licensing guidance

Account for bundle of licence

Is the licence distinct?
No and other goods/services

Yes

Determine the nature Right to access (Symbolic

of the licence IP under US GAAP) Over time recognition

Right to use (Functional SaaS / Service

IP under US GAAP] Franchise rights
Trademark/copyright/Brand
Software
Point in time recognition
Media content
(generally)
Drug formula

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Polling question

Can we recognise Yes

revenue for renewals of
A
a term licence before the
renewal period starts? B No

C It depends

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Common questions on step 5 Recognise revenue when
(or as) each performance obligation is satisfied

If the updates are bundled with the licence, how does that impact the recognition
2 pattern?

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Areas of judgement / hot
topics
Areas of judgement/hot topics
Technology sector

Identifying Overtime or point in Principal vs agent Costs to obtain

performance time contracts
obligations

1 2 3 4
Capitalisation of costs Presentation and Cloud computing
(software development) disclosure arrangements

5 6 7
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Identifying performance obligations
Example SEC comments

Please clarify if customers take We note some of your contracts have We note your statement within your
possession of the software licence. multiple performance obligations. significant judgments disclosure that
In addition, please clarify your Please tell us and revise to disclose certain cloud services are accounted
consideration of upgrades and the nature of these performance
technical support. obligations pursuant to ASC 606- please provide us with a specific and
10-50- For maintenance, comprehensive analysis of how you
support, and warranty services, please determined these items are
provide us with your analysis as to not distinct.
why these services were not
separately identifiable in accordance
with the guidance of ASC 606-10-25-
21, as applicable.

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Can I recognise software licence revenue over time?

Combined with a
service e.g. hosting

Combined with
updates (in limited
circumstances)

Combined with a
customisation or entity Software as a distinct PO is right to use because the value is in the functionality.
specific development If combined with a service, the combined PO is generally a service.

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Principal vs agent considerations
What is the issue?

IAS 18 conclusions Complexity in Impacts revenue Considered for each Can be highly
may be different identifying the and gross profit performance judgemental
under IFRS 15 customer? obligation

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Principal vs agent
Indicators Overview

IFRS 15 includes indicators to help determine if entities are acting as a principal or an agent

The Indicators do not override the assessment Should not be viewed in isolation
of control

Do not constitute a separate or additional evaluation Should not be considered a checklist of criteria to be
met or factors to be considered in all scenarios

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Principal vs agent

Old guidance New guidance

Risk and reward paradigm Assess whether the company controls the good or
Gross indicators: Net indicators: service before it is transferred
Primary obligor Supplier is Principal indicators:
General inventory risk primary obligor Primarily responsible for fulfilling the promise
Latitude in establishing price Amount earned Inventory risk
is fixed Discretion in establishing price
Changes products or performs
part of service Supplier has Indicator hierarchy no longer exists
credit risk
Discretion in supplier selection
Determines product
specifications Services and intangibles
Physical loss inventory risk Significant judgment involved!
Credit risk

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Principal vs. Agent An entity enters an arrangement to provide cloud services to customers. The
cloud services are not provided directly by the entity but are provided by a
vendor.
Key facts
The entity does not control and will not control the cloud services before
Example software as a these are transferred to the customer - control remains with the vendor
service (SaaS) at all times.
The cloud service provided is dictated by the vendor.
The entity does not have the ability to change the vendor once the customer
has signed up for cloud services.
The entity has no ongoing obligation once they source the vendor to provide
cloud services for the customer.
The entity is acting as agent to source the provider of the cloud services for its
customers. There is no further obligation on the entity once this is sourced.
Accordingly revenue is recorded at net consideration and at a point in time.

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Costs to obtain contracts

Incremental costs of obtaining a contract Costs to fulfill a contract

1 2
Must recognise an asset if expected to be recovered Apply other standards first (inventory, PP&E, etc.)
May recognise as an expense if the Recognise asset if costs:
amortization period is less than one year
Relate directly to a contract;
TRG Memo. 57 can have an impact on scope of
Generate or enhance resources to be used to satisfy
capitalisation
future performance obligations; and
Are expected to be recovered

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Costs to obtain contracts
Polling Sales commissions

ServiceCo pays an internal sales

employee a C500 commission for selling
an initial annual service contract to
Customer A. ServiceCo will also pay a
C250 commission for each annual
renewal. The services provided under
the initial and renewal contracts are
substantially the same and the annual
fee is the same. ServiceCo expects
Customer A to renew the contract.
ServiceCo concludes that the C500
commission is an incremental cost to
obtain the contract and records an asset.
ServiceCo also concludes that a five-
year average customer life is an
appropriate amortisation period.

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Costs to obtain contracts
Polling question

What pattern of ServiceCo should amortize the initial $500 commission over the first year only
amortisation should
A (i.e. expense)
ServiceCo use for the
capitalised costs? B ServiceCo should amortize the initial $500 commission over the average customer
life of five years

C Service Co should separate the initial commission of $500 into two components
and amortize $250 over the initial annual contract term and the remaining $250
over the average customer life of five years

D All of the above are acceptable

E Only B and C are acceptable

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 78

Capitalisation of software development costs
What everyone already knows...

Software development IAS 38: once criteria for

classification: IAS 2 or IAS 38 development costs are met,
capitalisation of costs are
Fundamental premise for cost required
capitalisation under both There is diversity in practice
standards is it must be probable amongst software companies
that cost capitalised will bring
future economic benefits

No intangible asset will arise from

Cost capitalisation standards: the research therefore research
IAS 2 and IAS 38 costs are expensed as incurred Selling, promotional and
marketing expenses are
always expensed

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 79

Capitalisation of software development costs
What everyone may not be consistently doing...

Critical practical judgement is Which costs should be

when to start and stop capitalising capitalised?
costs
What are the amortisation
methods for capitalised costs? When should capitalisation of
costs cease?

Costs are treated differently in

Costs resulting as a result of development and sales phases
sales are expensed

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 80

Which software development costs should be capitalised?

Judgement is required in these areas

Direct labour Labour costs include both Corporate senior Interest relating to
cash and share-based management and human specific financing
Sub-contractor costs payments capital costs are generally arrangements for
considered administrative development should be
and not capitalised capitalised once IAS 38
criteria met and cease
once the software is
launched

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Disclosures

Disaggregation of revenue

Contract balances and significant changes

Information about performance obligations

Remaining performance obligations

Significant judgments

Practical expedients

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Disaggregated revenue
Guidance summary

What information needs to Category examples:

be included?
Information sufficient to understand Type of good or service Geographical region Market or type of
relationship to revenue information customer
in segment disclosures
Disaggregate revenue to depict
how the nature, amount, timing, Type of contract Contract duration Timing of transfer
and uncertainty of revenues and (e.g. T&M) (ST v. LT)
cash flows are affected by
economic factors
Consider description of revenue Sales Channels
streams in accounting policies

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Disaggregated revenue
Example

Segments Consumer products ($) Transportation ($) Energy ($) Total ($)
Primary Geographical markets Categories
North America 990 2.250 5,250 8,490 presented is a
Europe 300 750 1000 2,050 matter of judgment
Asia 700 260 - 960
1,990 3,260 6,250 11,500 Tabular
Major Goods/Service Lines reconciliation to
Office supplies 600 - - 690 segment revenue
Appliances 990 - - 990
is not required
Clothing 400 - - 400
Motorcycles - 500 - 500
Automobiles - 2,760 - 2,760
Solar panels - - 1,000 1,000
Power plant - - 5,250 5,250
1,990 3,260 6,250 11,500
Timing of revenue recognition
Goods transferred at a point in time 1,990 3,260 1,000 6,250
Services transferred over time - - 5,250 5,250
1,990 3,260 6,250 11,500

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 84

Disaggregated revenue
Best practices Disclosures

Categories used for disaggregation should consider:

Information disclosed outside the Information included in investor Information reviewed by the chief
financial statements (e.g., annual presentations/websites operating decision maker
reports, earnings releases)

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 85

Identifying performance obligations
Best practices Disclosures

Provide clear disclosures Consider whether there is Clarify whether customers

about performance linkage between description take possession of software
obligations identified and of the business and licences (i.e. licence vs.
goods and services that are performance SaaS)
being combined obligation disclosure

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Estimating standalone selling price
Best practices Disclosures

Address Disclose information about

standalone the methods, inputs and
selling price as assumptions used for
part of the estimating standalone
discussion of key selling prices and
judgments and allocating discounts and
changes to those variable consideration to a
judgments specific part of the contract

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Disclosures following the adoption of IFRS 15
Remaining performance obligations Illustrative example

Timing of revenue recognition can be disclosed either:

Quantitatively, with appropriate time bands
2019 2020 2021 Total
Revenue expected to be recognised £530 £816 £411 £1,757
as of 31 December 2018

Or by providing a qualitative explanation

As at 31 December 2018, the aggregate amount of the transaction price
allocated to the remaining performance obligations was £1.8 million. We
expect to recognise this revenue as the projects are completed, with
approximately one-third and one-half of the revenues recognised over the
next 12 and 24 months, respectively, with the remaining amount recognised
thereafter.

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 88

Cloud Computing Arrangements (CCA) Definition

Access to software product Software as a service

Customer obtains the right to access (SaaS)
software product

Typical Platform as a service

arrangements

Remote access to the software product

Infrastructure as a
accesses the software remotely service

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Cloud Computing
Accounting considerations for customer

Key issues to consider: SaaS is a software distribution model in which

The key accounting issues identified with these the customer does not take possession of the
arrangements arise as result of a change in the
business model.
and application software from devices over the
Before SaaS After SaaS
internet or via a dedicated line
Own servers/apps Operating expenses The customer does not manage or control the
PPE underlying cloud infrastructure nor is
Intangible assets responsible for upgrades

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 90

Cloud Computing Accounting considerations

Example 1: Facts:
Accounting for how a Entity A enters into a three-year non-cancellable contract to obtain the use of software that
customer applies IAS is stored in the cloud, including various applications for that period (services) from a supplier
38 and IFRS 16 for fees for a monthly subscription fee.
paid to a supplier for
software access. -the-shelf
software package.
Entity A does not acquire the right or licence to use the services for more than the three-
year contract period and at the end of the contract period, the right to access and use the
service shall terminate.
The supplier has no obligation for delivery of the software program and will not ship copies
of the program to Entity A. The supplier, or its licensors, retain all ownership and intellectual
property rights to the services. In the event that the subscription fee is not paid, the software
goes into reduced functionality mode.

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 91

Cloud computing
Polling question

Can the future monthly Yes

payments be capitalised
A
as an intangible asset
on day 1? B No

C
D

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Cloud Computing Accounting considerations

Analysis: Does the arrangement meet the definition Analysis: Can the monthly
of a lease under IFRS 16? subscription fee be capitalised as
an intangible asset?
Entity A does not have control over the
1 The scope of IFRS 16 excludes rights held by a lessee under licensing software, as simply having a right to
agreements within the scope of IAS 38.
software would not be sufficient to
indicate that Entity A, controls a
2 resource that meets the definition of an
application software for more than the three years in terms of the contract.
intangible asset.
Entity A has therefore not determined
3 The supplier/its licensors, retain all ownership and intellectual circumstances in which the fee should
be capitalised as an intangible asset
due to the lack of control.

4 The criteria to be classified as a lease in terms of IFRS 16 is not met as

Entity A is not able to control the use of an identified asset.

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Cloud Computing Accounting considerations

Example 2: Facts:
Accounting for upfront Assume the same fact pattern as Example 1 except that the software is specifically customised
fees paid for software -the-
customisation that is software. Entity A will have to incur the costs for designing and configuring the cloud-based
not off the shelf. accounting suite to be specific to the needs of Entity A. Entity A therefore pays an upfront fee
for this customisation.

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Cloud computing
Polling question

Can the you capitalise Yes

the upfront payment?
A
B No

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 95

Cloud Computing Accounting considerations

Analysis: Does this change the accounting treatment?

The substance of the arrangement is that Entity A

1 pays an upfront fee (i.e. prepays) to customise/
configure the software that is stored on a cloud.

Explained that in some cases the upfront payment may give

rise to a prepayment.
The key take-away Focus on the rights/obligations that the
prepayment provides, e.g. do you have a proportional right of
refund if the SAAS does not function as promised during the
SAAS period?

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Hot topics - pricing
How have you found
implementation?
Polling question

How far advanced is We have transitioned to IFRS 15 and that is now business as usual
your IFRS 15 transition
A
project?
B adjustments to our reporting and have our comparative information in place

C We have not done anything yet (and that is why I am here!)

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Polling question

Now the standard has System solution update struggles

been adopted, what are
A
the main challenges are
you facing? B Stakeholder information challenges

C Changing the policies, training staff

D Lack of time

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 100
Learnings, issues and plan going forward

Learnings Issues Going forward

It has been essential to establish a Updating current accounting Educate and communicate within
detailed project plan/roadmap and policies and practices has been the organisation and training
explain the key milestones to the tricky and required more time than (including sales and commercial).
relevant stakeholders. expected.
Update processes and system
Detailed scoping exercise has Other stakeholders have had a lot documentation to ensure
made it clear which areas are of interdependencies which were organisational change is effective.
impacted more than others and previously not expected (e.g. HR,
Draft disclosures (both transition
need inputs. Tax, Forecasting)
and ongoing) in financial
Documenting all of our work within Determining system requirements, statements.
a central document has helped changes to systems and tools has
Manual adjustments where
bring in other stakeholders into the been a much longer process and
required.
projects. manual adjustments have been
needed.

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 101
Questions and Closing
Thank you!

Gareth Murfitt Richard Veysey

Partner Partner
T: +44 (0) 7595 849892 T: +44 (0) 7718 976960
E: gareth.j.murfitt@pwc.com E: richard.j.veysey@pwc.com

Andrea Allocco Jennifer Lau

Partner Senior Manager
T: +44 (0)7841 490926 T: +44 (0) 7595 611218
E: a.allocco@pwc.com E: jennifer.y.lau@pwc.com

Imran Younus
Director
T: +44 (0) 7808 205824
E: imran.younus@pwc.com

PwC Software Revenue Recognition Bootcamp The new standard IFRS 15 103
Thank you

pwc.com

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