When an entity and its customer enter into a contract to renew (or extend the period of) an existing licence, the entity will evaluate whether the renewal or extension should be treated as a new licence or, alternatively, as a modification of the existing contract. A modification would be accounted for in accordance with the contract modifications requirements in paragraphs 18–21 of IFRS 15. Identifying the contract – contract extensions
ServiceProvider has a 12-month agreement to provide Customer with services for which Customer pays $1,000 per month. The agreement does not include any provisions for automatic extensions, and it expires on November 30, 20X6. The two parties sign a new agreement on February 28, 20X7 that requires Customer to pay $1,250 per month in fees, retroactive to December 1, 20X6.
Customer continued to pay $1,000 per month during December, January, and February, and ServiceProvider continued to provide services during that period. There are no performance issues being disputed between the parties in the expired period, only negotiation of rates under the new contract.
Does a contract exist in December, January, and February (prior to the new agreement being signed)? Identifying the contract – contract extensions
Analysis Identifying the contract – contract extensions
A contract appears to exist in this situation because ServiceProvider continued to provide services and Customer continued to pay $1,000 per month according to the previous contract.
However, since the original arrangement expired and did not include any provision for automatic extension, determining whether a contract exists during the intervening period from December to February requires judgment and analysis of the legal enforceability of the arrangement in the relevant jurisdiction. Revenue recognition should not be deferred until the written contract is signed if there are enforceable rights and obligations established prior to the conclusion of the negotiations.
Impairment testing of contract costs and contract extensions
The topic of impairment testing related to contract costs was discussed by the TRG at its July 2014 meeting. The specific question brought to the attention of the TRG was whether the consideration expected to be received during renewal or extension periods should be considered in the impairment analysis.
TRG members stated that IFRS 15 requires an entity to consider contract renewals and extensions in “the remaining amount of consideration the entity expects to receive”. TRG members noted that this view was supported by the discussion in the Basis for Conclusions on IFRS 15 (paragraphs BC309 and BC310) and the totality of the guidance in IFRS 15 (paragraphs 99-104) which states that the “goods or services to which the asset relates” include goods or services from specifically anticipated future contracts such as renewals or extensions.