In many technology transactions, customers pay an upfront fee at contract inception, which may relate to the initiation, activation or set-up of a good to be used or a service to be provided in the future. Under the standard, entities must evaluate whether non-refundable upfront fees relate to the transfer of a good or service.
In addition, the existence of such fees may indicate that there are other implied elements in the contract, such as the option to renew a service at a discounted rate because the upfront fee would not be charged for the renewal period. In such situations, the identified promised goods and services would also include those implied items.
Under IFRS 15, the non-refundable fee is allocated to the identified performance obligations in the contract (which may include some implied performance obligations) and it is recognised as revenue as the performance obligations are satisfied. By requiring allocation of the upfront fees to the future goods or services or renewal options, adoption of IFRS 15 results in a change in practice for some entities.
When an entity determines that a contract with a customer does not meet the collectibility requirements of a contract under the standard, the entity should recognize nonrefundable consideration received as revenue only when one of the following events has occurred:
- The entity has fully performed, and substantially all the consideration has been received (i.e., the entity has fully performed on all performance obligations in the contract and has received substantially all cash consideration for the entire contract).
- The contract has been terminated.
- The entity has transferred control of the goods or services and has stopped transferring (and has no obligation under the contract to transfer) additional goods or services to the customer, if applicable.
Under IFRS 15, a technology entity assesses the customer’s ability and intent to pay substantially all of the consideration to which the entity expects to be entitled. This amount may not be the contractual price. It is no longer acceptable for entities to default to deferring revenue recognition until cash is collected if they have concerns about whether they will collect the contractual amount (i.e., they are unable to conclude that collectibility is reasonably assured).