|IFRS 15 changes practice for entities that sell their products through distributors or resellers.|
IFRS 15 changes practice for entities that sell their products through distributors or resellers (collectively referred to in this section as resellers). It is common in the software industry for entities to provide resellers with greater rights than end-customers in order to maintain a mutually beneficial relationship and maximise future sales through the reseller. For example, an entity may provide a reseller with price protection and extended rights of return. Reseller and distributor arrangements
Under IFRS 15, entities will need to first evaluate when control of the product transfers to the end-customer. To do this, entities may need to assess whether their contracts with resellers are consignment arrangements, under which control would likely not transfer until delivery to the end-customer. The standard provides three indicators that an arrangement is a consignment arrangement:
- The product is controlled by the entity until a specified event occurs (such as the sale of the product to a customer of the dealer) or until a specified period expires. Reseller and distributor arrangements
- The entity is able to require the return of the product or transfer the product to a third party (e.g., another dealer).
- The dealer does not have an unconditional obligation to pay for the product (although it may be required to pay a deposit).
An entity does not recognise revenue upon delivery of a product to a reseller if the delivered product is held on consignment because control of the product has not transferred. The entity would wait until the reseller sells the product to an end customer to recognise revenue, which would be considered the point in time that the entity has transferred control of the product. The result would be similar to current IFRS requirements of deferring revenue recognition until the reseller sells the product to an end customer [IAS 18 IE2(c) and IE 6].
If an entity concludes its contract with a reseller is not a consignment arrangement, the reseller will likely be considered a customer of the entity. The entity would be required to recognise revenue upon the transfer of control of the promised goods in an amount that reflects the amount to which the entity expects to be entitled. Reseller and distributor arrangements
In determining the amount to which they expect to be entitled, software entities are required to consider whether they provide resellers with explicit or implicit concessions (e.g., price protection, expanded return rights) that make the transaction price variable. In these instances, an entity needs to estimate the transaction price and, considering the constraint, include only the amount for which the entity determines it is highly probable that a significant reversal will not occur. An entity needs to carefully consider whether it can include the variable consideration resulting from the concessions it offers to its reseller customer(s) in its transaction price. Reseller and distributor arrangements
IFRS 15 indicates that when an entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, this is a factor that could increase the likelihood (or magnitude) of a revenue reversal. Entities, periodically, need to assess the facts and circumstances of their contracts to determine whether current practice are properly recorded under IFRS 15. Reseller and distributor arrangements