Under some contracts, entities provide the customer with the right to future purchases of additional tech products or services for an amount below fair value.
Under IFRS 15, such options are separate performance obligations if they provide a material right to the customer that it would not receive without entering into that contract. For example, it may convey a material right if the discount exceeds the range of discounts typically given for those goods or services to that class of customer in that geographical area or market. If an option is a separate performance obligation, a portion of the transaction price is allocated to the option (see Allocation of transaction price to performance obligations). The allocated amount will be deferred until the option is exercised or until the right expires. Revenue from additional goods or services
Technology arrangements often include options to purchase additional goods or services that may be priced at a discount, such as sales incentives, contract renewal options (e.g., waiver of certain fees, reduced future rates) or other discounts on future goods or services. Careful assessment of the contractual terms is important to distinguish between options that are accounted for as separate performance obligations under IFRS 15 and marketing offers (i.e. the option is substantive and the customer makes a separate buying decision and has the ability to exercise or not exercise its right). Revenue from additional goods or services
If the contract includes a customer option, the technology entity is not obligated to provide additional goods and services until the customer makes a separate purchasing decision (i.e., exercises the option). That is, the entity’s performance obligation at contract inception is to provide the quantity of goods or services specified in the contract. Consider a contract with a customer to purchase a two-year subscription to a SaaS finance management application for 50 users for $100,000. The contract states that the customer can add additional users during the two-year period at a price of $800 per user per year, prorated for the precise period of access to the service. The entity determines that its performance obligation is to provide continuous access to the SaaS application for 50 users for the two-year term. The entity concludes that it has provided the customer with an option to purchase subscriptions for additional users because the entity is not obligated to provide access for the additional users until the customer makes a purchasing decision. Revenue from additional goods or services
Revenue from additional goods or services
In contrast, if the entity is obligated to transfer the goods and services and the customer is obligated to pay for those promised goods and services, even if the consideration owed to the entity is not known at contract inception, the contract includes variable consideration. For example, consider a one-year contract for access to a SaaS application that allows the customer to process transactions, among other functions. The customer agrees to pay an annual fee of $100,000 plus overage fees at a rate of $0.1 per transaction based on the number of transactions processed through the application during the year that exceed one million (i.e., overage fees are only paid if the customer processes more than one million transactions during the year). Assume that the SaaS provider has determined that the nature of its performance obligation is to provide continuous access to the SaaS application regardless of the number of transactions processed. The SaaS provider determines that the $100,000 annual fee is fixed consideration and all additional consideration received as overage fees is variable consideration. Revenue from additional goods or services