Technology entities commonly enter into transactions involving the delivery of multiple goods and services, such as professional services provided in conjunction with hardware and networking or hosting services. Goods or services promised in a contract with a customer can be either explicitly stated in the contract or implied by an entity’s customary business practice (e.g., free access to a vendor’s online mobile controller application with the purchase of its audio hardware). IFRS 15 requires entities to consider whether the customer has a valid expectation that the entity will provide a good or service even when it is not explicitly stated. If the customer has a valid expectation, the customer would view those promises as part of the goods or services provided under the contract.
Revenue recognition for technological goods/services Revenue recognition for technological goods/services
|EXAMPLE: Bundling inseparable goods and services|
Hard Trade & Soft Tech is a software development firm that provides hosting services to a variety of consumer products entities. Hard Trade & Soft Tech offers a hosted inventory management software product that requires the customer to purchase hardware from Hard Trade & Soft Tech. In addition, customers may purchase professional services from Hard Trade & Soft Tech to migrate historical data and create interfaces with existing back office accounting systems. Hard Trade & Soft Tech always delivers the hardware first, followed by professional services and finally, the ongoing hosting services. Revenue recognition for technological goods/services
Scenario A — All goods and services sold separately
Hard Trade & Soft Tech determines that all of the individual goods and services in the contract are distinct because the entity regularly sells each element of the contract separately. Hard Trade & Soft Tech also determines that the goods and services are separable from other promises in the contract because it is not providing a significant service of integrating the goods and services and the level of customisation is not significant. Furthermore, because the customer could purchase (or not purchase) each good and service without significantly affecting the other goods and services purchased, the goods and services are not highly dependent on, or highly interrelated with, each other. Accordingly, the hardware, professional services and hosting services are each accounted for as separate performance obligations.
Scenario B — Hardware not sold separately
Hard Trade & Soft Tech determines that the professional services are distinct because it frequently sells those services on a stand-alone basis (e.g., Hard Trade & Soft Tech also performs professional services related to hardware and software it does not sell). Furthermore, the entity determines that the hosting services are also distinct because it also sells those services on a stand-alone basis. For example, customers that have completed their initial contractual term and elect each month to continue purchasing the hosting services are purchasing those services on a stand-alone basis. The hardware, however, is always sold in a package with the professional and hosting services and the customer cannot use the hardware on its own or with resources that are readily available to it. As a result, Hard Trade & Soft Tech determines the hardware is not distinct.
Hard Trade & Soft Tech must determine which promised goods and services in the contract to bundle with the hardware. Hard Trade & Soft Tech likely would conclude that because the hardware is integral to the delivery of the hosted software, the hardware and hosting services should be accounted for as one performance obligation while the professional services, which are distinct, would be a separate performance obligation.