Specified Upgrades For Software Contracts – FAQ | IFRS

Specified upgrades for software contracts

Entities may provide customers with the right to specified upgrades or enhancements as part of a software arrangement. Under IFRS 15, entities will need to evaluate whether the rights to receive specified upgrades or enhancements are promised goods or services and potentially separate performance obligations. If the specified upgrade is a separate performance obligation, a portion of the transaction price is allocated to it and revenue recognition is deferred until the specified upgrade is provided. Specified upgrades for software contracts

 

Some entities may account for a specified upgrade or enhancement as a separate identifiable component under current IFRS and allocate revenue to it, while others may account for it together with other components. Current IFRS does not restrict the methods that may be used to allocate consideration between components. If the specified upgrades are accounted for as a separate identifiable component, entities may use methods, such as relative fair value or a residual approach, to allocate consideration.

Specified upgrades for software contracts

Other IFRS preparers may look to US GAAP in developing their accounting policies. The requirements in IFRS 15 represent a significant change from ASC 985-605 for specified upgrades and enhancements. Under ASC 985-605, because VSOE of fair value is generally unavailable for a yet-to-be-provided upgrade, an entity that includes such a promise in an arrangement is unable to separate the delivered elements from the upgrade. As a result, the upgrade is combined with the delivered elements as a single component, and the recognition of the entire arrangement consideration is typically deferred until the specified upgrade is provided.

Entities that license software are likely to recognize some revenue from contracts that involve specified upgrades earlier than they did under legacy guidance. Under the new standard, if the specified upgrade is determined to be a separate performance obligation, only the revenue allocated to that upgrade is deferred. Under legacy guidance, by contrast, entities that license software are often unable to separate the delivered elements from the specified upgrade because Vendor-specific objective evidence of fair value is generally unavailable for the specified upgrade.

Applying the new guidance may not significantly change revenue recognition for SaaS providers that have historically accounted for specified upgrades as separate deliverables by using the best estimate of selling price under the multiple-element arrangement guidance.

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