IFRS 15 provides additional application guidance to help entities determine when control transfers for distinct licences of intellectual property (transfer of control for distinct software licences), based on the nature of the promise to the customer. This application guidance is applicable for both perpetual and term software licences.
IFRS 15 states that entities provide their customers with either:
transfer of control for distinct software licences
If the licence does not meet all three criteria, the licence is a right to use by default and the entity would recognise revenue at the point in time when the licence is delivered.
The key determinant of whether a licence is a right to access is whether the entity is required to undertake activities that affect the licenced intellectual property (or the customer has a reasonable expectation that the entity will do so) and the customer is, therefore, exposed to positive or negative effects resulting from those changes. These activities must not meet the definition of a performance obligation. However, the activities can be part of an entity’s ongoing and ordinary activities and customary business practices (i.e., they do not have to be activities the entity is undertaking specifically as a result of the contract with the customer). Furthermore, IFRS 15 notes that the existence of a shared economic interest between the parties (e.g., sales or usage-based royalties) may indicate that the customer has a reasonable expectation that the entity will undertake such activities. transfer of control for distinct software licences
When an entity is making this assessment (i.e., whether the licence is a promise to provide a right to access), it must exclude the effects of any other performance obligations in the arrangement. For example, assume an entity enters into a software arrangement with a customer for a software licence, with unspecified upgrades on a when-and-if available basis and telephone support.
The entity first determines whether the licence, telephone support and the promise to provide unspecified upgrades are separate performance obligations. If the entity concludes that the telephone support is a warranty element, rather than a revenue element, the contract will include two revenue elements: the software licence and the unspecified upgrades. Furthermore, if the entity determines that a licence is distinct, the entity will apply the licence application guidance to determine whether control transfers over time or at a point in time.
A software licence that represents a right to use the software is recognised at a point in time if the entity has no contractual (explicit or implicit) obligation to undertake activities that will significantly affect the software licence during the licence period beyond any changes and activities associated with the unspecified future upgrade rights. In the example in the preceding paragraph, all three criteria for a right to access are not met, and the entity’s promise is a right to use the licence (and therefore revenue is recognised at a point in time).