IFRS 15- Revenue from Contracts with Customers

Question 1

Q37- Sitka - IFRS 15

right to recieve Sitka’s software unlikely to be intangible asset/ lease

Answer 1

• Exam Trend: Focus on modern phenomena of licensing software
• Approach: State the rule, then apply it
• IFRS 15 Fundamentals:
  
  • Performance obligation identification
  • Revenue recognition over time
• IFRS 15 Criteria for Distinct Goods/Services:
  
  • Customer benefit
  • Separately identifiable promise to transfer
• Updates in Contract with Cent Co:
  
  • Integral for benefit derivation
  • Judgment needed for separate performance obligation determination
  • Updates not essential but improve software effectiveness
  • Essentiality: Changes functionality or essential for it
  • Frequency of updates significant
  • Cent Co’s acceptance of updates crucial
• Conclusion on Performance Obligation:
  
  • Reduced benefit without updates
  • Single promise for combined item delivery
  • Revenue allocation over four years
• Revenue Recognition Method Disclosure: Necessary for transparency
• Allocation of Revenue: Based on standalone selling price
• Alternative Conclusion: If argued well, recognizing two performance obligations possible if software functions without updates
• Cent Co Perspective on Intangible or Lease:
  
  • Intangible Asset Recognition:
    
    • Criteria: Identifiability, control, future economic benefits
    • Control criterion not met as Cent Co doesn’t own rights
  • Lease Recognition:
    
    • No right to direct asset use
    • Contract is a service contract, not a lease, expensed over the period