QUESTION 7 A vendor enters into a contract with a customer to supply a licence for a standard ‘off the shelf’ software package, install the software, and to provide unspecified software updates and technical support for a period of two years. The vendor sells the licence and technical support separately, and the installation service is routinely provided by a number of other unrelated vendors. The software will remain functional without the software updates and technical support. Whether it is a distinct contact?
ANSWER 7
Based on the IFRS 15 criteria for a performance obligation being considered distinct, we could look at this case in the following manner:
- The customer can benefit from each of the goods or services either on its own or together with other resources that are readily available to the customer - In this case, the software license, installation service, and the technical support are each capable of being distinct as the customer can benefit from them individually or with other readily available resources.
- The entity’s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract - Here, the software license, installation, and technical support are each separately identifiable. The installation service does not significantly modify or customize the software license itself, and technical support and software updates are separate services that do not change the functionality of the software itself.
Given this, it appears each of the promised goods or services (software license, installation, technical support, and updates) are distinct. Therefore, the vendor would have four performance obligations in this contract.
It's important to note that IFRS 15 requires judgement and this analysis could change based on the specific facts and circumstances of the contract.
Here is how it would look in a table:
