Use Cases

  • Use Case 1
  • Use Case 2

Technology Inc. enters into an arrangement with a customer, Network Co., for a fixed fee of $10 million, which includes separate performance obligations for 100 servers (delivered at the same time), network monitoring software, installation services, and post-contract support (PCS). Technology Inc. can earn an additional $500,000 per year for the next two years if it achieves specified performance bonuses related to the performance of the servers, which it expects to achieve based on history with similar arrangements. This type of bonus is common in Technology Inc.’s other server-only transactions. Technology Inc. has concluded its standalone selling prices for the performance obligations as follows:

POB SSP
100 servers $10 million
Installation $500000
Software license $2.5 million
PCs $1.125 million
Total $14.125 million
Analysis

The total transaction price includes the fixed consideration of $10 million plus the estimated variable consideration of $1 million for a total of $11 million. Technology Inc. allocates the $10 million fixed consideration to all of the performance obligations based on relative standalone selling price. The variable consideration, however, relates solely to the performance of the servers, and management has concluded that allocating the variable consideration directly to the servers is consistent with the standard’s allocation objective (that is, the variable consideration allocated directly to the servers depicts the amount of consideration that Technology Inc. expects to be entitled to in exchange for transferring the servers to the customer). Therefore, $8.08M (($10,000,000 * 70.8%) + $1,000,000) will be allocated to the servers, $350K will be allocated to the installation, $1.77M will be allocated to the software license, and $800K will be allocated to the PCS.

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Software vendor XYZ enters into a contract to licence software products A and B to a customer for a total of CU20,000. Software vendor XYZ agrees to provide a discount of CU3,000 if the customer licences products C, D or E within a year of entering the arrangement. The estimated selling price of both products A and B is CU10,000. The estimated selling prices of products C, D and E are CU10,000, CU20,000, and CU40,000 respectively. The Software vendor XYZ determines that the future discount provides a material right to the customer because it rarely discounts products C, D, or E and it considers the discount percentage to be significant.

Analysis

Software vendor XYZ would allocate the transaction price to the individual performance obligations in the contract, including the option, in proportion to the stand-alone selling prices of goods underlying each performance obligation. Assume software vendor XYZ concludes that the standalone selling price for the option to purchase future products at a discount is CU1,500 based on the potential value of the discount and the likelihood the customer will take advantage of the discount. As a result, the relative selling price allocation would be as follows:

POB Estimated SSP Allocation
Software A 10000 9300
Software B 10000 9300
Option to purchase future 1500 1400
Product 20000
How Hamilton Helps

One of the severely impacted industries by IFRS 15 is hitech companies (after telecom). Implementation of any software solution for hitech companies or telecom companies is complicated. With Hamilton, this is made easy. It’s a proven solution which as been implemented successfully by telecom.