IFRS NEWS FEBRUARY 2019 - PWC
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IFRS news
February 2019
IFRS 15 for the However, there might be limited
circumstances where the licence
software industry – and updates are combined into a
PwC In brief single performance obligation.
At a glance The determination of whether
This month's issues:
licence and updates are separate
It has long been understood that performance obligations requires
• IFRS 15 for the software
the software industry would be one judgement. It is common for
industry – PwC In brief
of the industries more significantly updates to improve the
• In transition - the latest on
affected by the adoption of IFRS 15. effectiveness of software. However,
IFRS 17 implementation - Jan
This is because current guidance for the updates to be combined
2019
under IFRS, in particular for with the licence, they should
licence revenue, is limited, and fundamentally change the
many entities have historically functionality of the software or be
looked to develop accounting essential to its functionality. A
policies based on industry-specific combination of a number of factors
US GAAP which has now been should be considered, including:
superseded. In depth 2014-02 on Nature of software – Software that
revenue recognition for software can function on its own without
sets out some of the key changes as updates is likely a performance
a result of the standard. obligation that is separate from the
The implementation of IFRS 15 in updates. There might be limited
the software industry is proving to cases where the updates are
be a challenge, as expected. Even if essential to the customer’s ability
there is no significant change to the to benefit the licence because of the
pattern of revenue recognition, function of the software or the
management will need to make a industry in which it operates.
number of new judgements and
estimates. One of the most Significance of updates – Updates
significant changes that affects the that change the functionality of the
industry is the recognition of more software might indicate that such
revenue ‘upfront’ in the scenario updates significantly modify the
where software is delivered and licence. This might be the case for
control passes to the customer. any significant update to the
This document provides additional software, but this factor should be
insight into some of the key considered, along with the other
judgements facing the industry indicators about the nature or
during the implementation phase. frequency of the updates, to
determine if such an update is
Judgements and estimates essential to the functionality of the
Determining whether a software.
licence is distinct
Frequency and acceptance of
Software licences are commonly updates – Frequent updates might
sold in a bundle that includes indicate that the updates are
updates, also known as post- essential to the operation of the
contract customer support (‘PCS’). software; however, management
It is common that the software is a should consider not only the
distinct ‘right to use’ licence, with frequency but also whether the
revenue recognised at the point in customers accept the updates.
time when it is transferred, while
the PCS is delivered over time.
PwC | IFRS news | 1Updates that are made available This could be an indication that An entity might use the renewal
but not used might indicate that the vendor’s activities do not price to determine the amount to
the software is functional transfer anything to the customer, be allocated to the software if
without updates. and so they do not represent a certain criteria are met and the
separate performance obligation. outcome faithfully represents the
If a licence and updates are However, there might be price if the software was sold
combined, the outcome is circumstances in which the separately. For example, assume
generally a performance implementation activities provide that an entity sells licensed
obligation that is delivered over a separate benefit to the customer software and maintenance to a
time. Example 55 in IFRS 15 that can be used with another customer for C1.1m, and it
provides an illustration of this service (such as software provided regularly sells PCS for C1m and it
approach. There might be other by another supplier), in which case licenses software on a stand-alone
performance obligations they do represent a separate basis for between C0.5m and C5m.
included as part the PCS package performance obligation. It would not be appropriate to
that require separate apply the residual approach and
identification. However, they are Estimating stand-alone allocate C0.1m to the software.
often delivered over time and selling price This is because the residual
over a similar period as the approach results in a nominal
combined service of software and In software arrangements, entities allocation of selling price to the
updates; and, in practice, any will often provide multiple distinct software licence, which does not
allocation of transaction price goods and services (for example, faithfully reflect the stand-alone
would not have a significant licences and updates) together as a selling price.
effect on the timing and amount single package, and they will need
of revenue recognised. to allocate the transaction price Contract term and
based on the relative stand-alone termination penalties
Set-up and integration selling prices of those distinct
activities goods and services. In many cases, The contract term is the period
the stand-alone selling price will during which the parties to the
Arrangements involving software not be directly observable, and so contract have present and
often include a promise to it must be estimated. IFRS 15 does enforceable rights and obligations.
provide implementation support, not prescribe a specific method to Determining the contract term
such as data conversion, software estimate, but the allocation should could significantly affect the
design or development, and faithfully represent the price if the accounting for software
customisation. Entities need to items were sold separately. transferred at the beginning of the
apply judgement to determine licence. This is because the
whether such activities are The most appropriate approach to portion of revenue allocated to the
accounted for as a separate estimating stand-alone prices will licence for the entire contractual
performance obligation and depend on facts and circumstances term is recognised when the
when revenue should be including the extent of observable licence is transferred to the
recognised (that is, at a point in selling-price information. We customer. If that contract term is
time when the service is believe that it is acceptable to use shorter, it will decrease the
complete, or over time as the a range of prices when amount of revenue recognised
service is performed). Example determining the stand-alone upfront.
11 in IFRS 15 provides an selling prices, provided that the Entities need to consider
illustration of this judgement in range reflects the reasonable termination clauses when
the context of software that is a pricing of each item as if it were assessing the contract term. If an
‘right of use’ licence. priced on a stand-alone basis for entity enters into a contract for a
similar customers. term of several years, but that
Software as a service (SAAS) contract can be terminated early
arrangements also often include It is common for entities to only for no compensation, the contract
implementation services. It sell software and PCS as a might, in substance, be a shorter-
might be more challenging to package, or to only sell term contract with a right to
conclude that the customer is maintenance separately as a renew. Management should assess
receiving a separate service in renewal. IFRS 15 only permits the a renewal to determine if it
the context of an SAAS use of a residual approach in provides a material right similar to
arrangement. The service often limited circumstances. other types of customer option. In
involves configuring the contrast, a contract that can be
customer’s system to interact terminated early, but requires
with the vendor’s software to payment of a substantive
enable it to provide the service. termination penalty, is likely to
have a contract term equal to the
stated term.
PwC | IFRS news | 2We believe that termination In contrast, if a licensor provides, It also might split the initial
penalties could take various for an incremental fee, additional commission into two components:
forms, including cash payments or incremental rights that the one reflecting an amount
(which might be paid upfront) or customer did not previously commensurate with the renewal
the transfer of an asset to the control, the customer is likely commission; and the remainder
vendor. Judgement should be exercising an option to acquire treated as an upfront commission
applied in determining whether a additional rights. that is amortised over the
termination penalty is estimated customer life. Other
substantive. A payment need not Capitalising and amortising approaches could also be
be labelled a ‘termination commissions acceptable if they are consistent
penalty’ for it to create with the pattern of transfer of the
enforceable rights and IFRS 15 requires entities to services related to the asset. For
obligations. A substantive capitalise incremental costs of example, where there is a term
termination penalty might exist obtaining a contract (for example, licence, and a large proportion of
if a customer gives up, with no sales commissions) in most revenue is recognised upfront, it
right to a refund, the rights to a situations. The asset is both might be appropriate to recognise
licence that it has already paid a assessed for impairment and a similar proportion of
significant upfront fee to obtain. amortised on a systematic basis commission upfront.
that is consistent with the transfer
Distinguishing usage-based of the related services. Determining the contract
royalties from additional Determining the amortisation
rights period can be complex, because it Previous revenue guidance did not
does not necessarily reflect the provide explicit guidance on
Many software licence length of the contract period. In identifying a contract, but this is
arrangements include a variable particular, where there are an important step in applying
fee linked to usage of the anticipated renewals, the IFRS 15. This might cause an
software. Entities will need to amortisation period should entity to change the way that it
distinguish between fees include anticipated renewals, thinks about contracting. For
representing a usage-based unless the entity also incurs a example, an entity might conclude
royalty (a form of variable commensurate cost for renewals. that there is a contract in place
consideration) and an option to before a signed legal agreement
acquire additional goods or Assessing whether costs incurred exists, whereas historically this
services. A usage-based royalty is for contract renewals are might not have been the case. This
recognised when the usage ‘commensurate with’ costs could affect the accounting
occurs or the performance incurred for the initial contract conclusion as well as disclosures
obligation is satisfied, whichever could require judgement. The about remaining performance
is later. Fees received when an assessment should not be based obligations.
option to acquire additional on the level of effort required to A contract can be written, oral, or
rights is exercised are recognised obtain the initial and renewal implied by an entity’s customary
when the additional rights are contracts. Instead, it should business practices. Generally, any
transferred; however, at contract generally be based on whether the agreement that creates legally
inception, management would initial and renewal commissions enforceable rights and obligations
need to assess whether the are reasonably proportional to the meets the definition of a contract.
option provides a material right. respective contract values. Sometimes, the parties will enter
If it does, revenue might be into amendments or ‘side
recognised later, because a Where renewal commissions are agreements’ to a contract that
portion of the transaction price is paid but are not commensurate either change the terms (for
allocated to the option and with initial commissions, the example, contract term) of, or add
deferred until the option is initial commission should be to, the rights and obligations of
exercised or expires. amortised over a period longer that contract (for example,
Judgement might be required to than the initial contract term. An providing customers with options
distinguish between a usage- entity might amortise the initial or discounts), or change the
based royalty and an option to commission over the average substance of the arrangement. All
acquire additional goods or customer life of five years and of these items have implications
services. If a licensor is entitled expense renewal commissions as for revenue recognition; therefore,
to additional consideration based incurred. understanding the entire contract,
on the usage of software to which including any amendments, is
the customer already has rights, critical to the accounting
without providing any additional conclusion. See the discussion on
or incremental rights, the fee is ‘contract term’ above.
generally a usage-based royalty.
PwC | IFRS news | 3Principal versus agent (for example, future It is essential that entities update
maintenance periods). IFRS 15 their accounting policies and
It is common for software requires these to be disclosed, disclosures on significant
entities to enter into in addition to an explanation of judgements and estimates to
arrangements that involve two or what comprises accrued and reflect the application of IFRS 15.
more unrelated parties that deferred revenue (contract
contribute to providing a liabilities and contract assets) IFRS 15 also requires a number
specified good or service to a and over what period the of new disclosures, relating to
customer. For example, software services have been, or will be, significant judgements that are
entities might sell third party performed. applied, which supplement IAS 1.
software, hardware or services in These include disclosing
addition to their own products IAS 1 requires entities to disclose judgements made in applying the
and services. Management needs certain information about standard which significantly
to determine whether the entity significant judgements and affect the determination of the
is a principal or agent separately estimates. Management might amount and timing of revenue
for each specified good or service conclude that the judgements from contracts with customers,
promised to a customer. This will and estimates made in the in particular when performance
determine whether or not application of IFRS 15 result in obligations are satisfied and the
revenue is presented gross (when similar accounting to previous transaction price and its
acting as principal) or presented GAAP, but the thought process is allocation to performance
net (when acting as agent). likely to be different. obligations.
Disclosures This might mean that the When does this apply?
judgements and estimates
In software arrangements, often disclosed are different. IFRS 15 applies for entities with
there can be contract financial years beginning on or
deliverables that are not yet after 1 January 2018.
billed
In transition - the latest on IFRS 17 implementation - Jan 2019
IASB proposes to further • Expand the scope for the risk The Board expects to publish an
amend IFRS 17 mitigation exemption for Exposure Draft of the
insurance contracts with amendments to IFRS 17 around
IASB agrees to propose certain direct participation features the end of the first half of 2019,
further amendments to IFRS 17 to reinsurance contracts held to be in a position to finalise
to better reflect the economics of that are used to mitigate amendments such that 1 January
insurance contracts financial risk. However, the 2022 remains as the proposed
Board will not expand the effective date of IFRS 17.
At a glance scope of the variable fee
approach to reinsurance The views in this In transition
On 23 January 2019 the IASB contracts issued or held; and are based on our observations
continued its discussions on • Require consideration of the from the 23 January 2019
IFRS 17/ It tentatively agreed to existence of an investment meeting, and they might differ in
propose amendments to IFRS 17 return service in allocating some respects from the official
to: the CSM using coverage units. minutes of the meeting to be
published by the IASB at a later
• Require allocation of The Staff plans to bring papers date.
insurance acquisition cash on the remaining
flows to anticipated future implementation concerns and Background
renewals; challenges to the Board during
• Require recognition of a gain the first quarter of 2019. At a 1. In connection with the
in profit or loss when an future meeting the Board plans issuance of IFRS 17, the IASB
insurer recognises losses on to consider the package of all the established a transition resource
onerous underlying insurance proposed amendments to ensure working group (‘TRG’) to provide
contracts at initial that they comply with the criteria a public forum for stakeholders
recognition, to the extent that the Board agreed in October to follow the discussion of
a reinsurance contract held 2018 and will consider the need questions raised on
covers the losses of each for additional disclosures as a implementation of the new
contract on a proportionate consequence of the proposed standard.
basis; amendments.
PwC | IFRS news | 42. Since the issuance of the The Board noted that limiting the Overview of items discussed
standard, IASB staff have also deferral to one year would minimise during the January IASB
been engaged in a variety of disruption to entities that are Board meeting
activities with stakeholders to furthest advanced in
follow the implementation of implementation, address users’ 5. Continuing with the discussions
IFRS 17. At the IASB meeting on concerns that adoption of IFRS 17 of concerns and implementation
24 October, the Board agreed to and IFRS 9 should not be challenges raised by IFRS 17
explore potential amendments to significantly delayed, and provide a stakeholders, at the January 2019
IFRS 17 based on a list of clear signal to the industry that it meeting the Board evaluated 5 of
implementation issues and should not stop implementation the 25 concerns and
concerns compiled by the staff. projects. implementation challenges
The Board noted that the criteria reported in October 2018, noting
sets a high hurdle for change, 4. In December 2018 the IASB that the remaining six issues plus
and any amendments suggested continued discussions of the the question postponed in
would need to be narrow in concerns and implementation December would be discussed
scope and deliberated quickly to challenges raised by stakeholders of further in the first quarter for 2019
avoid significant delays in the IFRS 17. The IASB agreed to aiming for issuance of an exposure
effective date. propose one narrow-scope draft containing the proposed
amendment to require presentation changes around the end of first half
3. In November 2018, the IASB of insurance contracts on the this year.
Board agreed to start the process balance sheet at the portfolio level
to amend IFRS 17 to defer the rather than at the grouping level 6. Below is the summary of the
mandatory effective date of IFRS used for contract measurement decisions reached by the IASB in
17 by one year. Subject to IASB purposes. The other eleven this meeting on potential
due process, entities will be implementation challenges amendment of the standard
required to apply IFRS 17 for discussed in this meeting did not applying the evaluation criteria
annual periods beginning on or result in any proposed agreed in October 2018.
after 1 January 2022. amendments.
Concerns and implementation
Staff paper IASB decision
challenges
Insurance acquisition cash Insurance acquition cash flows directly
flows for renewals outside the attributable to newly issued contracts
Amend
contract Boundary (Staff paper that economically anticipates future
2A) renewals outside the contract boundary
Reinsurance contracts held - Losses from onerous underlying
onerous underlying insurance insurance contracts that are covered by
Amend
contracts (Staff paper 2B and proportionate reinsurance contracts
2C) held
Reinsurance contracts ineligible for the
variable fee approach
Reinsurance contracts held -
underlying insurance contracts
Not Amend
with direct participation Limitation of risk mitigation exemption
features (Staff paper 2D) for insurance contracts with direct
participation features
Recognition of the contractual Amortisation of the contractual service
service margin in profit or loss margin for contracts under the general
Amend
in the general model (Staff model that include an investment
paper 2E) return service
PwC | IFRS news | 516. The Staff noted that 18. Under IFRS 17 as currently The staff paper noted these
subsequent to publication of the written, when entities use concerns and recommended to not
staff papers several stakeholders derivatives to mitigate the expand the scope of the VFA to
have reached out expressing financial risks arising from reinsurance contracts issued or
concerns that the expanded insurance contracts and certain held and instead amend the risk
scope only applies to criteria are met, an entity is mitigation exception.
proportionate reinsurance permitted to recognise changes in
contracts. The Board agreed with financial risk in profit or loss Recognition of the
the staff’s explanation of the instead of adjusting the CSM as is contractual service margin in
limited scope of the proposed normally required under the profit or loss in the general
amendment, noting that for variable fee approach (‘VFA’) for model
proportionate contracts there is a participating contracts. This
direct linkage between the exception was included to allow 21. The Board agreed to propose
reinsurance and underlying entities to avoid the accounting an amendment so that in the
contracts on inception. That is, mismatch that would otherwise general model, the CSM is
claims are reimbursed as a result and better reflect the net allocated on the basis of coverage
specified percentage of the economics of an entity’s decision units that are determined by
claims incurred. One member to hedge the financial risk considering both insurance
noted that the Board is being inherent in the participating coverage and ‘investment return
pragmatic in this proposed contracts, for example minimum service.’ An ‘investment return
amendment as the loss on the return guarantees. The staff service’ can only exist where an
underlying contract could be due papers note that some reinsurance investment component is present.
to cash flows other than claims, held may act in the same However, the staff noted that the
Several Board member agreed mitigating way as derivatives, and existence of an investment
with the rationale for restricting therefore the same accounting component will not automatically
the amendment to proportionate election should apply when an mean that an investment return
reinsurance contracts but that entity purchases reinsurance for service is present. The staff noted
the term by ‘proportionate’ this financial risk mitigation that the ‘investment return
should be included either in the purpose. service’ is different from asset
defined terms in the standard or management services performed
more explanation given in the 19. In its December 2018 Board in conjunction with a participating
basis for conclusions. meeting the IASB agreed to contract subject to the VFA
discuss the retrospective because for non-VFA contracts the
Risk mitigation exception to application of the risk mitigation entity is not managing assets on
the variable fee approach exemption on transition at a behalf of the policyholders (i.e.
future meeting. The IASB did not not providing asset management
17. The Board agreed to amend have that discussion at this services). Instead it is providing
IFRS 17 to expand the scope of meeting, but is expected to discuss the policyholder with access to an
the risk mitigation exception for it in the upcoming months. investment return that would not
insurance contracts with direct otherwise be available to the
participation features so that it Explanation of the scope of policyholder because of the
applies not only when derivatives the variable fee approach amounts invested, liquidity,
are used, but also when entities complexity or expertise.
use reinsurance contracts to 20. The VFA applies to contracts
mitigate the financial risks in that meet the definition of 22. Under the proposal, an entity
these contracts. In order to be insurance contracts with direct would be required to use
eligible for this exception, the participation features, where the judgement, consistently applied,
conditions outlined in the entity promises an investment in deciding whether an investment
current standard must be met for return based on underlying items return service exists; no objectives
reinsurance contracts. less a variable fee. IFRS 17 notes or criteria for that determination
that neither reinsurance contracts will be included in the standard.
held nor reinsurance contracts
issued are eligible for the VFA.
Some stakeholders raised
concerns that accounting
mismatches will occur when
underlying contracts are
accounted for under the VFA and
the reinsurance held contract is
accounted for under the general
measurement model.
PwC | IFRS news | 6The investment return service 25. Board members also • Modified retrospective
would end when the entity has expressed some concern with how approach
made all investment related the ‘relative weighting of benefits’ • Loans and other forms of credit
payments to the policyholder and ‘pattern of delivery’ on ‘a that transfer insurance risk
under the contract. The systematic and rational basis’
assessment of the relative would be interpreted, noting that 29. The staff’s preliminary views
weighting of the benefits there was much room for in the papers for the October
provided by the insurance judgement. However, they also Board meeting are that the
coverage and the investment acknowledged that other areas of following remaining issues may
return services and their pattern the standard also require similar not meet the criteria for
of delivery would not be judgements and so the staff should amendment:
prescribed but instead would be exercise care and not be too
determined on a systematic and prescriptive in this amendment. • Level of aggregation
rational basis by management. In • OCI on FV transition approach
addition, cash flows relating to 26. In summary, the Board • Date of initial application of
fulfilling the investment return acknowledged that the comparatives
service (but excluding introduction of investment return • Optionality on transition
gains/losses on any investments) services will have a significant • Retrospective application of
would be included in the impact on the pattern of profit risk mitigation exception on
measurement of the insurance recognition where such transition (Deferred from
contract. For the determination components exist. Significant December 2018 Board
of PAA eligibility, an entity judgement is required in meeting)
should consider both the determining the existence of an
insurance coverage and any investment return service, the
investment return service. weighting of components and the
pattern of delivery, with all
23. The Board is proposing the needing to be applied consistently.
above changes based on Board members suggested that
stakeholder feedback at the May this amendment may require
2018 TRG and through various additional disclosures, which the
other outreach that some staff will consider at a future date.
contracts that do not meet the
VFA criteria nevertheless Future expected discussions
provide investment-related
services or other services. They 27. The Board noted that
agreed that investment services discussions on the remaining
should be reflected in the implementation challenges and
coverage units that are used to concerns will continue in future
allocate CSM over the period of Board meetings, with
the services provided. deliberations expected to be
completed in the first quarter of
24. However, some Board 2019. The Staff propose to bring
members expressed some back a summary of all suggested
concern with how the definition amendments and assess the total
for such services would be package of amendments against
interpreted, including the words the criteria previously agreed to
‘providing the policyholder with and consider the need for any
access to an investment return’ amendments in the disclosures as
and thought that perhaps the a consequence of the proposed
staff should consider adding amendments.
some wording in drafting, even if
only in the basis for conclusions, 28. In its papers for the October
to clarify the meaning. Board 2018 Board meeting the IASB staff
members also discussed whether presented 25 identified
some guidance should be implementation challenges. Of the
provided on how to evaluate and remaining concerns to be
account for situations where an discussed at a future meeting, the
investment return service might staff’s preliminary views in the
be inconsequential or de papers for the October Board
minimis, or only manifests itself meeting indicate that it might be
in remote scenarios. possible to potentially amend
IFRS 17 for the following issues in
a way that meets the criteria for PwC | IFRS news | 7
amendment:Order now:
Manual of accounting - IFRS 2019
(Two-volume set)
Key updates includes:
• Amendments to IAS 19, ‘Employee benefits’
- Plan amendments , curtailment or settlement
• Annual improvements 2015 – 2017
• Amendments to IFRS 9, ‘Financial instruments’
- Prepayment features with negative compensation
• Amendments to IAS 28, 'Investments in associates'
-Long term interests in associates and joint ventures
• Revised conceptual framework issued in March 2018
For more information visit www.pwc.com/manual
PwC | IFRS news | 8Contacts Revenue recognition, liabilities and other areas E:katja.van.der.kuij@pwc.com E:hugo.van.den.ende@pwc.com T: +31 (0) 88 792 4087 T: + 31 (0) 88 792 5283 Financial instruments and financial services E: kees-jan.de.vries@pwc.com E: geert.c.wognum@pwc.com T: +31 (0) 88 792 4922 T: +31 (0) 88 792 2159 Business combinations and adoption of IFRS E: maarten.hartman@pwc.com E: renick.van.oosterbosch@pwc.com T: +31 (0) 88 792 5191 T: +31 (0) 88 792 4057 Insurance E: jeroen.tuithof@pwc.com T:+31 (0) 88 792 6715 This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2018 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 180126-165332-KR-OS
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