Article:

To bundle or not to bundle, that is the question

12 June 2017

It is common for a business to provide customers with several goods and services at the same time, such as a mobile phone company who sells a monthly phone contract to a customer which includes a hand-set. These multiple deliverables may all be under a single contract or may each be under a separate contract. For example, in the mobile contract above there is one fixed monthly fee which in the contract is for both the hand-set and the data/minutes allowance.

When applying IFRS 15, it is necessary to combine or separate (‘bundle’ or ‘unbundle’) these into individual performance obligations. When identifying performance obligations within a contract (or a group of related contracts), IFRS 15 requires you to look at the overall substance of the arrangement, rather than the legal form.
 

Distinct goods and services

Previously, IFRSs had little guidance for bundling and unbundling separate deliverables in a contract.  IFRS 15, however, contains detailed requirements and examples.  For the purposes of the new standard it is key to look at the relationship between contract components to determine whether they are ‘distinct in the context of the contract’. If individual components are not considered distinct, they are bundled together in order to form a single distinct performance obligation.  In order to determine whether goods or services are, the vendor will need to consider a number of factors, including:

  • Can the customer benefit from the good or service either on its own or together with other resources that are readily available to them.  In other words, can someone else provide the other good(s) or perform the other service(s) required, or does the customer already have these? For a mobile phone contract, the answer would be yes - the hand-set can be bought from one company and the data/minutes allowance from another
  • Are these goods or services regularly sold separately? For example, mobile phone hand-sets are now regularly sold outside of contracts, and sim-only contracts are available.
  • Is the vendor providing a significant service to integrate two or more of the services or goods promised?
  • Do any of the goods or services significantly affect any of the other promised goods or services? In other words, are they highly dependent on (or highly interrelated with) one another? In context of the mobile phone contract the response would be no – the hand-set is not altered by the data/minutes allowance package.

Given the number of different considerations that may factor into this determination, this is likely to be an area of significant judgement for management. In consequence, it is expected to feature in the disclosure of key accounting judgements required within the financial statements for businesses where this is relevant.

For the example of a mobile phone contract sale which for a fixed monthly fee which includes the hand-set, these are distinct goods and services and so will need to be ‘unbundled’ and treated as a) the sale of a hand-set and b) the provision of mobile service with data/minutes allowance. The portion of the total contract fee which is allocated to the hand-set under IFRS 15 will need to be recognised on day one.
 

Do I need to bundle?

The exact commercial/operational nature of the services or goods provided are important when determining whether goods and services are distinct; there is no ‘one-size-fits-all’, even when it comes to companies operating in similar markets. Let’s consider a contract for a licence of software, along with product support for three years:

Example A – to ‘bundle’

It has been determined that the level of support provided is considered essential for the software to function properly and that only the vendor is capable of providing the support. In this example, the software and the support elements of the contract are considered to be highly interrelated and will be bundled together as a single performance obligation.

Example B – not to ‘bundle’

It has been determined that, whilst the software licence is always sold with a three year support agreement, the software can function properly without that support. What’s more, support can also be provided by other providers after the initial support period has elapsed. Here, the software and the support are each considered to be distinct parts of the contract treated as two separate performance obligations.
 

Why does this matter?

Whether components are bundled together into one performance obligation or not is particularly important when it comes to the timing of revenue recognition as each performance obligation is considered separately for ‘point in time’ versus ‘over time’ revenue recognition. For example:

  1. In example A above, the software licence and support are not distinct and are treated as a single performance obligation that is fulfilled over the three year contractual period. This would generally meet the criteria for ‘over time’ revenue recognition.
  2. In example B above, the software licence and support are two separate performance obligations. The licence may meet the criteria for ‘point in time’ revenue recognition and will be earned on the delivery of the software to the customer. However, the support will still be delivered over the three year contractual period and would generally meet the criteria for ‘over time’ revenue recognition.

The effect of these different revenue recognition patterns is shown below:

 

Year 1

Year 2

Year 3

Total

Example A - Single performance obligation

 

Total:

1,500

1,500

1,500

4,500

 

Example B - Separate performance obligations

 

Software

3,000

-

-

3,000

 

Support

500

500

500

1,500

 

Total:

3,500

500

500

4,500

 

 

 

 

 

 

Difference

(2,000)

1,000

1,000

-


For help and advice on revenue recognitions issues please get in touch with your usual BDO contact or Scott Knight.

Read more on revenue recognition:

Sale with a right of return

IFRS 15 in the spotlight: Accounting for vouchers

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