Software licence or SaaS: revenue timing under IFRS 15

How do you tell a software licence from SaaS?

A licence transfers a right to the software itself. If the customer can take possession of the software and run it on its own infrastructure, or through a hosting provider of its choice, without significant penalty, it controls a licence. If the software runs only on the supplier's servers and the customer receives access, the supplier is providing a service. In 2019 the IFRS Interpretations Committee used the same distinction to conclude that a customer's right to access software hosted by the supplier is usually a service contract, not an intangible asset. See IFRS 15 licences.

Is a software licence a right to use or a right to access?

Software usually has significant stand-alone functionality, and the supplier's later activities, such as releasing updates, do not change the software the customer already has. So a software licence is normally a right to use the intellectual property as it exists, recognised at the point the customer can use it. Updates are a separate promise if they are sold with the licence.

Software licence or SaaS: the same deal both ways

A customer pays US$ 300 thousand for three years of the software. As a term licence, the price covers the licence and three years of support and unspecified updates; based on stand-alone selling prices, 80% is allocated to the licence. As SaaS, it covers three years of access to the hosted service.

Under the licence, 240 thousand is recognised when the customer can use the software, and support of 20 thousand a year over time. Under SaaS, revenue is even. Companies moving from licences to subscriptions therefore see revenue dip in the transition years even if bookings grow.

How are support and updates treated?

Post-contract support, typically technical support plus unspecified updates when and if available, is usually a stand-ready obligation recognised evenly over the support period. Support and updates may be separate performance obligations if they have different patterns of transfer, but are often combined. Where updates are critical to the software's continued use, for example security definitions in antivirus software, the licence and updates may be a single performance obligation recognised over time.

How are term licence renewals recognised?

Revenue for renewing a right-to-use licence is not recognised before the renewal period begins, even if the renewal is agreed and invoiced earlier, because the customer cannot use the renewed licence before then. Support renewals are recognised over the support period as usual.

What about hybrid licence and cloud offerings?

Some products combine on-premise software with cloud services, such as analytics run on the supplier's servers. If the customer can benefit from the licence without the cloud services, they are separate performance obligations: the licence at a point in time, the cloud services over time. If the cloud component is integral to the software's functionality, so that the two are highly interdependent, they form one performance obligation recognised over time. Contracts allowing customers to switch from a licence to the cloud during the term need assessing for material rights and modifications.

How does US GAAP compare?

ASC 985-20 and ASC 606 set an explicit test: hosted software is a licence only if the customer has the contractual right to take possession without significant penalty and can feasibly run it itself or with another provider. The outcomes are generally the same as under IFRS. See SaaS revenue under ASC 606, SaaS revenue recognition under IFRS 15 and SaaS accounting.

This guide is general information. It is not tax or legal advice for your situation.