IFRS 15 adopted, half year report, software policies, cumulative effect method, para C8 transitional disclosures

Kinaxis Inc. – Half year report – 30 June 2018

Industry: software

[Note: company produces quarterly reports].

Notes to Condensed Consolidated Interim Financial Statements (extract)

For the six months ended June 30, 2018 and 2017 (Expressed in thousands of U.S. dollars, except share and per share amounts) (Unaudited)

  1. Changes in significant accounting policies (extract 1)

(a) IFRS 15: Revenue from Contracts with Customers (“IFRS 15”):

Effective January 1, 2018, the Company adopted IFRS 15. The impact of the transition is shown in note 3(a)(i) below. The Company’s accounting policy under IFRS 15 is as follows:

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for the products or services. The Company’s contracts often include multiple products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

Nature of products and services

The Company’s hosted software-as-a-service (“SaaS”) application, which allows customers to use hosted software over the contract period without taking possession of the software, is provided on a subscription basis, and recognized ratably over the contract period, commencing on the date an executed contract exists and the customer has the right-to-use and access to the platform.

On-premise, fixed term subscription licenses and hybrid software subscriptions (where the customer has the option to take the hosted software on-premise) provide the customer with a right-to-use the software as it exists when made available to the customer. Revenue from distinct on-premise subscription licenses is recognized upfront at the point in time when the software is made available to the customer and the right to use the software has commenced. On-premise subscription licenses and hybrid subscriptions are bundled with software maintenance and support services and/or hosting for a term. The license component and maintenance and support/hosting components are each allocated revenue using their relative estimated standalone selling prices (SSP). Revenue allocated to the bundled maintenance and support and hosting is recognized ratably over the term of the maintenance and support services.

Professional services are provided for implementation and configuration of software licenses and SaaS, as well as ongoing technical services and training. Professional services are typically billed on a time and material basis and revenue is recognized over time as the services are performed. For professional services contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed.

Maintenance and support services provided to customers on legacy perpetual software licenses is recognized ratably over the term of the maintenance and support services.

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expect the costs to be recoverable, and has determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized contract acquisition costs are amortized consistent with the pattern of transfer to the customer for the goods and services to which the asset relates. The amortization period includes specifically identifiable contract renewals where there is no substantive renewal commission. The expected customer renewal period is estimated based on the historical life of our customers, which the Company has determined to be six years. The Company applies the practical expedient available under IFRS 15 and does not capitalize incremental costs of obtaining contracts if the amortization period is one year or less.

The timing of revenue recognition often differs from contract payment schedules, resulting in revenue that has been earned but not billed. These amounts are included in unbilled receivables. Amounts billed in accordance with customer contracts, but not yet earned, are recorded and presented as part of deferred revenue.

The Company has elected to apply the practical expedient to not adjust the total consideration over the contract term for the effect of a financing component if the period between the transfer of services to the customer and the customer’s payment for these services is expected to be one year or less.

Significant judgments and estimates

Contracts with customers often include promises to deliver multiple products and services. Determining whether such bundled products and services are considered i) distinct performance obligations that should be separately recognized, or ii) non-distinct and therefore should be combined with another good or service and recognized as a combined unit of accounting may require significant judgment. In general, the Company’s professional services are capable of being distinct as they could be performed by third party service providers and do not involve significant customization of the licensed software.

The determination of the SSP for distinct performance obligations can also require judgment and estimates. The Company uses a single amount to estimate SSP for bundled items such as subscription licenses and maintenance and support in subscription arrangements that are not sold separately. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services. In general, SSP for maintenance and support bundled in on-premise and hybrid subscription arrangements is established as a percentage of the subscription license fee as supported by third party evidence and internal analysis of similar vendor contracts. SSP for hosting and professional services is established based on observable prices for the same or similar services when sold separately, or estimated using a cost plus margin approach.

(i) Impact of transition to IFRS 15

Effective January 1, 2018, the Company adopted IFRS 15 using the cumulative effect method, with the effect of adopting this standard recognized on January 1, 2018, the date of initial application. Accordingly, the information presented for 2017 has not been restated. It remains as previously reported under IAS 18, IAS 11 and related interpretations.

Adoption of IFRS 15 has not impacted the accounting for the Company’s SaaS, professional services or legacy maintenance and support arrangements for the Company’s legacy perpetual software licenses. However, adoption has impacted the accounting for the Company’s on-premise and hybrid subscription license arrangements, its accounting for contract acquisition costs as well as requiring expanded disclosure on revenue, performance obligations and contract balances.

Prior to adopting IFRS 15, subscription fees for licenses and coterminous maintenance and support and hosting services were combined and recognized ratably over the term of the subscription contract. Under IFRS 15, the fees for on-premise and hybrid subscriptions are separately allocated to each distinct performance obligation. Revenue attributable to the distinct software license component is recognized upfront upon term commencement and revenue allocated to maintenance and support and hosting components is recognized ratably over the term. This results in earlier recognition of revenue for these subscription arrangements.

Prior to adopting IFRS 15, contract acquisition costs, including commissions paid to employees and referral fees to third parties, were expensed upon commencement of the related contract revenue.

Effective January 1, 2018, revenue from SaaS arrangements, maintenance and support from on-premise and hybrid arrangements and hosting services from hybrid arrangements are reported as subscription services revenue. Revenue recognized for the software license component from on-premise arrangements is separately reported as subscription term license revenue. Professional services and revenue from maintenance and support on legacy perpetual licenses arrangements continue to be reported separately.

In its adoption of IFRS 15, the Company has elected to apply the requirements of the new standard only to contracts that are incomplete at the date of initial application. The Company has also elected to apply the contract modification practical expedient and reflect the aggregate effect of all contract modifications prior to the transition date.

The following table summarizes the impact of transition to IFRS 15 on the Company’s retained earnings as at January 1, 2018.

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  1. Changes in significant accounting policies (extract 2)

(d) Impact of adopting IFRS 15 and 16:

The following tables summarize the impact of adopting IFRS 15 and IFRS 16 on the Company’s condensed consolidated interim statements of financial position as at June 30, 2018 and its interim statements of comprehensive income for the three and six months ended June 30, 2018. There was no material impact on the Company’s interim statements of cash flows for the three and six months ended June 30, 2018.

Impact on the condensed consolidated interim statements of financial position as at June 30, 2018:

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Impact on the condensed consolidated interim statements of comprehensive income for the three months ended June 30, 2018:

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Impact on the condensed consolidated interim statements of comprehensive income for the six months ended June 30, 2018:

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  1. Contract acquisition costs:

The Company’s total capitalized contract acquisition costs net of accumulated amortization are $13,722 as at June 30, 2018 and relate primarily to costs incurred and previously expensed prior to adopting IFRS 15. During the six months ended June 30, 2018, amortization of $1,700 and an impairment loss of $100 were recorded in selling and marketing expenses related to the contract acquisition costs.

  1. Deferred revenue:

The following table presents changes in the deferred revenue balances for the six months ended June 30:

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  1. Revenue:

The following table presents revenue for the three and six months ended June 30:

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The following table presents revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at June 30, 2018:

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