IFRS 15, modified retrospective method, current year effect of old standards, policies, judgements, other disclosures, additional prior year information.

SimCorp A/S – Annual report – 31 December 2017

Industry: computer software

1.2 CHANGES IN ACCOUNTING POLICIES

The Group early adopted IFRS 15 Revenue from Contracts with Customers opting for the modified retrospective method with the cumulative effect of initially applying IFRS 15 recognized on equity at the date of initial application of January 1, 2017. As a result, the Group has changed its accounting policy for revenue recognition as detailed below.

The Group has applied IFRS 15 as an adjust­ment to the opening balance of equity at January 1, 2017. Therefore, the comparative information has not been restated and contin­ues to be reported under IAS 18 and IAS 11.

Revenue is derived from fees charged to cli­ents for software licenses, maintenance fees, professional services, application service pro­vider (ASP) on-boarding fees and hosting fees, and operational services.

Software is licensed to clients via subscription, fixed term, or perpetual licensing agreements. Accounting policies for revenue derived from standard perpetual software licenses remain unchanged.

License revenue for on-premise fixed term license agreements and subscription agree­ments are no longer recognized on a straight-line basis over the terms of the agreements, but when the client has obtained control of the license or service and has the ability to use and obtain substantially all the benefits from the license or service.

SimCorp has assessed that the client obtains control of the license when a contract is agreed, the license is delivered, and the client has the right to use it. Revenue will therefore be recognized in the year of sale, provided that the contract does not have functionality gaps or unmet acceptance criteria. The IFRS 15 recognition is similar to revenue recognition for perpetual licenses, the only difference is that subscription-based license fees are dis­counted to net present value.

For multi-element contracts, the basis for rev­enue recognition is an assessment of the standalone selling prices for the identified per­formance obligations, including rebates, dis­counts, allowances, and inherent interest. The right to use software license is considered a separate performance obligation when it satis­fies the following conditions: can be delivered separately from other services, can be installed by a third party, can be used without upgrades, and is functional without upgrades or technical support.

Revenue recognition for maintenance fees, professional services, application service pro­vider (ASP) on-boarding and hosting fees, and operational services remain unchanged.

In addition, management expects commission paid to employees as a result of acquiring new client contracts to be recoverable. In accor­dance with IFRS 15, capitalized commission fees are expensed when the related revenues are recognized.

In the initial year of application, the Group presents revenue both as reported (applying IFRS 15), and adjusted (applying IAS 18 and IAS 11).

The following tables summarize the impact of adopting IFRS 15 on the Group’s consolidated financial statements for the year ending December 31, 2017.

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CONSOLIDATED FINANCIAL STATEMENTS (extract)

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SECTION 2 REVENUE AND EARNINGS (extract)

This section provides information related to the composition of revenue, operating costs, and earnings per share. The notes present details of the Group’s profit and earnings per share for the year. Details include disclosures on revenue, segment information, operating costs, and employee costs and other operat­ing profit (EBIT) items.

Group operating profit (EBIT) was EUR 88.9m. Due to the adoption of IFRS 15, this figure is not comparable with the EUR 68.2m achieved in 2016. In 2017, operating costs increased to EUR 254.7m compared with EUR 228.0m in 2016. The main contributor to the higher oper­ating costs was a surge in the level of business activity, in particular professional services that increased by 30.1%.

Accounting policies that do not relate exclu­sively to a specific income statement note are set out below. Accounting policies which relate to a particular note to the income state­ment have been included with each individual note.

In this section, the following notes are pre­sented:

2.1 Revenue

2.2 Segment and other revenue information

2.3 Future performance obligations

2.4 Operating costs

2.5 Employee costs

2.6 Earnings per share

2.1 REVENUE

Accounting policy

Revenue is mainly derived from fees charged for SimCorp Dimension, SimCorp Coric, and SimCorp Sofia software licenses, maintenance fees, professional services, and application service provider (ASP) fees. For software con­tracts, which are comprised of several com­ponents, the total contract sum is allocated to the separate performance obligations for the purpose of revenue recognition.

Revenue recognition requires an agreement with the client, which creates enforceable rights and obligations between the parties, has commercial substance, and identifies payment terms. In addition, it must be probable that the consideration determined in the contract will be collected.

Revenue is recognized when the client has obtained control of the license or service and has the ability to use and obtain substantially all the benefits from the license or service.

For multi-element contracts, the basis for reve­nue recognition is an assessment of the stand­alone selling prices for the identified perfor­mance obligations, including rebates, discounts, allowances, and inherent interest.

License fees

Fixed term license agreements and subscrip­tion agreements give the right to use the soft­ware for a determined period of time, which can be extended at the end of the initial term.

Standard perpetual software licenses provide clients with the right to use the software whilst the contract remains in force. Clients obtain control of the license for installation on their premises or in a cloud-based infrastructure.

New license fees are comprised of income derived from new clients and additional license income originating from supplementary sales to existing clients.

The main possible performance obligation related to license agreements has been iden­tified as the right to use the software. The right to use software license is considered a separate performance obligation when it satis­fies the following conditions: can be delivered separately from other services, can be installed by a third party, can be used without upgrades, and is functional without upgrades or technical support.

SimCorp has assessed that the client obtains control of the license when a contract is agreed, the license is delivered, and the client has the right to use it. License revenue is there­fore generally recognized at that point-in-time. When the contract contains functionality gaps or requires client acceptance of functionality, the revenue recognition will be deferred until the time of acceptance or delivery. Subscrip­tion-based license fees are discounted to net present value when the value of the financing element is deemed significant.

Professional service fees

Professional service agreements can include multiple performance obligations. The main possible performance obligations are described below.

Implementation service relates to the implemen­tation of new and existing contracts irrespective of the terms of the contract. Time and material implementation contracts are recognized based on work performed. Fixed fee agreements are recognized based on percentage of completion.

Client-driven development entails direct coop­eration between SimCorp’s development team and the client towards a client-defined goal. Such agreements are individually evaluated to determine if revenue is recognized at a point in time or over time.

Validation and testing services help clients streamline, document, prepare, and execute the entire testing process surrounding the operation of the SimCorp Dimension. Revenue is recognized upon client acceptance.

ASP on-boarding services comprise setup of infrastructure, these services are sold for a fixed fee and revenue is recognized based on per­centage of completion.

ASP operating services occur when, in addition to hosting, SimCorp undertakes the operation of the client’s system in a cloud-based environ­ment. Revenue is recognized on a straight-line basis over the contract period.

Maintenance fees

Maintenance fees are related to contracts made on perpetual and subscription-based license terms. Maintenance fees include both initial license and additional license-based maintenance fees. Performance obligations include: unspecified future upgrades, mainte­nance, and helpline support. Revenue from maintenance agreements is recognized on a straight-line basis over the contract period.

ASP fees

The ASP offering gives the client the right to use the SimCorp Dimension software in a cloud-based infrastructure provided by Sim­Corp (hosting). Revenue from ASP hosting fees is recognized on a straight-line basis over the contract period.

Other revenue

Other revenue consists of, for instance, train­ing and education and is recognized when the services have been delivered.

Transaction price allocation

The total transaction price is allocated to each performance obligation on the basis of the relative stand-alone selling price of each dis­tinct good or service.

An apportionment has been determined for the allocation of the transaction price between license and maintenance after deducting other performance obligations from the total consideration.

For SimCorp Dimension subscription agree­ments, it has been determined that 50% of the subscription value relates to license and 50% to maintenance. For perpetual licenses agree­ments the allocation is similar if assuming a five-year term.

For SimCorp Coric subscription agreements, it has been determined that 75% of the sub­scription value relates to license and 25% to maintenance.

For SimCorp Sofia subscription agreements it has been determined that 50% of the sub­scription value relates to license and 50% to maintenance.

Professional services stand-alone value is determined based on the hourly billing rate for the relevant market unit.

Hosting services are assumed to be quoted to the client at their stand-alone value if it is equal or above hosting costs.

Contract modifications

A modification is considered a separate con­tract if additional distinct licenses or services are promised and the price of the contracts increases by an amount of consideration that reflects the stand-alone price of the additional goods. If this is not the case, the original con­tract is considered terminated at the modifi­cation point.

Accounting estimates and judgments

Revenue recognition requires management to make judgments which are based on assump­tions on historical and forecast information, as well as on regional and industry economic conditions in which we or our clients operate. A short description of main judgments made in relation to revenue recognition follows.

Assessing whether it is probable that the con­sideration from contracts with clients will be collected requires judgment and might impact the timing and amount of revenue recognition.

Establishing whether distinct goods or ser­vices are considered to be separate perfor­mance obligations requires judgment and might impact the timing and amount of reve­nue recognition.

The allocation of the total transaction fee of a client contract to the distinct deliverables requires judgment in determining an appor­tionment which reflects the fair value mea­surement of each performance obligation. This may impact the timing and amount of revenue recognized.

Determining whether different contracts with the same client are accounted for as one agreement involves the use of judgment as it requires us to assess whether the contracts are negotiated together or linked in any other way. The timing and amount of revenue rec­ognition can vary depending on whether two contracts are accounted for separately or as one single arrangement.

The percentage-of-completion method requires estimation of total revenue and the stage of completion.

The assumptions, estimates, and uncertainties inherent in determining the stage of comple­tion affect the timing and amounts of revenue recognized. If there is no sufficient basis to measure the percentage-of-completion, or to estimate the total contract revenue, revenue recognition is limited to the amount of con­tract costs incurred provided the contract is expected to be profitable.

The determination of whether a sufficient basis to measure the percentage-of-comple­tion exists is judgmental. Changes in estimates of progress towards completion and of con­tract revenue and costs are accounted for as cumulative catch-up adjustments to the reported revenue for the applicable contract.

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2.3 FUTURE PERFORMANCE OBLIGATIONS

This table depicts revenue expected to be rec­ognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the reporting date.

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Figures presented above are not discounted and are translated at exchange rates as of December 31, 2017. These balances refer mainly to maintenance for subscription agree­ments and fixed fee for multi-year professional services agreements.

Considerations from contracts with clients are included in the amounts presented above except for rolling maintenance agreements with cancellation periods of 12 months or less, and time and material services agreements. Unsat­isfied performance obligations include: license agreements where there is a requirement for client acceptance of functionality, performance obligations satisfied over time (maintenance agreements and ASP agreements), and fixed fee professional services from multi-year con­ tracts that are recognized as the work has been performed under the percentage-of-comple­tion method.

The Group applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining performance obligations that have original expected dura­tions of one year or less.

Accounting estimates and judgments

Uncertainties exist with respect to the timing of the satisfaction of performance obligations when contracts include functionality gaps or a requirement for client acceptance of func­tionality. Judgment is used to determine when such performance obligations will be satisfied.

Under the percentage-of-completion method used for fixed fee services agreements, recog­nition of profit is dependent upon the accu­racy of a variety of estimates. Such estimates are based on various judgments with respect to multiple factors and are difficult to accu­rately determine until the project is signifi­cantly underway. Due to uncertainties inherent in the estimation process, it is possible that the actual timing of completion may vary from estimates.

For time and material agreements for profes­sional services, it is not possible to accurately determine the timing and amount of revenue to be recognized until the client has requested delivery. Such contracts have not been included above.

4.2 CONTRACT BALANCES

Contract balances consist of client-related assets and liabilities. Contract assets stem from subscription agreements with payments in the future. Contract assets originate from the adoption of IFRS 15. The initial adoption caused a reduction of EUR 3.0m in prepay­ments from clients and the recognition of EUR 24.6m to contract assets with opposite post­ings of EUR 27.6m to equity.

Accounting policy

When control over goods or services is trans­ferred to a client before the client pays con­sideration, the contract is recognized as either a contract asset or a receivable.

A contract asset represents the right to con­sideration in exchange for the right to use software or services transferred to a client when that right is linked to, but not condi­tional on SimCorp’s future performance.

If the timing of payments specified in the con­tract provides the client with a significant financing benefit, the transaction price is adjusted to reflect this financing component. The Group applies the practical expedient in paragraph 129 of IFRS 15 and does not adjust the amount of consideration for the effects of a financing component if it expects, at con­tract inception, that the period between delivery and payment will be one year or less.

Contract assets relate to the Group’s rights to consideration for software licensed to clients under subscription agreements with future payments, subsequent to revenue recognition.

When a client pays consideration in advance, or an amount of consideration is due contrac­tually before transferring of the license or ser­vice, then the amount received in advance presented as a liability.

Contract liabilities represent mainly prepay­ments from clients for unsatisfied or partially satisfied performance obligations in relation to licenses, maintenance, and services. Mainte­nance and ASP billing generally occurs at peri­odic intervals (e.g. quarterly or yearly) prior to revenue recognition, resulting in liabilities.

The majority of license agreements are recog­nized as revenue in the year of sale. However, contracts with functionality gaps or accep­tance criteria may have revenue recognition deferred, resulting in a contract liability when billing has occurred.

Contracts in progress relating to fixed fee pro­fessional services are measured at the esti­mated sales value of the proportion of the contract completed at the balance sheet date. Amounts invoiced on account in excess of work completed are included in prepayments under current liabilities.

Significant changes in the contract assets and the contract liabilities balances are as follows:

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*Adjustments include: reclassifications, foreign exchange adjustments, cumulative catch-up adjustments (including those arising from change in measurement of progress, change in estimate of transaction price and contract modifications), change in time frame for a right to consideration to become unconditional or for a performance obligation to be satisfied.

FINANCIAL REVIEW 2017 (extract page 50/51)

INCOME STATEMENT 2017 (extract)

REVENUE

SimCorp derives revenue from three primary sources: license fees, fees from professional services, and maintenance income. License fees comprise sales to new clients and addi­tional sales to existing clients.

SimCorp generated total revenue of EUR 343.4m in 2017 compared with EUR 309.2m in restated 2016 revenue, equal to an increase of 11.0%. The growth was driven by a significant increase in sales of professional services and additional licenses to existing clients, while sales of new subscription-based licenses were lower than restated 2016 figures. Exchange rate fluctuations for the year had a negative impact on revenue of EUR 4.6m, equal to 1.5%. In local currencies, revenue thus increased by 12.5%. The acquired company, SimCorp Italiana, accounted for 1.9% of the revenue growth.

Total license fee recognized from subscrip­tion-based licenses, new perpetual licenses, and add-on licenses was EUR 74.1m, a decrease of EUR 4.9m, or 6.2% compared with restated 2016 figures. Currency fluctuations impacted total license fee negatively by EUR 1.5m. In total, the reported total license fee revenue accounted for 21.6% of the Group’s total revenue compared with 25.5% in restated 2016 figures. 

License fee from new sales was EUR 21.1m compared with EUR 39.6m in restated 2016 figures. Currency fluctuations impacted rev­enue negatively by EUR 0.5m. The decrease in license fee from new sales was caused by a combination of fewer and smaller new sales than in 2016. Based on the existing pipeline, license fee from new sales are expected to increase in 2018.

License fee from additional sales to existing clients increased by 34.7% from EUR 39.4m in restated 2016 figures to EUR 53.0m. Currency fluctuations impacted additional sales revenue negatively by EUR 1.0m. The license fee from additional sales to existing clients in 2017 is the highest level achieved in the company’s history. This achievement goes well in hand with a record high client satisfaction index score (Net Promotor Score) and a record low number of client-reported errors in 2017.

The accumulated value of the installed license base for SimCorp Dimension clients who have an installed license base above EUR 2m accounted for 91% of the value of the total installed license base compared to 92% in 2016. The decrease is partly due to exchange rates and partly due to conversions from perpetual to subscription-based licenses. The license base is the contract value of all soft­ware licenses sold.

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Maintenance income increased by 7.1% from EUR 129.3m last year to EUR 138.6m with the completion and implementation of new client installations and new functionality to existing clients. The increase in local currency was 8.4%. Maintenance income accounted for 40.4% of total revenue compared with 41.8% in restated 2016 figures. License agreements signed in 2017 will increase annual main­tenance income by around EUR 14m once fully implemented, while cancelled contracts in 2017 and conversions from perpetual to subscription-based licenses will decrease annual maintenance income by around EUR 3.5m.

Fees from professional services increased by 30.1% from EUR 94.3m last year to EUR 122.7m due to a strong demand for implemen­tation assistance related to new installations for contracts signed the last two years and new functionality sold to existing clients, as well as solid sales of operational services to existing clients. Currency rate fluctuations impacted revenue growth from professional services negatively by EUR 1.4m. Fees from professional services accounted for 35.7% of total revenue in 2017 compared with 30.5% in 2016 based on restated figures.

ASP hosting fees and training fees amounted to EUR 8.0m compared with EUR 6.6m in 2016.

The ten largest clients generated around 22% (2016: 25%) of SimCorp’s total revenue, which is a decrease of 3%-points from last year’s level. The largest client accounted for 3.4% (2016: 3.5%) of the revenue in 2017.

SimCorp entered 2018 with signed revenue for the full year of EUR 215.8m – an increase of EUR 8.5m compared with the beginning of 2017.

In 2017, SimCorp achieved a top-line growth of 25% in the designated growth market North America. SimCorp APAC achieved a top-line growth of 69%, while some of the mature markets also achieved relatively high growth rates, taking SimCorp’s already strong position in these markets into consideration, while only the UK & Middle East business unit’s top-line declined (for more details, see the Business Unit Review 2017, pp 60-61).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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