Computacenter plc – Annual report – 31 December 2022
Industry: support services
3 Critical accounting estimates and judgements (extract)
3.2 Critical judgements (extract)
3.2.1 Technology Sourcing principal versus agent recognition
Management is required to exercise its judgement in the classification of certain revenue contracts for Technology Sourcing revenue recognition on either an agent or principal basis.
Because the identification of the principal in a contract is not always clear, Management will make a determination by evaluating the nature of our promise to our customer as to whether it is a performance obligation to pass control of the specified goods or services ourselves, in that we are the principal, or to arrange for those goods or services to be provided by the other party, where we are the agent.
Following its meeting that concluded on 1 December 2021, the IFRS Interpretation Committee (the Committee) published a tentative agenda decision in response to a submission from a valued added reseller to determine whether an entity should treat revenue from the resale of standard software licences on a principal or agent recognition basis under IFRS 15 Revenue from Contracts with Customers (IFRS 15).
The Committee did not reach a definitive conclusion on the submission received, as it maintained that an entity should apply judgement in making its assessment under the principles contained within IFRS 15, using the specific facts and circumstances relevant to the entity and the transactions or contracts entered into. However, the Committee did provide a number of discrete guidance points on the application of various control criteria or indicators that entities should consider under their IFRS 15 agent and principal recognition criteria processes that specifically relate to the resale of standard software and have an impact on those resellers within the industry. Computacenter plc included a preliminary assessment of the impact of the tentative agenda decision within note 3.2.1 of the 2021 Annual Report and Accounts.
At its 20 April 2022 meeting, the Committee finalised and approved its agenda decision. The International Accounting Standards Board, at its May 2022 meeting, did not object to the agenda decision.
The discussion and guidance within the approved agenda decision provides direction for the implementation of the principal or agent elements of IFRS 15 Revenue from Contracts with Customers for value-added resellers where standard standalone software and implicitly, due to the similarity in the transactional fact pattern, resold services such as maintenance contracts, extended warranties or support contracts, that are sourced from a third-party vendor and resold to a customer. As noted in our 2021 Annual Report and Accounts the approved agenda decision has impacted our existing treatment for the principal or agent recognition of these revenue streams, and whether they are recorded on a gross or net basis within revenue. Previously such sales were recognised on a principal or gross basis, apart from in certain limited instances as described in note 3.2.1 of the 2021 Annual Report and Accounts, with gross invoiced income reported as revenue, and costs of the resold software or services presented as part of cost of goods sold.
The Group has now completed its assessment of the impacts of the agenda decision and revised its accounting policies accordingly. Standalone revenue from standard software sales is now recognised on an agency or net basis where the margin earned on the contract is recognised as revenue with zero cost of goods sold. Other software revenues, particularly where the Group has performed configuration or customisation services, as part of the software sales agreement, or where the software is included alongside hardware elements within a pre-configured bundle from the vendor and resold within the pre-set bundle, continue to be recognised on a principal basis. Similarly, the Group has determined that third-party services agreements resold on a standalone basis are also recognised on an agent basis due to the similar fact pattern of the transaction to that of software sales unless these are also included alongside hardware elements within a pre-configured bundle from the vendor and resold within the pre-set bundle.
Management continues to assess the classification of other revenue contracts for Technology Sourcing revenue recognition on either an agent or a principal basis. Because the identification of the principal in a contract is, on occasion, not always clear and the level of judgement required can, in small number of instances, be high with the outcomes of assessments finely balanced, Management makes a determination by evaluating the nature of our promise to our customer as to whether it is a performance obligation to provide the specified goods or services ourselves, in that we are the principal, or to arrange for those goods or services to be provided by the other party, where we are the agent.
We determine whether we are a principal or an agent for each specified good or service promised to the customer by evaluating the nature of our promise to the customer against the following non-exhaustive list of indicators that a performance obligation could involve an agency relationship:
- we do not control each specified good or service before that good or service is delivered to the customer;
- the vendor retains primary responsibility for fulfilling the sale;
- we take no inventory risk before or after the goods have been ordered, during shipping or on return;
- we do not have discretion to establish pricing for the vendor’s goods, limiting the benefit we can receive from the sale of those goods; and
- our consideration is in the form of a, usually predetermined, commission.
As a result, the Group continues to report all hardware elements of its Technology Sourcing business, along with its internally provided Managed Services and Professional Services revenues, on a principal basis.
The Group will continue to report Technology Sourcing Gross Invoiced Income and aggregated with our Services revenues as Total Group Gross Invoiced Income as an Alternative Performance Measure.
The changes in the Group’s revenue accounting policies to reflect the agenda decision of the Committee have resulted in the following impact on the current year Financial Statements and, in accordance with IAS8, a retrospective restatement of the relevant prior year reported Financial Statements:
- Revenue and cost of sales decreased by the value of revenue assessed as being recognised on an agency basis by £2,581.7 million in 2022 (2021: £1,889.0 million). The retrospective application of the agenda decision resulted in a reduction of previously reported revenue and cost of sales for 2021 by £1,691.3 million.
- Gross profit, operating profit, and profit before and after taxes have remained unchanged in all periods. As a result, there is no impact on basic and diluted earnings per share.
Accounts examples 