Computacenter plc – Half year report – 30 June 2022
Industry: support services
3 Significant Accounting Policies (extract)
The accounting policies adopted are consistent with those of the previous financial year as disclosed in the Computacenter plc 2021 Annual Report and Accounts except for the change in revenue recognition policies relating to software licences and third-party services agreements resold on a standalone basis following the finalisation of an agenda decision by the IFRS Interpretation Committee (the ‘Committee’).
Following its meeting that concluded on 1 December 2021, 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 standalone software and have an impact on those valued added 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 a non-exhaustive list of indicators that a performance obligation could involve an agency relationship:
- evaluating who controls each specified good or service before that good or service is transferred 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.
Resultingly, 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 period Financial Statements and, in accordance with IAS8, a retrospective restatement of the relevant prior period reported Financial Statements:
- Revenue and cost of sales decreased by the value of revenue assessed as being recognised on an agency basis by £1,142.8 million in H1 2022 (H1 2021: £862.5 million; FY 2021: £1,889.0 million).
- Gross profit, operating profit, and profit before and after taxes has remained unchanged in all periods. As a result, there is no impact on basic and diluted earnings per share.
Apart from changes discussed above, the Critical accounting estimates and judgements reported in the Group’s 2021 Annual Report and Accounts are unchanged.
2 Basis of preparation (extract)
As described in note 4 In accordance with IAS 8, a retrospective restatement of the relevant prior period reported Financial Statements for the period to 30 June 2021 and the year to 31 December 2021 has taken place due to a change in revenue recognition policies relating to software licences and third-party services agreements resold on a standalone basis following the finalisation of an agenda decision by the IFRS Interpretation Committee (the ‘Committee’).
For our trading businesses which operate on our Group Enterprise Resource Planning (ERP) system we were able to quickly determine the adjustments required under the new accounting policy to restate the comparative information through readily available high quality data. For one of our North American business units, an entity operated on a legacy ERP system following its acquisition in October 2018, prior to its migration to the Group ERP system on 1 September 2021, this has proved more difficult. The legacy ERP system used at the time was not designed to produce the analysis to identify software and resold services product sales that are now recognised on an agent basis to the degree of precision required. Further, data migration issues have been identified that also impact this analysis post-migration and during the first six months of 2022.
Significant data interrogation has been performed by the Group to produce the adjustment for this business unit both for the 8 month time period concerned, in 2021, where it continued to operate on the legacy system, and subsequently where it now operates on our Group ERP system.
The detailed work to date has produced the comparative adjustment required for this business unit which forms part of the overall Group, and North American Segment, restatement, and for the impact on the current period revenue and cost of goods sold.
For the comparative period to 30 June 2021, the business unit recorded £414.7 million of gross invoiced income with an estimated netting adjustment to revenue and cost of sales of £122.7 million and therefore revenue of £292.0 million compared to Group gross invoiced income of £3,287.6 million, an adjustment of £862.5 million and revenue of £2,425.1 million.
For the year to 31 December 2021, the business unit recorded £917.3 million of gross invoiced income with an estimated netting adjustment to revenue and cost of sales of £294.9 million and therefore revenue of £622.4 million compared to Group gross invoiced income of £6,923.5 million, an adjustment of £1,889.0 million and revenue of £5,034.5 million.
For the current period to 30 June 2022, the business unit recorded £756.3 million of gross invoiced income with an estimated netting adjustment to revenue and cost of sales of £169.3 million and therefore revenue of £587.0 million compared to Group gross invoiced income of £3,971.9 million, an adjustment of £1,145.2 million and revenue of £2,826.7 million.
We continue to cleanse and address residual data migration issues, and consider that any differences that may be identified as a result of this, will be immaterial. The issues identified affect only the quantification of revenue and cost of goods sold, by equal amounts, for this impacted business unit. Gross profit, operating profit, profit before and after taxes, and cash, are not changed by the new accounting policy.
Independent Review Report
to the members of Computacenter plc (extract)
Qualified conclusion
We have been engaged by the company to review the condensed consolidated financial statements in the Interim Report and Accounts for the six months ended 30 June 2022 which comprises the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and the related explanatory notes.
Except for the adjustments to the condensed consolidated financial statements that we might have become aware of had it not been for the matter described in the Basis for qualified conclusion section of our report, based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements in the Interim Report and Accounts for the six months ended 30 June 2022 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK and the Disclosure Guidance and Transparency Rules (“the DTR”) of the UK’s Financial Conduct Authority (“the UK FCA”).
Basis for qualified conclusion
As described in note 3, during the interim period the directors reassessed the Group’s accounting policy in respect of whether it was acting as agent or principal in certain revenue transactions as a result of an IFRIC agenda decision. This accounting policy change impacted, amongst others, the Fusionstorm division, which recorded revenue of £587.0m for the six months ended 30 June 2022 (year ended 31 December 2021 restated: £622.4m, six months to 30 June 2021 restated: £292.0m). It was not possible for us to undertake satisfactory review procedures over the determination of principal vs agent transactions in relation to revenue and cost of sales for Fusionstorm for the current six-month period, the prior year or the prior six-month period owing to data limitations in the Group’s accounting records, the extent of the detail in the Group’s analysis of the adjustments and the volume of transactions affected by the change in accounting policy. Had we been able to complete our review of revenue and cost of sales, matters might have come to our attention indicating that adjustments might be necessary to revenue and cost of sales for the current six-month period ended 30 June 2022, the year ended 31 December 2021 and the prior six-month period ended 30 June 2021, and that related adjustments might be necessary in the other information contained in the Interim Report and Accounts.
There is no impact on gross invoiced income, gross profit, operating profit, profit before tax or net assets from this matter.
Except as explained in the above paragraph, we conducted our review in accordance with International Standard on Review Engagements (UK) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity (“ISRE (UK) 2410”). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the Interim Report and Accounts and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial statements.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
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