IFRSIC tentative decision (confirmed in April 2022) on principal versus agent recognition by software resellers, disclosure of potential effect

Computacenter plc – Annual report – 31 December 2021

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. 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.

Management continues to monitor the primary indicators used to assess the ‘agent/principal’ presentation of our Software and certain Resold Services revenue against our general contractual terms and conditions including, detailed analysis of how terms and conditions are applied in practice, the weighting applied to the agent/principal indicators and evaluation of emerging practice. Management has concluded that whilst this remains a finely balanced judgement, no change to the presentation of our Software and certain Resold Services revenues is currently required and revenue for these items will continue to be presented gross where the underlying facts and circumstances remain the same. Management continues to monitor the development of new methods of transacting business within the traditional vendor to reseller channel and the emergence of best practice in the revenue recognition treatment and disclosure of all Technology Sourcing revenues.

Since the adoption of IFRS 15 on 1 January 2018, a line of business emerged within our Technology Sourcing business where vendors and customers typically approach us with an opportunity where the vendor is taking the contract and performance risks and sets the selling price, using Computacenter as a pass-through agent in the channel to transact the deal for a set fee. To date, these have been primarily large software deals where there is no ongoing obligation of service on us following the transaction. We have no say in the pricing or selection of the product and are merely standing in the sales channel between the vendor and customer for the predetermined fee. Management reviews the facts and circumstances of these types of deals, case by case, with regards to its specific terms and conditions against the Group’s accounting policy to determine whether our performance obligation is to provide the good or service itself, where we are acting as the principal in the deal, or to arrange for another party to provide the good or service, where we are acting as an agent. Based on the facts and circumstances of each deal we have classified several of these deals as agency, concluding that the fee received should be booked as net revenue. Such agency deals would have increased revenue by £197.7 million during 2021 if recognised on a principal basis (2020: £273.7 million).

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. A finalised agenda decision is not expected until the second quarter of 2022, following the consideration of public comments which closed on 8 February 2022.

The Group typically recognises standalone software licence revenue on a principal or gross invoiced income basis, with a small number of material transactions, where the fact pattern remains different to the standard terms and conditions, recognised as an agent. Whilst the Committee is finalising its decision, the Group is working towards assessing changes to its accounting policies that will result if the final agenda decision remains broadly characteristic of the tentative decision. The resultant change in policies would reflect that standalone revenue from standard software sales (software) would be recognised on an agency or ‘net’ basis where the margin earned on the contract would be 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, would most likely continue to be recognised on a principal basis. Similarly, the Group has determined that third-party services agreements resold on a standalone basis (resold services), such as vendor-provided maintenance support agreements, would also be changed to be recognised on an agent basis due to the similar fact pattern of the transaction to that of software sales.

Such a change in policy would be accompanied by a programme of system enhancements required to be able to accurately report on the new basis. These changes, as required, will be allowed sufficient time to be appropriately implemented in order that the reporting under the new basis is as accurate as possible.

The Group’s current best estimate, without doing a detailed retrospective contract by contract review, is that the proposed potential changes in policy would have the following impact on the Group’s Financial Statements:

  • Revenue and cost of sales would decrease by the value of revenue assessed as being recognised on an agency basis. Whilst the work is not yet complete to determine the value for 2021, the total value of the revenue categories under consideration for the change in policy is estimated to be up to £1,800 million in 2021. We estimate that the majority of that revenue in those categories will be derecognised, leaving only the margins earned on the transactions to be recognised as revenue.
  • Gross profit, operating profit, and profit before and after taxes will be unchanged.

These estimates are preliminary and subject to further Management review. However, they provide an order of magnitude to assess the future impact on reported revenues. These estimates are for the total amount in these software and resold services revenue categories as measured on a principal basis and include elements that may, following Management review, continue to be recognised on a principal or gross basis. The Group will continue to report, as an alternative performance measure, all revenue recognised on a principal basis as Gross Invoiced Income, to allow the reader of the accounts to more accurately determine the linkage between revenue and cash flows.