A company sells a software licence, installation and 3 years of support in one contract. Walk through how you would recognise revenue under IFRS 15 / Ind AS 115.

What the interviewer wants to hear

• Applies the five-step model
• Assesses whether licence, installation and support are distinct performance obligations
• Determines the transaction price including any variable consideration
• Allocates the price using standalone selling prices
• Recognises licence and installation at a point in time or over time, and support over the 3 years

Model answer

I would apply the five-step model. Step one, confirm there is an enforceable contract with agreed rights and payment terms. Step two, identify performance obligations: the licence, installation and support are usually distinct if the customer can benefit from each on its own and they are not heavily customised into one output. If installation substantially customises the software, licence and installation might be one obligation. Step three, fix the transaction price, including any variable elements such as service credits or usage bonuses, estimated and constrained. Step four, allocate the price based on standalone selling prices, using observed prices where available or a cost-plus or residual approach where they are not. Step five, recognise revenue: a right-to-use licence at the point control passes, installation when done or as it progresses, and support evenly over the three years. Cash received in advance becomes a contract liability.

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