Example of IFRS 15 Accounting

Background

While the vast majority of Kinaxis’ subscription arrangements are SaaS (or cloud-based), we do support some customers through on-premise subscription agreements. Many “on-premise” customers have been with Kinaxis for a long time and/or are in industries that may be more sensitive to the idea of their data residing in the cloud. Overwhelmingly, Kinaxis’ new customers choose SaaS delivery, though it’s possible that some may choose the on-premise model.

Effective January 1, 2018, Kinaxis adopted IFRS 15, which impacts the revenue recognition of subscription agreements where the software is delivered on-premise. We are required to look beyond the related subscription payment terms (generally annual prepayment) to allocate the total revenue between two elements. The first element is related to the “right to use” RapidResponse over the subscription contract term. This element is recognized as a lump sum on the initiation or renewal of the subscription term arrangement, and is referred to as “Subscription term licenses” in our financial statements. The remainder of the revenue is attributed to “Maintenance and support” and is recognized ratably over the entire contract term. Under IFRS 15 for SaaS agreements, we continue to ratably recognize the full amount of subscription revenue over the full term of the agreement. Further, IFRS 15 does not change the revenue reporting for Professional Services or legacy maintenance and support services. 

Note: The pricing and cash flow is structured identically whether a subscription agreement calls for SaaS or on-premise delivery of the software. The subscription is paid for annually in advance. IFRS 15 only impacts the related revenue recognition, not any of the commercial terms of the arrangement.

Example

Consider a hypothetical example where Kinaxis renews (or newly signs) an on-premise agreement in Q1 19 with a customer for a three-year term and a $1 million annual subscription fee. In this case, let’s assume that it is reasonable to assign 60% of the $3 million total contract value (or $1.8 million) to the right to use the software (i.e., recorded as “Subscription term licenses” revenue) and the remaining 40% ($1.2 million) is related to “Maintenance and support”. Generally, as the contract term increases so does the percentage of total contract value allocated to “Maintenance and support”. Under IFRS 15, the accounting for such an arrangement would be as follows.

INCOME STATEMENT BALANCE SHEET - ENDING BALANCE
 
Revenue  
Quarter Subscription  Term Licenses Maintenance and Support Total Trade Receivables Unbilled Receivables Deferred Revenue Cash Flow
 
Q1 - 19 1,800 100 1,900 1,000 900 - -
Q2 - 19 100 100 - 1,000 1,000
Q3 - 19 100 100 1,100 -
Q4 - 19 100 100 1,200 -
Q1 - 20 100 100 1,000 300 -
Q2 - 20 100 100 - 400 1,000
Q3 - 20 100 100 500 -
Q4 - 20 100 100 600 -
Q1 - 21 100 100 1,000  -  300 -
Q2 - 21 100 100 - 200 1,000
Q3 - 21 100 100 100 -
Q4 - 21   100 100 - -
Total 1,800 1,200 3,000

If the same agreement called for SaaS delivery*, the accounting would be as follows:

INCOME STATEMENT BALANCE SHEET - ENDING BALANCE
 
 
Quarter SaaS Revenue Maintenance and Support Total Trade Receivables Unbilled Receivables Deferred Revenue Cash Flow
 
Q1 - 19 250 250 1,000 750 -
Q2 - 19 250 250 - 500 1,000
Q3 - 19 250 250 250 -
Q4 - 19 250 250 - -
Q1 - 20 250 250 1,000 750 -
Q2 - 20 250 250 - 500 1,000
Q3 - 20 250 250 250 -
Q4 - 20 250 250 - -
Q1 - 21 250 250 1,000 750 -
Q2 - 21 250 250 - 500 1,000
Q3 - 21 250 250 250 -
Q4 - 21 250   250 - -
Total 3,000     -   3,000

*This was also the accounting treatment for both SaaS and on-premise delivery prior to IFRS 15.

Summary

In summary, some of the major accounting impacts of the adoption of IFRS 15 include:

  • Accelerated recognition of revenue compared to previous accounting standards

  • The introduction of two new revenue elements to the income statement for all on-premise-delivered subscription arrangements: “Subscription term licenses” and “Maintenance and support”

  • The introduction of “Unbilled receivables” to the balance sheet and (typically) lower “Deferred revenue” balances through the contract term, due to the accelerated recognition of revenue

  • No impact on trade receivables, cash flow, nor the commercial terms of the underlying subscription arrangements