Revenue – ifrs 15 handbook

Example 9 – Technology company: Up-front fees and allocation of 
variable consideration
Technology Company T enters into a contract with Customer C to provide C 
with access to its hosted transaction processing software application for three 
years. T concludes that the software licence is not distinct from the hosting 
services and that there is a single performance obligation satisfied over time 
to provide transaction processing services. It also concludes that the licence is 
not the predominant item in the transaction, because the hosting services have 
a significant value to C. Therefore, the licence guidance does not apply to this 
performance obligation.
T charges 0.90 per transaction throughout the contract period, billed quarterly. 
In addition, C is required to pay a non-refundable up-front fee of 48,000. 
T determines that it should recognise the transaction-based fees in the period in 
which the transactions are processed, because: 
– the variable amounts relate specifically to C’s usage of the application that 
day; and
– allocating the transaction-based fees to each day is consistent with the 
allocation objective because each day has a similar pricing structure. When 
considering whether the fixed fee is allocated to all of the days in the 
contract, the resulting allocation of potential variable amounts and fixed fees 
depicts what T would expect to receive for each day of service. 
The fixed fee is attributable to the entire performance obligation and recognised 
over the contract period.

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110 | Revenue – IFRS 15 handbook
Example 10 – Pharmaceutical company: Allocating elements of the 
transaction price to specific performance obligations
Biotech Company B enters into a contract with Pharma Company C for 
Compound X, which is under development. Under the arrangement, C 
will receive a licence for X and B will continue to perform the research and 
development (R&D) activities required to take X through to commercialisation. 
Under the contract, B receives an hourly rate for its R&D services and 2% of any 
sales of X by C. This hourly rate is consistent with the rate that B charges other 
entities for similar services. 
B assesses the arrangement and determines that the hourly rate reflects 
the stand-alone selling price of the R&D services. Therefore, B concludes 
that it is appropriate to allocate the sales-based royalty entirely to the 
licence arrangement. 
If, instead of an hourly rate, B received monthly fixed payments designed to 
cover the costs of R&D, careful consideration would be required to determine 
whether it was appropriate to allocate those payments in their entirety to the 
R&D services. If it was not appropriate, then B would be required to determine 
the stand-alone selling price of the licence and R&D services and allocate the 
fixed payments on that basis. 
Allocating the transaction price will also be more complex if the consideration 
under the contract includes a significant non-refundable up-front payment.