IFRS 15 for the TMT industries – Contracts that contain multiple goods or services

27 June 2018

Bundling or unbundling of performance obligations

Previously, IFRS had little guidance for ‘unbundling’ contracts into components.  In contrast, IFRS 15 Revenue from Contracts with Customers contains detailed guidance, and it is likely that many entities will need to amend their current accounting policies and approaches.  This may have a significant effect on the pattern of revenue and profit recognition. The changes for entities in the technology, media and telecommunications (TMT) industry are likely to be particularly significant.

The lack of existing guidance in IFRS has resulted in significant judgment being applied when considering how revenue should be allocated and recognised, for example, for contracts involving the supply of a free mobile phone handset that is combined (bundled) with an allocation of permitted use (minutes) in return for a monthly payment for a minimum period of time. Some entities have treated the cost of the handset as a marketing expense, while others have deferred the cost of the handset, and amortised it over the minimum contract period.  In other cases, entities have recognised revenue from the sale of the handset, but have limited this to its cost. 

The application of IFRS 15 will result in the revenue to be derived from the contract being allocated to each component (or ‘performance obligation’).  This means that at the start of each contract, entities will record revenue and profit that is attributable to the supply of the handset.  In comparison with current practice, this will typically mean the recognition of more revenue and profit on inception of contracts, and less revenue and profit as the contract continues.

Combining contracts

Entities will also need to consider whether they have to combine separate contracts entered into with the same customer. Currently, there is no requirement in IAS 18 Revenue to combine separate revenue contracts. This is superseded by IFRS 15 which contains specific guidance that requires contracts to be combined if certain criteria are met.

Combining contracts


As with many other goods and services, telecommunication equipment is frequently sold with a warranty that it will operate satisfactorily for a specified period of time.  The accounting treatment for these warranties depends on whether:

  • Customers have an option to purchase the warranty separately, and
  • The warranty is part of the overall package of goods and services sold to the customer and, if so, whether the warranty simply provides assurance that the hardware and software is in compliance with the agreed-upon specifications in the contract.

Agreed-upon specifications often relate to an assurance that an item will function properly for a specified period, and may link to legal requirements in some jurisdictions.

If customers have an option to purchase a warranty separately from the telecommunications equipment itself, this is accounted for separately.  If the warranty is part of the overall package, then if it simply provides an assurance of compliance with agreed-upon specifications, it is not accounted for separately. If it goes beyond compliance with agreed-upon specifications, then it is accounted for separately regardless of whether it is identified as a separate component of the sales transaction.

Example – Unbundling of performance obligations


Customer A signs a 24-month mobile data plan with Telecom Co. As part of this plan they pay $50 a month and receive 10GB of data per month, and unlimited calls and text messages.

As part of the contract, Customer A also receives an IPhone 7 for which they pay an additional $5 per month. The standalone selling price of the phone is $800.

How many performance obligations does Telecom Co. have and how should the transaction price be allocated among them?

Telecom Co. has entered into one contract with Customer A, but IFRS requires that all distinct performance obligations be identified and accounted for separately.

In this case, there are two performance obligations: the provision of mobile data services, and the sale of a phone.

The total transaction price is $1,320, made up of $1,200 for the mobile data services (i.e. $50 a month for 24 months), and $120 for the handset (i.e. $5 a month for 24 months). This transaction price of $1,320 is then allocated to each of the two performance obligations, in proportion to their standalone selling prices. The table below illustrates this allocation.

Contract components Contract price Standalone selling price Revenue
Mobile phone $120 $800 $528
($1,320 x (800/2,000)
Mobile data $1,200 $1,200
(24 x $50)
($1,320 x (1,200/2,000)
Total $1,320 $2,000 $1,320

Telecom Co. should then recognise revenue of $528 up front when the phone is provided to the customer because it has fulfilled its performance obligation to deliver the phone. Telecom Co. would also recognise $33 ($792/24) each month for the mobile data services.

Current practice under IAS 11/IAS 18

The common practice under IAS 11/IAS 18 would be recognise $55 a month as revenue. The IFRS 15 requirement to ‘unbundle’ performance obligations will result in a significant change to the pattern of revenue recognition, with revenue on the handset being recognised upfront.

Example – Combination of contracts and bundling of performance obligations


A customer purchases a 12-month license from Software Co. for $1,000. They also have a separate contract for installation of the software, which is priced at $200. The software cannot be installed by any other party and cannot be used without the installation services. The software license and access key was provided on 1 January 2018 and installation services occurred on 1 February 2018.

Should these two contracts be combined?

Referring to the decision tree for combining contracts above, these two contracts should be combined because at least one of those criteria have been met, i.e.:

  • Software Co. negotiated these contracts with Customer A as a package with a single commercial objective
  • Customer A cannot benefit from the software on its own as they require the installation services to benefit from it, and
  • The goods and services promised in the two contracts for a licence and installation services comprise one performance obligation.

The table below demonstrates the difference in timing of revenue recognition if the contracts were combined and one performance obligation identified or the two contracts left separate (which will also result in two separate perfomrance obligations).

  Separate contracts (revenue) Combined contracts (revenue)
1 January 2018 $1,000 -
1 February 2018 $200 $1,200

Software Co. should therefore combine the contracts and recognise the revenue from the transaction when the software has been installed.

Current practice under IAS 11/IAS 18

Current practice under IAS 11/IAS 18 is to account for the two contracts separately.

Practical implications on systems and processes

Some of the practical implications on systems and processes for Telecom Co. and Software Co. include:

  • Identifying that there are two related contracts
  • Determining whether related contracts should be combined
  • Identifying the number of performance obligations
  • Working out the standalone selling price for each performance obligation
  • Systems to recognise revenue for the phone handset and mobile data services separately.