IFRS IC Potential Agenda Item Request
We kindly request the IFRS Interpretations Committee (hereinafter referred to as the
“Committee”) to examine the following issue in connection with the application of IFRS 15
with regard to the distinction between the principal and the agent.
1. Problem
The submission deals with the question whether, when software licences are sold by
third parties, i.e. by IT service providers or IT system houses, the respective third party
is to be classified as principal or agent. Doubts arise especially with respect to contract
models in which the third party is a value-added reseller and directly performs complex
and extensive consulting services in advance within the scope of the contractually
agreed performance (so-called indirect contract models).
The question is especially whether the pre-sales consulting to be performed in the indi-
rect contract model and the sale of a software licence represent goods and services in
the meaning of IFRS 15.29 (c), which are highly interdependent or highly interrelated.
While the affected value-added resellers of the entire IT industry usually assume that a
significant integration service is on hand – which would imply classification as principal
– [another party] published indications to be used for the assessment, which imply that
in general, the goods and services are separable.
The distinction made between the role of the principal and that of the agent of an entity
has significant consequences for the presentation of the revenue in the income state-
ment.
For value-added resellers, it is therefore important to have a clear, reliable procedure.
2. Fact Pattern
The fact pattern is as follows:
(1) The volume licence is the typical licence model in the B2B segment. A customer
who obtains a volume licence acquires the software and, via the licence contract,
the right to use a certain number of copies without obtaining a physical storage
medium. The software is usually made available via a software portal. The software
activation takes place by means of a key; however, a volume licence programme
does not require the customer to use a new key for every activation, but only a
single (corporate) key for the activation of all installed software products.
(2) Regardless of the licence model, the software manufacturer enters a contract with
the end customer.
(3) In the context of the sales partnership, the IT service providers in the indirect con-
tract model act as value-added resellers who create combined products that in-
clude their own services and sell these to their customers as custom solutions.
(4) The distribution agreement between the value-added reseller and the software pro-
vider confers an enforceable right on the value-added reseller to grant software
(5) The consulting service is a key element of the performance towards the customer.
The obligations of the value-added reseller in this regard are governed primarily by
the agreement between the value-added reseller and the software manufacturer
and thus become an essential element of every contract between the value-added
reseller and the customer. Furthermore, the value-added reseller undertakes to
provide every new customer with “certified consulting” services upon registration
on the official company website. Thus, every customer is entitled to qualified advice
according to the terms and conditions of the respective partner agreement and can
expect a performance package with these features.
(6) The combination of qualified pre-sales consulting with the software licence is what
delivers the customer benefit in the form of a suitable, legally compliant software
solution.
(7) By means of the pre-sales consulting, a customer-specific contract package is con-
figured for the customer for a planning horizon of three years. The pre-sales con-
sulting is not based on standard offers or assumptions, but rather on the precisely
identified needs of the customer. Especially aspects such as its corporate goals
and the derived IT strategy are taken into consideration. In most cases, the pre-
sales consulting culminates in the conclusion of a contract that provides the cus-
tomer with various upgrade options and maximum flexibility.
(8) The pre-consulting services may only be performed by duly trained and certified
employees (licence consultants). Depending on the complexity of the case, several
person-days are often required for this pre-sales consulting. Apart from the direct
consulting overhead that arises from the performance of the pre-sales consulting,
the value-added reseller is faced with substantial upfront investments.
(9) In the case of public RFP of public-sector clients, both the partner status and the
consulting are often explicitly requested and are part of the conditions of the RFP.
They are thus explicitly agreed. It is remunerated within the framework of the total
price for the software solution advised. If the contract is not concluded, the remu-
neration does not apply.
(10) The partner agreement between the software manufacturer an den value-added
reseller stipulate that vis-à-vis the customer, the value-added reseller has complete
discretion in his pricing.
(11) The value-added reseller invoices the software licence to the customer and re-
ceives the remuneration for all his services exclusively via the margin between the
purchase price and the selling price. This includes the procurement of the software
licences from the manufacturer, the consulting service provided and the above-
mentioned upfront investments.
(12) The value-added reseller is exposed to a special form of inventory risk, since in the
event of mislicensing (i.e. where the type or number of software licences sold was
not appropriate), he cannot return the licences to the software vendor or sell them
to another customer.
(13) Below, the question raised is demonstrated on the basis of [a particular software
manufacturer’s] volume licence models, as this vendor accounts for a significant
share of the entire software trading business worldwide and has implemented a
standardised, globally valid agreement framework with its partners, thereby estab-
lishing the precondition for an industry-wide comparison. However, the objective is
not merely to assess [this particular software manufacturer] and its contract mod-
els. In fact, the contract models of virtually all vendors have a similar structure.
Value-added resellers often maintain business relationships with a wide range of
software vendors.
(14) A special feature of the contract programmes of this particular software manufac-
turer in the indirect model is that in the contractual relationship, the value-added
reseller stands between [software manufacturer] and the customer and is re-
quested to place orders on behalf of the customer and administer purchases of the
customer.
(15) In the relationship with [this particular software manufacturer], the role of the value-
added reseller comprises the responsibility for the sales and the after-sales pro-
cesses. In the relationship with the customer, the value-added reseller is the first
point of contact for all questions. The value-added reseller is responsible both for
the order process and for any licensing issues that arise after the conclusion of the
order.
3. Issue
Should the value-added reseller in the indirect contract model be regarded as the prin-
cipal or as the agent?
3.1. View 1: The Value-Added Reseller is the Principal
In application of IFRS 15.24, IFRS 15.27 and IFRS 15.29 (c) and additionally of
IFRS 15.B35A (c) as well as of IFRS 15.B37 (a) to (c), this view is supported by the fol-
lowing:
3.1.1. Identification and Evaluation of the Promises
According to IFRS 15.24, the value-added reseller identifies the sale of a software li-
cence as a promise in the customer contract. Moreover, the value-added reseller identi-
fies the pre-sales consulting as an implicit promise to the customer pursuant to
IFRS 15.24.
To fulfil that the good or service is capable of being distinct (according to
IFRS 15.27 (a) in conjunction with IFRS 15.28), both identified promises would have to
deliver benefits to the customer. Prior to every sale of a software licence, the value-
added reseller is under the obligation to provide qualified advice, firstly due to a pre-
contractual consulting obligation (see below) and secondly due to the partner agreement
entered into. If this requirement is not complied with, the partner could lose his partner
status and thus his authorisation to sell software licences. Thus, it is not possible to pur-
chase a licence without the consulting service, as there is no market legalised by the
software vendor. It would not be possible for the end customer to purchase licences
without the consulting service. Even if another value-added reseller were to be selected,
the respective value-added reseller would in turn have to perform his own consulting
service.
For the evaluation of whether the promise to transfer the good or service is distinct
within the context of the contract (IFRS 15.27 (b) in conjunction with IFRS 15.29), it
is relevant that the purchase of a licence within the scope of the indirect model represents
the result of a consulting process that not only serves the identification of the “right” li-
cence, but also influences the type of licensing. The pre-sales consulting service has a
significant effect on the ensuing licensing solution, i.e. the licence greatly depends on
the prior consulting service and vice versa.
For the customer, the purchase of software licences raises various questions concerning
the scope of the rights of use of the licences. This includes aspects of strategic and
operational software procurement and consulting services with respect to the contract
and compliance. Consulting services are closely linked to the sale of the software prod-
ucts and are considered to be a material component of the performance obligation to-
wards the customer. These pre-consulting services may only be performed by duly
trained and certified employees (licence consultants). The certifications of the licence
consultants must regularly be renewed. The required training measures involve high
costs, regardless of the quantity sold.
Without such consulting, no customer benefit can be gained. Moreover, the opinion of
the value-added resellers is that the promises cannot be separated, as such separation
does not reflect the characteristics of the indirect contract model (nature of the promise).
The value-added resellers are of the opinion that the inseparability of the performance is
also supported by the Board’s explanations in IFRS 15.BC116M. With the example of
IFRS 15.BC112 (development of a product concept with subsequent manufacturing of
prototypes), the Board shows that a combined end result can be achieved over more
than one phase, one element or one unit. The performance in the example
IFRS 15.BC112 is basically separable, but interdependent, and so are the pre-sales con-
sulting and the subsequent software sale.
An appraisal under civil law also supports the view that the promises cannot be sepa-
rated: According to general accepted legal principles, the combination of the pre-con-
tractual consulting obligation with the subsequent conclusion of the contract is manda-
tory, as it refers to the contract to be concluded and has legal consequences for the
subsequent contractual relationship (damages in the event of wrong advice). A seller has
consulting obligations if he has undertaken to provide the buyer with advice with respect
to the properties of the item to be purchased or other circumstances relevant for the
buyer. Such obligations can be assumed explicitly or implicitly. The applicability of the
seller’s consulting obligation increases the more the buyer needs protection and the
more expertise the seller claims to have. The value-added reseller’s consulting obligation
arises with the commencement of the professional advice and is documented at the lat-
est when an offer is submitted. Provided that the other preconditions are met, a breach
of the consulting obligation results in a claim for damages. The party protected by the
ancillary obligation is to be put in a position as if the obligation had been duly performed.
Moreover, depending on the circumstances, the breach of ancillary obligations can insti-
tute a reason for rescission or termination of the contract.
Moreover, the uniform billing and the fact that the value-added reseller usually does not
have a separate claim to remuneration underlines the nature of the combined integrated
performance for the customer.
In summary, the following applies to the indirect contract model in the field of software
licensing involving a value-added reseller (in accordance with IFRS 15BC116J et seq).
(1) The customer benefit only arises from the interaction or combination of the individual
promises.
(2) From the perspective of the customer, the promise largely represents a single per-
formance (= provision of a suitable and legally secure software solution).
(3) The consulting service directly and greatly influences the licence (and vice versa).
Thus, consulting risks also give rise to licence risks. The value-added reseller bears
the risk for the entire service package and may be held liable accordingly.
(4) The consulting thus has a significant impact on the customer benefit.
Against the backdrop of both the implicit and, in certain cases, the explicit obligation to
provide such comprehensive consulting services, the value-added reseller comes to the
conclusion that pre-sales consulting represents an implicit (significant) promise to the
customer. The performance consists, not only of the sale of the standard software li-
cence, but of a combined performance bundle comprising the standard software licence
and the qualified consulting services of the value-added reseller. The customer-specific
licensing concept establishes a transformative connection between the pre-sales con-
sulting and the sale of the vendor’s software licence. In this process, the customer’s
needs are fully taken into consideration. The responsibility for the transformation services
lies with the value-added reseller alone.
3.1.2. Further Aspects – Regulations of IFRS 15.B35 et seq
Against the above-mentioned backdrop, the value-added reseller considers the criteria
for the classification as a significant integration service (IFRS 15.B35A (c)) to be fulfilled,
by way of which the value-added reseller obtains the control before transferring the per-
formance bundle to the customer.
Apart from the value-added reseller's original consulting service, this is also supported
by the fact that due to his partner status and the associated distribution agreement, he
holds overriding distribution rights of the vendors. The distribution agreement between
the value-added reseller and the software provider confers an enforceable right on the
value-added reseller to grant software licences to his customers. The software provider
has granted the value-added reseller a right to use his IP (i.e. to sell licences for his IP),
which is separated from the actual underlying software licences. In connection with the
application of the control criteria to intangible goods and services, IFRS 15.BC385Q also
indicates that the evaluation of the control should not merely take individual parts of the
promise, but the entire promise into consideration. Therefore, the evaluation of the con-
trol should examine the combined output, and it must be determined whether the entity
controls the combined output before it transfers it to the customer.
The classification as principal is supported by the other indicators of IFRS 15.B37:
The value-added reseller is mainly responsible for fulfilling his obligation towards the
customer, as he ensures the compatibility of the standard software license and the
customer requirements.
Moreover, the value-added reseller is free to determine the price for the combined
performance obligation at his own discretion (see Fact Pattern, item 10).
Furthermore, the value-added reseller is exposed to a special form of inventory risk
with regard to the standard software licence, since in the event of non-acceptance
by the customer, he cannot return it to the software vendor or sell it to another cus-
tomer (see Fact Pattern, item 12).
Under certain contract models, the software vender pays additional remuneration for the
sale of licences. In this contract models, the customer usually requests comprehensive
consulting within the scope of the tender process. Here too, a customer-specific licencing
concept is on hand, in which all above-mentioned indicators for classification as principal
are met. From the perspective of the value-added reseller, an additional remuneration
by the vendor does not change the assessment of whether he acts as principal or agent.
This opinion of the value-added reseller is in accordance with the accounting and meas-
urement principles of the software reseller industry, with which intensive interchange
takes place with regard to this discretionary judgment.
3.2. View 2: The Value-Added Reseller is an Agent
This deviating interpretation of IFRS 15 does not assume the existence of a significant
integration performance in the indirect business if the main purpose of the consulting
service is to fulfil the licensing requirements of the software vendors.
[Revenue] from the sale of standard software licences must be presented on a net basis
in accordance with IFRS 15.B36 (accounting as agent) if the consulting service per-
formed in connection with the sale of the software is primarily aimed at the fulfilment of
the software vendor’s licensing requirements and does not represent any significant ser-
vice of integrating the goods or services at the request of the customer in the meaning
of IFRS 15.29. For the assessment of whether the consulting service could potentially
be a significant integration service, the following aspects must also be taken into consid-
eration: the proportion of the consulting overhead and the licence value; the primary in-
terest of the software vendor in appropriate licensing, which is important for the amount
of his income; the fact that (in certain contract models) the software vendor pays remu-
neration for the sale of a licence and the fact that the consulting service is performed
prior to the submission of a quotation, i.e. even in cases in which the software sale does
not materialise.
The view that a pure agency activity is on hand is supported by the fact that in the context
of the sale of standard software licences in the indirect business, a direct contractual
relationship is instituted between the customer and the software vendor in addition to the
contractual relationship between the customer and the value-added reseller and until
then, the value-added reseller does not control the software licence. In this context, the
pre-sales consulting would be regarded as a pure sales service on the part of the value-
added reseller.
[This] reasoning can be supported as follows:
The consulting service of the value-added reseller aims primarily at the software
vendor’s interest in due licensing.
Compared to the value of the standard software licence, the pre-sales consulting
overhead and the gross margin usually accounts for a minor share.
Pre-sales consulting is provided even in cases in which the sale ultimately does not
materialise. Thus, pre-sales consulting services are offered even without remuner-
ation.
A customer who knows which contract model would be suitable and how many
standard software licences he or she needs would not gain any added value from
the pre-sales consulting.
From the perspective of the value-added resellers, the following points conflict with view
2:
The activities of the value-added reseller do not only primarily aim at the fulfilment of the
software vendor’s licensing requirements. Rather, according to the partner agreement
with [a particular software manufacturer], the value-added reseller has assumed the con-
tractual obligation to provide every customer with certified consulting services according
to the terms and conditions of the partner agreement, and this involves substantial up-
front expenses. From the customer perspective, this manifests the expectation of receiv-
ing the respective performance bundle (see Fact Pattern, items 5 and 8 above).
The value-added reseller is liable for his consulting services, as the pre-contractual con-
sulting obligation also refers to the contract to be concluded and has legal consequences
for the subsequent contractual relationship (damages in the event of wrong advice).
These aspects of the legal relationships between the software vendor and the value-
added reseller go far beyond a mere sales service. Thus, it is irrelevant that compared
to the volume of the overall order, pre-sales consulting services usually account for a
minor share or are performed even in the rare case that no contract is concluded.
As described in chapter 3.1.2 above, the distribution agreement between the value-
added reseller and the software provider also confers an enforceable right on the value-
added reseller to grant software licences to his customers (see also Fact Pattern, item
4). The software provider has granted the value-added reseller a right to use his IP (i.e.
to sell licences for his IP), which is separated from the actual underlying software li-
cences.
In view of the above reason, the value-added reseller considers the criteria for the clas-
sification as a significant integration service (IFRS 15.B35A (c)) to be fulfilled and as-
sumes that he obtains the control before transferring the performance bundle to the cus-
tomer.
After all, according to IFRS 15.B35A (c), the entity controls the inputs before the entity
renders the combined performance. In the case of software sale, this means that the
software licence is controlled by the value-added reseller prior to the combination with
pre-sales consulting services.
4. Summary
The assessment of the principal/agent issue when selling third-party software licences
within the context of the indirect contract model depends on numerous factors.
Especially the complex and extensive pre-sales consulting plays a key role in assessing
the principal/agent issue. In view of the explicit and/or implicit obligation to provide com-
prehensive consulting in the context of the indirect model, consulting can be assumed to
be an implicit, or, depending on the contract model, in some cases also an external per-
formance obligation towards the customer. Furthermore, the value-added reseller is lia-
ble for his pre-contractual consulting services upon conclusion of the contract.
Accordingly, the licence is not sold alone, but as a combined performance bundle con-
sisting of the licence and the qualified advice of the value-added reseller (i.e. a customer-
specific licensing solution) for which the value-added reseller is responsible. In the indi-
rect contract model, there is a transformative connection between the mandatory pre-
sales consulting and the sale of software licences. The goods and services are highly
interdependent or highly interrelated.
Moreover, the regulations concerning the “significant service of integrating the goods or
services” (IFRS 15.B35A (c)) and “primary responsibility” (IFRS 15.B37 (a)) support the
view of the resellers that they gain the control before the performance bundle is trans-
ferred to the customer. The indicators “inventory risk” (IFRS 15.B37 (b)), “pricing”
(IFRS 15.B37 (c)) and the “right to direct another party” (IFRS 15.B35A (b)) also support
this statement.
Therefore, the value-added reseller is the principal in the indirect contract model and
presents the entire trading revenue.
5. Reasons for the IFRS IC to address this issue
a. Is the issue widespread and has, or is expected to have, a material effect on those
affected?
The issue concerns all IT service providers worldwide who sell software licences to B2B
customers under indirect contracts. In the fiscal year 2020 (2019), the revenue from such
contracts of six European companies of the peer group amounted to approximately
€11 billion (€10 billion).
For these companies, some of which are listed at the stock exchange, it is vital to gain
legal certainty with regard to the presentation of revenue.
b. Would financial reporting be improved through the elimination, or reduction, of di-
verse reporting methods?
Yes. The principal/agent assessment has a major impact on revenue – which is one of
the most important performance indicators of an entity. An aligned procedure will improve
the comparability of financial reporting.
c. Can the issue be resolved efficiently within the confines of IFRS Standards and the
Framework?
Yes. Due to the existing uncertainties with regard to the interpretation, the case de-
scribed needs to be evaluated by the Committee and can be resolved efficiently within
the scope of the IFRS Standards and the Framework.
d. Is the issue sufficiently narrow in scope that the Interpretations Committee can ad-
dress this issue in an efficient manner, but not so narrow that it is not cost-effective
for the Interpretations Committee to undertake the due process that would be re-
quired when making changes to IFRS Standards?
Yes, the issue is narrow in scope and refers to the sale of software volume licenses.
Thus, efficient processing is guaranteed.
e. Will the solution developed by the Interpretations Committee be effective for a rea-
sonable time period? The Interpretations Committee will not add an item to its
agenda if the issue is being addressed in a forthcoming Standard and/or if a short-
term improvement is not justified.
In view of the stable business models of the affected IT service providers and the current
developments in the field of cloud solutions and software as a service (SaaS), which are
inherently even more consulting-intensive, the solution will remain effective for a reason-
able time period.
Questions and answers related to the
IFRS IC Potential Agenda Item Request
• Additional information about the contract between the software manufacturer and
end customer
• Questions on facts provided in the fact pattern within the submission
within the submission
Questions
2: Regardless of the licence model, the
software manufacturer enters a contract
with the end customer.
Could you provide more information about the
contract between the software manufacturer
and end customer?
Could you provide more information about the contract between the software manu-
facturer and end customer?
Essentially, the contract between the software manufacturer and the end customer com-
prises the general terms and conditions of the software manufacturer and the signatures of
the contracting parties. The general terms and conditions include, in particular, the rights to
use the software license, the right to verification of the performance of the contract by the
software manufacturer (compliance), e.g. correct number of licenses in use by the customer,
the purely functional warranty by the software manufacturer as well as the term of the soft-
ware licenses and the general pricing. This pricing structure provides that the value-added
reseller is free in its pricing to the end customer.
In addition, for example in the case of contracts with [a particular software manufacturer], the
value-added reseller is named as a partner in the general terms and conditions and thus oc-
cupies the middle position between the software manufacturer and the end customer. Ac-
cording to the contract, the partner is a company authorized by [the particular software man-
ufacturer] to sell licensed products to the customer. In the contractual relationship between
the software manufacturer and the customer, the partner is commissioned by the customer to
place orders on behalf of the customer and to manage purchases by the customer.
We would like to clarify that the role as a partner is by no means "limited to placing orders for
the customer, managing purchases" as well as mediating ("establishing") a contractual rela-
tionship between end customers and the software manufacturer and bringing about follow-up
orders. It is our clear understanding, as well as that of the entire industry, that the consulting
services provided by a value-added reseller go beyond the simple brokerage service and ra-
ther focus on the provision of an integration service.
within the submission
Questions
4: The distribution agreement between
the value-added reseller and the soft-
ware provider confers an enforceable
right on the value-added reseller to
1) Could you provide more information about
the distribution agreement between the soft-
ware manufacturer and reseller?
grant software licences to his custom-
ers.
2) Does the reseller hold the master key to the
software licence before any contract is
signed with a customer?
3) Does the reseller have a pool of pre-pur-
chased software licences?
4) Or instead does the reseller purchase soft-
ware licences only after a contract with a
customer is signed?
1) Could you provide more information about the distribution agreement between the
software manufacturer and reseller?
The distribution agreement between the software manufacturer and the value-added reseller
contains the general terms and conditions for resellers (partners) and the resulting distribu-
tion rights. The general terms and conditions include, in particular, the conditions under
which the value-added reseller may sell the software licenses. The agreement also stipulates
that the value-added reseller is responsible for both, the sales and after-sales process. In ad-
dition, the agreement stipulates that the value-added reseller must pay the software manu-
facturer for each license, even if a quantity is ordered that exceeds the customer's require-
ments. Furthermore, the agreement stipulates that the value-added reseller has full discre-
tion in its pricing. In addition, the agreement stipulates that the value-added reseller must en-
sure that the customer has purchased a sufficient number of software licenses. In the event
of incorrect licensing, the value-added reseller would be liable for damages.
The software manufacturer reserves the right to refuse a customer through the distribution
agreement. From our point of view, this contractual clause is at best of a theoretical naturer,
since we are not aware of any case in which the software manufacturer has refused to ac-
cept a customer from the value-added reseller in recent decades. In the course of the busi-
ness transaction, therefore, it is (in fact) the value-added reseller alone who decides on the
acceptance of a customer. This results not least from the fact that the value-added reseller in
the discussed model as a partner is the primary and in relation to the software manufacturer
the only contact for the customer.
The value-added resellers therefore conclude that they have an overriding, enforceable right
to grant licenses before individual software licenses are transferred to the customer. It is the
value-added reseller's enforceable rights against the software vendor that give the value-
added reseller the right to virtually instruct the software manufacturer to grant the software
licenses. These rights exist before the customer places a license order. Therefore, the value-
added reseller concludes that it controls the software licenses within the meaning of IFRS 15
before the software licenses are transferred to its customers.
2) Does the reseller hold the master key to the software licence before any contract is
signed with a customer?
3) Does the reseller have a pool of pre-purchased software licences?
4) Or instead does the reseller purchase software licences only after a contract with a
customer is signed?
According to IFRS 15.B35A(c), the entity normally controls the inputs before the entity pro-
vides the combined service consisting of pre-sales consulting and license. In the case of soft-
ware sales, this means that the software license would have to be controlled by the value-
added reseller prior to the combination.
The individual license right only arises after the order by the value-added reseller and the
granting of the license by the software manufacturer. The value-added reseller does not keep
licenses in stock, but orders the licenses only after the customer has placed an order. This is
a more or less efficiently designed purchasing process that eliminates the classic risks of
stockpiling. Nevertheless, the value-added reseller bears a special form of inventory risk with
regard to the order, since in the event of incorrect licensing the customer does not accept (i.e
pay for) the licenses and the value-added reseller has no right of return against the software
manufacturer.
Furthermore, the value-added reseller holds distribution rights of the software manufacturer
through the partner status and the associated distribution framework agreement. The master
distribution agreement between the value-added reseller and the software vendor transfers
an enforceable right to the value-added reseller to grant software licenses to its customers.
The software provider has transferred to the value-added reseller a right to use its intellectual
property - IP (i.e., to sell licenses to its IP) - this right is separate from the underlying software
licenses themselves.
Furthermore IFRS 15.BC385Q specifies that the application of the control principle should
not relate to individual parts of the performance obligations, but to the entire performance ob-
ligation. Rather, control should relate to the combined output and it should be determined
whether the entity controls the combined output before it is transferred to the customer.
Therefore, as already clarified, we do not consider the consideration of the transfer of the li-
cense in isolation to be appropriate.
Facts provided in the fact pattern
within the submission
Questions
5: The consulting service is a key ele-
ment of the performance towards the
customer.
6: The combination of qualified pre-
sales consulting with the software li-
cence is what delivers the customer
benefit in the form of a suitable, legally
compliant software solution.
7: By means of the pre-sales consult-
ing, a customer-specific contract pack-
age is configured for the customer for a
planning horizon of three years. The
pre-sales consulting is not based on
standard offers or assumptions, but ra-
ther on the precisely identified needs of
the customer.
1) Paragraph B34 of IFRS 15 states ‘An entity
determines whether it is a principal or an
agent for each specified good or service
promised to the customer. A specified good
or service is a distinct good or service (or a
distinct bundle of goods or services) to be
provided to the customer.’ Could you walk us
through the thought process in determining
that there is a distinct bundle of goods or
services?
2) Could you describe the nature of the consult-
ing service in more detail? What happens if
the customer decides not to buy any soft-
ware licences? Does the customer pay for
the consulting services in that case?
3) Does the contract between reseller and cus-
tomer involve changing or modifying the soft-
ware licences?
1) Paragraph B34 of IFRS 15 states ‘An entity determines whether it is a principal or
an agent for each specified good or service promised to the customer. A specified
good or service is a distinct good or service (or a distinct bundle of goods or
services) to be provided to the customer.’ Could you walk us through the thought
process in determining that there is a distinct bundle of goods or services?
Refer to 3.1.1 Identification and measurement of promises from the enquiry to the IFRS In-
terpretations Committee 2021-05-10.
According to IFRS 15.24, the value-added reseller identifies the sale of a software licence as
an explicit promise in the customer contract and the pre-sales consulting as an implicit prom-
ise to the customer.
To fulfil that the good or service is capable of being distinct (according to IFRS 15.27 (a) in
conjunction with IFRS 15.28), both identified promises would have to deliver benefits to the
customer separately. Prior to every sale of a software licence, the value-added reseller is ob-
ligated to provide qualified advice, firstly due to a pre-contractual consulting obligation arising
from law (see below) and secondly due to the partner agreement entered into. If this require-
ment is not complied with, the partner could lose his partner status and thus his authorisation
to sell software licences. Thus, it is not possible to purchase a licence without the consulting
service, as there is no market legalised by the software manufacturer. It would not be possi-
ble for the end customer to purchase licences without the consulting service. Even if another
value-added reseller were to be selected, the respective value-added reseller would in turn
have to perform his own consulting service.
For the evaluation of whether the promise to transfer the good or service is distinct within
the context of the contract (IFRS 15.27 (b) in conjunction with IFRS 15.29), it is relevant
that the purchase of a licence within the scope of the indirect model represents the result of a
consulting process that not only serves the identification of the “right” licence, but also influ-
ences the type of licensing. One type of licensing could be, for example, that the desired li-
cence type can be used in the home office, while another cannot be used in the home office
due to licensing limitations. The pre-sales consulting service has a significant effect on the
ensuing licensing solution, i.e. the licence greatly depends on the prior consulting service
and vice versa.
For the customer, the purchase of software licences raises various questions concerning the
scope of the rights of use of the licences. This includes aspects of strategic and operational
software procurement and consulting services with respect to the contract and compliance.
Consulting services are closely linked to the sale of the software products and are consid-
ered to be a significant component of the performance obligation towards the customer.
These pre-sales services may only be performed by duly trained and certified employees (li-
cence consultants). The certifications of the licence consultants must regularly be renewed.
The required training involve high costs, regardless of the quantity sold.
Without such consulting, no benefit can be gained by the customer. Moreover, the opinion of
the value-added resellers is that the promises cannot be separated, as such separation does
not reflect the characteristics of the indirect contract model (nature of the promise). The
value-added resellers are of the opinion that the inseparability of the performance is also
supported by the Board’s explanations in IFRS 15.BC116M. With the example of
IFRS 15.BC112 (development of a product concept with subsequent manufacturing of proto-
types), the Board shows that a combined end result can be achieved over more than one
phase, one element or one unit. The performance in the example IFRS 15.BC112 is basically
separable, but interdependent, and so are the pre-sales consulting and the subsequent soft-
ware sale.
An appraisal under civil law also supports the view that the promises cannot be separated:
According to general accepted legal principles in our jurisdiction, the combination of the pre-
contractual consulting obligation with the subsequent conclusion of the contract is manda-
tory, as it refers to the contract to be concluded and has legal consequences for the subse-
quent contractual relationship (damages in the event of wrong advice). A seller has consult-
ing obligations if he has undertaken to provide the buyer with advice with respect to the prop-
erties of the item to be purchased or other circumstances relevant for the buyer. Such obliga-
tions can be assumed explicitly or implicitly. The applicability of the seller’s consulting obliga-
tion increases the more the buyer needs protection and the more expertise the seller claims
to have. The value-added reseller’s consulting obligation arises with the commencement of
the professional advice and is documented at the latest when an offer is submitted. Provided
that the other preconditions are met, a breach of the consulting obligation results in a claim
for damages. The party protected by the ancillary obligation is to be put in a position as if the
obligation had been duly performed. Moreover, depending on the circumstances, the breach
of ancillary obligations can institute a reason for rescission or termination of the contract.
2) Could you describe the nature of the consulting service in more detail? What hap-
pens if the customer decides not to buy any software licences? Does the customer
pay for the consulting services in that case?
The requested extensive consulting service can vary greatly depending on the customer. For
example, the type and scope of the pre-sales consulting depend on whether an existing cus-
tomer or a new customer is concerned and what the budget and IT needs of the customer
are. In the pre-sales consulting, an individual contract package is configured for the customer
for a planning horizon of three years. The pre-sales consulting is not about selling standard
offers or assumptions, but is geared towards catering to the precisely identified needs of the
customer. Especially aspects such as their corporate goals and the derived IT strategy are
taken into consideration. Under ideal circumstances, the pre-sales consulting culminates in
the conclusion of a contract that provides the customer with various upgrade options and
maximum flexibility.
Pre-sales consulting especially comprises the following activities:
• Check for possible licensing law changes by the licensor.
• Comparison of the current infrastructure with the preferred licensing.
• Determination of possible advantages of a cloud solution compared to on premise li-
censing.
• Checking whether a technologically newer solution is more advantageous for the cus-
tomer than renewal of the existing license. This includes consideration of financial
goals as well as technical possibilities and expectations of the customer.
• Checking whether the preferred license model can be used in the desired application
area, e.g. home office, in terms of technical as well as licensing requirements.
• Calculation of the quantity structure also with regard to possible procurement ad-
vantages.
3) Does the contract between reseller and customer involve changing or modifying
the software licences?
In the case of the indirect contract model discussed here, no material adjustments in the
classic sense, such as programming, are provided.
We would like to refer to a statement in IFRS 15 that is important for value-added resellers.
According to IFRS 15.BC107, an integration service is characterized by the fact that the risks
arising from the transfer of the individual goods and services are not distinct, since the es-
sential part of the performance promise to the customer is to ensure that the individual goods
and services flow into the overall product, in our case "adequate license bundle". This idea of
not distinct risk is taken up again in IFRS 15.BC108. According to this, risks are not distinct if
the risk resulting from the integration is negligible. In the present facts, it is obvious in our
view that risks from pre-sales consulting are directly reflected in the overall product "ade-
quate license bundle" and are therefore by no means negligible.
At the same time, it should be noted that there is considerable scope for discretion in these
paragraphs between the simple installation of software and the rather clear case of customiz-
ing. The necessity of the introduction of IFRS 15.29 itself as well as the remaining uncer-
tainty, which IFRS 15.BC111 clearly expresses, indicate the necessity of exercising appropri-
ate discretion on the diverse cases of practice.
We would like to emphasize once again that, particularly in the case of our transaction dis-
cussed here, the two elements of consulting services and license transfer are not distinct.
The connecting link here is the customer's need for an IT solution, which is made up of an IT
concept that is suitable for him and the transfer of the necessary licenses. This result is
based on competent consulting by the value-added reseller. The type and number of soft-
ware licenses is derived from this IT concept and is embedded in the overall result of an IT
solution tailored to the specifics of the individual customer. It would lead precisely to a risk if
the two elements were not transferred in a coordinated manner. The customer's needs would
not be met if, for example, the consultation resulted in 500 licenses of a certain type being
transferred, but ultimately only 250 were transferred. Conversely, the transfer of too many
costly licenses would lead to the risk of incorrect licensing with recourse claims by custom-
ers. This again underlines the customer's interest in a total package - in the combined prod-
uct.
within the submission
Questions
12: The value-added reseller is ex-
posed to a special form of inventory
risk, since in the event of mislicensing
(i.e. where the type or number of soft-
ware licences sold was not appropri-
ate), he cannot return the licences to
the software vendor or sell them to an-
other customer.
1) In whose name are the software licences is-
sued?
2) In the event of mislicensing, what happens
to the software licences? Does the reseller
have to pay the software manufacturer for
the software licences?
1) In whose name are the software licences issued?
The software licences are issued by the software manufacturer to the end customer, i.e. in
the end customer’s name.
2) In the event of mislicensing, what happens to the software licences? Does the re-
seller have to pay the software manufacturer for the software licences?
In the event of non-acceptance by the customer, the licences remain with the Value-added
Reseller. He cannot return the software license to the software manufacturer or sell it to an-
other customer so that he has to write them off to the profit or loss.
Nevertheless, the value-added reseller must pay the software manufacturer for its licenses.
within the submission
Questions
15: In the relationship with [the particu-
lar software manufacturer], the role of
the value-added reseller comprises the
responsibility for the sales and the af-
ter-sales processes. In the relationship
with the customer, the value-added re-
seller is the first point of contact for all
questions. The value-added reseller is
responsible both for the order process
and for any licensing issues that arise
after the conclusion of the order.
1) Could you provide more information about
the after-sales processes and licensing is-
sues?
2) Who (software manufacturer or reseller) is
responsible for making the software availa-
ble to the customer and for any glitches in
the software?
1) Could you provide more information about the after-sales processes and licensing
issues?
As part of the after-sales process, the value-added reseller performs an yearly inventory of
the software licenses for the software manufacturer only in the direct contract model which is
not issued here. This service represents a separate performance obligation and is distinct.
The licensing issues essentially comprise technical and commercial services provided by the
value-added reseller after the purchase. In particular, these are after-sales services, which
essentially cover the handling of support issues and assistance with manufacturer software
maintenance. These services are generally provided through the operation of a hotline, on-
site support in the form of training courses. Within the scope of their design, these services
result in independent usability in the form of customer services. Therefore, they are distinct
from other performance obligations.
2) Who (software manufacturer or reseller) is responsible for making the software
available to the customer and for any glitches in the software?
Although the software functionality is guaranteed by the software manufacturer, the value-
added reseller is responsible for the correct granting of licenses. In the overall context of the
discussed indirect model, the customer only gains his benefit from the combination of soft-
ware (functionality), consulting and correct licensing, which is provided by the value-added
reseller in the course of his ordinary business activities. The assumption of liability for the
correct selection of licenses is not negligible from our customers' point of view. In fact, it is
itself an essential component of the service, since companies would bear a considerable loss
in the event of incorrect licensing under certain circumstances.
