Identify the separate performance obligations in this software bundle contract under IFRS 15.

This practice question tests your ability to apply Step 2 of the IFRS 15 five-step model — identifying separate performance obligations using the distinctness test under IFRS 15.26. Work through the scenario, then compare your answer with the model solution and the paragraph-level analysis below.

Scenario: Software Bundle Contract

CloudSoft Ltd, a limited company, has developed a communications software package called FlowERP. CloudSoft Ltd has entered into a contract with BuildCo to supply the following:

• (a) Licence to use FlowERP
• (b) Installation service. This does not require an upgrade to the computer operating system, but the software package does not need to be customised.
• (c) Technical support for nine months
• (d) Two years of updates for FlowERP

Required

Advise whether the goods or services provided to BuildCo are distinct as defined in accordance with IFRS 15.

Solution: Four Separate Performance Obligations

FlowERP was delivered before the other goods and remains functional without the updates and the technical support. It may be concluded that BuildCo can benefit from the software on its own.

The promises to transfer each good and service to the customer are separately identifiable. In particular, the software is not specifically modified or customised to integrate with BuildCo's systems, and the installation service represents a separate output promised by CloudSoft Ltd rather than an input used to produce a combined output.

In conclusion, the goods and services are distinct and amount to four performance obligations in the contract.

Analysis: Applying the IFRS 15 Distinctness Test

The two-part test under IFRS 15.26

A good or service is distinct only if both of the following criteria are met simultaneously:

• IFRS 15.26(a) — the customer can benefit from the good or service on its own, or together with other resources that are readily available.
• IFRS 15.26(b) — the entity's promise to transfer the good or service is separately identifiable from other promises in the contract.

The solution applies criterion (a) to the licence first, because if the licence itself were not independently useful, none of the other items would need to be analysed separately — everything would collapse into a single bundled obligation.

Why criterion (a) is met for the licence

IFRS 15.27 clarifies that a customer can benefit from a good or service if it can be used, consumed, sold for more than scrap value, or otherwise held in a way that generates economic benefit. The fact that FlowERP was already delivered and operational before installation, support, and updates are provided is strong evidence that BuildCo derives standalone benefit from the licence alone.

Why criterion (b) is met — and when it would not be

IFRS 15.29 lists three indicators that promises are not separately identifiable:

1. The entity provides a significant integration service — the goods and services are inputs to a combined output (e.g., a bespoke system where software, customisation, and integration are inseparable).
2. One item significantly modifies or customises another (e.g., the software is rewritten to embed into BuildCo's proprietary ERP environment).
3. The items are highly interdependent — neither can be fulfilled without the other.

None of these apply here. The installation is standard (no customisation), the software operates independently of the support and updates, and CloudSoft Ltd could transfer the licence, the installation, the support, and the updates at different times to different customers.

What If the Software Required Customisation?

If FlowERP required significant customisation to integrate with BuildCo's existing systems — for example, rewriting core modules to connect with BuildCo's proprietary database — the installation service would no longer be a separate output. Instead, it would be an input into a combined deliverable (the customised, integrated software). Under IFRS 15.29(b), the licence and installation would bundle into a single performance obligation, recognised over time as the customisation is completed (IFRS 15.35(c)).

Similarly, if the updates were essential for the software to function rather than enhancements to an already-working product, they might not pass criterion (a) independently — BuildCo could not benefit from the licence without them.