Australian illustrative examples for not-for-profit public sector licensors
These illustrative examples accompany, but are not part of, AASB 15. They illustrate aspects of the Australian guidance for not-for-profit public sector licensors in AASB 15, but are not intended to provide interpretative guidance.
These examples illustrating aspects of the Australian guidance for not-for-profit public sector licensors in AASB 15 complement, and have the same status, as the Illustrative Examples accompanying IFRS 15 Revenue from Contracts with Customers, which are available on the AASB website to website users in Australia.
These examples are additional to the illustrative examples accompanying AASB 15 that were added as part of AASB 2016-8 Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities. Therefore the numbering of these paragraphs starts at IE5 and the numbering of the examples starts at Example 8.
IE5
The following examples portray hypothetical situations. They are intended to illustrate how a not-for-profit public sector licensor might apply some of the requirements of AASB 15 Revenue from Contracts with Customers to non-IP licences that they issue, on the basis of the limited facts presented. Although some aspects of the examples might be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying AASB 15. The evaluations in each example are not intended to represent the only manner in which AASB 15 could be applied.
Satisfaction of performance obligations (paragraphs 31–38)
IE6
Example 8 illustrates a not-for-profit public sector licensor recognising revenue when (or as) the licensor satisfies the performance obligation of transferring the promised licence to the licensee. A licence is transferred when (or as) the licensee obtains control of that licence. To determine when a licensee obtains control of the promised rights associated with the licence and the licensor satisfies its performance obligation, the licensor shall consider the requirements for control in AASB 15 paragraphs 31–34 regarding control by the licensee (the customer).
IE7
The licensor shall determine at the inception of each licensing arrangement whether the performance obligation from issuing the licence is recognised over time (in accordance with AASB 15 paragraphs 35–37) or at a point in time (in accordance with AASB 15 paragraph 38).
Example 8—Performance obligations, non-IP licence
Example 8A – Exclusivity rights
Public Sector Authority A (Licensor) issued Casino Operator B (Licensee) a licence to operate a casino in geographical location C for $100 million.
The terms of the arrangement are:
· a period of ten years;
· payment for the arrangement is not refundable and is due when the licence is issued;
· the arrangement contains an exclusivity clause, whereby no other casinos may operate within geographical location C during the licence period. Licensor is responsible for protecting the exclusivity of the arrangement and will be responsible for the payment of damages to Licensee if exclusivity is breached;
· as part of the arrangement, Licensor is responsible for performing a number of regulatory oversight and monitoring activities prior to issuing the licence and ongoing throughout the licensing period to ensure Licensee and operation of the casino remain free from criminal influence or exploitation, and gaming in the casino is conducted honestly; and
· the cost for issuing the casino licence (including surveying the proposed gaming premises and the upfront and ongoing regulatory activities) is expected to be $100,000.
Applying the accounting framework for licences issued by not-for-profit public sector licensors
Is the arrangement a licence or a tax?
Licensor applies paragraph G3 and concludes its arrangement with Licensee is not a tax, on the basis that the majority of the indicators support a licence classification:
· it is a discretionary arrangement entered into by each of the parties;
· its primary purpose is not generating income for the public sector, but ensuring that the participation of the general public in gaming activities is controlled, provided in a safe environment and protected from criminal influence and exploitation. The low costs of $100,000 in comparison to the licence payment of $100 million may be indicative of a tax element (see below);
· it contains an obligation for Licensor to issue a casino licence, and creates enforceable rights for Licensee to conduct gaming activities;
· it gives Licensee specific permission to provide gaming activities which would otherwise be unlawful;
· there is no underlying asset of Licensor that is transferred to Licensee.
Licensor applies paragraphs G4–G6 and concludes there is no tax element that needs to be separated. Although the arrangement has a low cost in relation to the consideration received, which might be indicative of a tax element, the transaction price is not refundable, and there is no other evidence indicating similar activities operating through different structures (such as online gaming) are subject to a tax. Accordingly, the criteria necessary to rebut the presumption for Licensor to allocate the transaction price of $100 million wholly to the licence are not satisfied.
Is it a low-value or short-term licence?
Applying paragraphs Aus8.1 and G22–G27, Licensor concludes that its arrangement with Licensee is not a low-value or short-term licence because the transaction price of the licence is $100 million and the term of the licence is 10 years.
Is it an intellectual property (IP) licence?
Applying paragraph G13, Licensor concludes its arrangement with Licensee is a non-IP licence as the arrangement does not involve rights over IP of Licensor.
Is the non-IP licence a lease or does it contain a lease?
Applying paragraphs Aus5.2 and G14(a), Licensor concludes its arrangement with Licensee gives Licensee a right to perform an activity (ie operate a casino) rather than conveying a right over an identified asset of the Licensor. Therefore the arrangement is not a lease and does not contain a lease.
Identifying the performance obligation
Who is the customer?
Applying paragraph G16, Licensee (Casino Operator B) is identified as the customer. Licensee has entered into an arrangement with Licensor to obtain goods or services that are an output of Licensor’s ordinary activities in exchange for consideration.
What are the goods and services promised in the arrangement?
Applying paragraphs G18–G21, Licensor concludes the only goods and services transferred to Licensee (the customer) is the licence itself, being the ‘right to perform’ gambling activities.
Licensor observes that the following promises/activities are not performance obligations as they do not transfer additional goods or services to Licensee, beyond the licence itself, but instead either confirm the attributes promised at inception of the licence or confirm that the terms of the licence have been met:
· refraining from issuing new casino licences in geographical location C as the licence is exclusive (ie an exclusive licence is issued and continues throughout the licence period); and
· performing regulatory activities to monitor that Licensee continues to meet the eligibility criteria (including that the gaming offered is honest and free from criminal influence) during the period of the licence. The Licensee must meet the eligibility criteria to be issued the licence and controls whether the criteria continue to be met, so no additional goods or services are provided by the licensor.
Licensor does not identify any remaining promises to transfer a good or service to Licensee in the arrangement that are distinct from the licence.
Licensor concludes there is a single distinct performance obligation to issue the licence.
Example 8B – Distinct goods or services
In this example, the facts of Example 8A apply, except that, in addition to issuing the licence, Licensor will perform maintenance of Licensee’s gaming machines throughout the licence term to ensure that the gaming machines are in working order, have not been tampered with and are not in need of repair. If such services were not provided by Licensor, it is expected that Licensee would engage a third party to carry out the maintenance services to provide assurance to Licensee’s patrons that the machines are functioning as they should be. In addition:
· Licensor observes that, based on market conditions, a customer in the market for such maintenance services would be willing to pay $5 million; and
· the upfront payment of $100 million includes the maintenance services.
Applying the accounting framework for licences issued by not-for-profit public sector licensors
Licensor concludes on the same basis as Example 8A that its arrangement to issue a non-IP licence to Licensee is not a tax, is not a low-value or short-term licence, is not an IP licence and is not a lease or does not contain a lease.
Identifying the performance obligation
Licensor concludes on the same basis as Example 8A that Licensee is the customer, and identifies the issue of the licence (the right to perform) as a performance obligation.
Applying paragraphs 22 and G15–G20, Licensor concludes there are two distinct performance obligations to:
· issue the license; and
· provide a series of maintenance services.
The promise to perform maintenance services on the gaming machines transfers a series of services that are substantially the same and have the same pattern of transfer to Licensee and in accordance with paragraph 27 this service is distinct from granting the licence to operate a casino, as:
(a) Licensee can benefit from the service either on its own or together with other resources that are readily available to Licensee (paragraph 28) – if Licensor were not providing this service to Licensee, Licensee would be reasonably expected to obtain such services from a third party to ensure machines are operating at capacity to generate maximum revenue; and
(b) Licensor’s promise to transfer the good or service to Licensee is separately identifiable from other promises in the arrangement (paragraph 29) as:
(i) the maintenance services are not integral to the issue of the casino licence;
(ii) the maintenance services do not modify the rights provided by the licence; and
(iii) the nature of Licensor’s promise is to transfer the maintenance services separately to the issue of the casino licence.
Licensor does not identify any remaining promises to transfer a good or service to Licensee in the arrangement that are distinct from the license and the maintenance services.