Software revenue according to IFRS 15.

In the annual report 2020 and the interim report 2021, Bechtle AG had drawn attention to the controversy regarding the presentation of revenue from software licence business. In the annual financial statements as of 31 December 2021, Bechtle changed the accounting method for the sale of standard software licenses.

On this page we will explain the impact of the accounting method and answer some of the questions you may have.

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At a glance.

Business model and business volume unaffected by the change.
Purely accounting-related change in revenue recognition.
Higher margin through less revenue while earnings remain the same.

FAQ on the revised accounting method.

IFRS 15.

What is IFRS 15 about?
How does IFRS 15 differentiate between the principal and an agent?
What does IFRS 15 say about revenues generated from standard software licences?
How does this affect software revenue on Bechtle’s balance sheet specifically?
How did this affect revenue growth in FY 2021?
What is IFRS 15 about?

The International Financial Reporting Standard (IFRS) 15 (Revenue from Contracts with Customers) regulates how companies recognise their revenue. Where more than one party is involved in the delivery of goods or services, the amount of revenue to be recognised depends on whether the relevant entity qualifies as the principal actor or its agent.

How does IFRS 15 differentiate between the principal and an agent?

Whether an entity qualifies as the principal or an agent has consequences for the presentation of revenue on the profit and loss statement. The principal must recognise as revenue the gross amount they receive in return for a service, while the agent’s revenue amounts to the fee or commission they receive for their agency.

An entity is the principal if it controls the specified goods or services prior to their being transferred to the customer, i.e. the principal is a retailer or manufacturer. In this case, the principal’s revenue equals the amount invoiced to the end customer.

If an entity has no control over the specified goods or services before they are transferred to the customer, it is an agent. In this case, the company’s revenue equals the gross margin it achieved.

What does IFRS 15 say about revenues generated from standard software licences?

As soon as another party (software manufacturer) is involved in the delivery of goods or services, Bechtle must determine if we assume the obligation to deliver ourselves, and therefore the role of the principal, or if we arrange for those specified goods and services to be delivered by another party and we are, therefore, an agent. For software, in particular, the transfer is often made directly from the manufacturer to the customer without the need for a software reseller in the middle.

How does this affect software revenue on Bechtle’s balance sheet specifically?

Where Bechtle, according to the re-evaluation of IFRS 15, qualifies as an agent and not as the principal with respect to the sale of standard software licences, Bechtle will no longer recognise the entire revenue from standard software licences, but only the amount of the gross margin achieved (accounting as the agent).

How did this affect revenue growth in FY 2021?

Disregarding the re-evaluation of our accounting methods, revenue growth in the reporting year 2021 would have been 7.3 per cent. According to the new method, it is was 5.1 per cent. This is largely due to the very positive business development of our subsidiary, Bechtle Clouds, over the reporting year, showing above-average growth in revenue compared to the group as a whole. Following the re-evaluation, Bechtle Clouds revenue is largely classified as being generated by an agent, and we are therefore no longer able to recognise the full amount.

 


 

Implementation.

Why has Bechtle taken this step now?
What does the re-evaluation mean for previous years?
When can the IFRS Interpretations Committee’s final decision be expected?
Why has Bechtle taken this step now?

As announced on page 143 of the Annual Report 2020, Bechtle submitted a request for clarification to the IFRS Interpretations Committee (IFRS IC), which was considered by the IFRS IC in its meeting on 30 November 2021. The Staff Paper that informed the meeting and the consequent discourse revealed a discrepancy in how key elements of the required analysis according to IFRS 15 are being assessed, and it is our understanding that there is a clear tendency to deem Bechtle an agent (net presentation of revenue).

As a result of IFRS IC’s preliminary findings, Bechtle has reassessed its previous discretionary decisions. These predominantly relate to pre-sales consulting, which is no longer considered an essential component of our performance obligation to the customer and, therefore, does not represent a (significant) value proposition to the customer.

The IFRS IC’s preliminary findings see Bechtle as an agent and revenues generated from the indirect sale of standard (non-customised) software were reduced accordingly. As both revenue and cost of sales were reduced by the same amount, our gross profit on sales presented on the profit and loss statement remained unchanged. This reduction in revenue while maintaining gross profit rose the EBIT/ EBT margin.

What does the re-evaluation mean for previous years?

We are applying the re-evaluated accounting method regarding net revenue with retrospective effect from 31 December 2021. This will not affect previous financial statements, however, we will be presenting the previous year’s figures adjusted to reflect the re-evaluated application of IFRS 15.

When can the IFRS Interpretations Committee’s final decision be expected?

The IFRS IC’s preliminary working paper was open for comments until 8 February 2022. A final decision is not expected until Q2 2022. However, based on what has gone before, Bechtle does not expect any significant changes and has therefore implemented the findings retrospectively with effect from 31 December 2021.

 


 

Business model.

What does this mean for Bechtle’s operative business?
Has Bechtle’s business model changed?
What impact will the potentially higher EBT margin have on Vision 2030’s target of 5 %?
What does this mean for Bechtle’s operative business?

There will be no impact whatsoever on operative business. Trade in software and all related services continues. Neither our customers nor manufacturer partners are affected by the change. The re-evaluation only affects our accounting methods.

Has Bechtle’s business model changed?

No. We remain a full-service provider offering our customers hardware and software and the full range of related IT services.

What impact will the potentially higher EBT margin have on Vision 2030’s target of 5 %?

The re-evaluation of our accounting methods exclusively pertains to the way we recognise revenue. All other figures remain the same. As revenue will be lower while earnings stay the same, the margin as a ratio of earnings to revenue will increase accordingly. To what extent Bechtle AG will make changes to the Vision’s objectives will be discussed by the Executive and Supervisory Boards in due time.

 


 

IT market.

Does this change in revenue recognition affect other companies?
Will there be an impact on customer relationships?
Will there be changes to how Bechtle works with software manufacturers?
Does this change in revenue recognition affect other companies?

In general, all companies preparing their statements in accordance with the IFRS must comply with these standards and their interpretation by the IFRS IC.

Will there be an impact on customer relationships?

No. We remain a full-service provider offering our customers hardware and software and the full range of related IT services.

Will there be changes to how Bechtle works with software manufacturers?

No, operative business is not affected. Our partnerships with software manufacturers will not be impacted by the changes.  We hold the highest partner statuses with all relevant software manufacturers. Changes to how revenue is recognised is a matter for accounting only.

 


 

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