Information technology (IT) Seller and IT Buyer execute a 10-year IT Outsourcing arrangement in which IT Seller provides continuous delivery of outsourced activities over the contract term. For example, the vendor will provide server capacity, manage the customer’s software portfolio, and run an IT help desk. The total monthly invoice is calculated based on different units consumed for the respective activities. For example, the billings might be based on millions of instructions per second of computing power (MIPs), number of software applications used, or number of employees supported, and the price per unit differs for each type of activity.

Before the delivery of the service, IT Seller performs certain initial set-up activities to be in a position to provide the other services in the contract. IT Seller charges the IT Buyer a nonrefundable upfront fee related to the transition activities. IT Seller concludes that the set-up activities do not transfer services to the customer.

The per unit price charged by IT Seller declines over the life of the contract. The agreed upon pricing at the onset of the contract is considered to reflect market pricing. The pricing decreases to reflect the associated costs decreasing over the term of the contract as the level of effort to complete the tasks decreases. Initially, the tasks are performed by more expensive personnel for activities that require more effort. Later in the contract, the level of effort for the activities decreases, and the tasks are performed by less expensive personnel. The contract includes a price benchmarking clause whereby the IT Buyer engages a third-party benchmarking firm to compare the contract pricing to current market rates at certain points in the contract term. There is an automatic prospective price adjustment if the benchmark is significantly below IT Seller’s price.

Assume IT Seller concludes that there is a single performance obligation that is satisfied over time because the customer simultaneously receives and consumes the benefits provided by its services as it performs.

In this example, the events that trigger the variable consideration are the same throughout the contract, but the price per unit decreases each year. The staff thinks that even with the declining prices, the allocation objective could be met if the pricing is based on market terms or the changes in price are substantive and linked to changes in the entity’s cost to fulfill the obligation or value provided to the customer. In this example, the contract contains a price benchmarking clause whereby the IT Buyer engages a third-party benchmarking firm to compare the contract pricing to current market rates, which may help support the allocation objective.

Transaction Processer (TP) enters into a 10-year agreement with a customer. Over the 10-year period, TP will provide continuous access to its system and process all transactions on behalf of the customer. The customer is obligated to use TP’s system to process all of its transactions; however, the ultimate quantity of transactions is not known. TP concludes that the customer simultaneously receives and consumes the benefits as it performs.

TP charges the customer on a per transaction basis. For each transaction, the customer is charged a contractual rate per transaction and a percentage of the total dollars processed. TP also charges the customer a fixed upfront fee at the beginning of the contract.

If the nature of the entity’s promise is a single service to process as many transactions as the customer requires, the fees based on quantity processed and the fees based on a percentage of dollars processed might be considered variable consideration. The staff thinks the fees based on quantity processed and percentage of dollars processed could meet the allocation objective for each month of service. For example, the allocation objective could be met if the fees are priced consistently throughout the contract and the rates charged are consistent with the entity’s standard pricing practices with similar customers.

Hotel manager (HM) enters into a 20-year agreement to manage properties on the behalf of the customer. HM receives monthly consideration based on 1 percent of monthly rental revenue, reimbursement of labor costs incurred to perform the service, and an annual incentive payment based upon 8 percent of gross operating profit. HM concludes that the customer simultaneously receives and consumes the benefits provided by its services as it performs.

Example C is similar to the hotel management example in paragraph BC285 of Update 2014-09 where the Board noted that variable consideration based upon 2% of daily occupancy rates could be allocated to each day. The staff thinks the base monthly fees could meet the allocation objective for each month because they are similar to the example in paragraph BC285 in that there is a consistent measure throughout the contract period that reflects the value to the customer each month (the % of monthly sales). Similarly, if the cost reimbursements are commensurate with the entity’s efforts to fulfill the promise each day, then the allocation objective for those variable fees could also be met. Finally, the staff thinks that the allocation objective could also be met for the incentive fee if it reflects the value delivered to the customer for the annual period (reflected by the profits earned) and is reasonable compared to the incentive fees that could be earned in other periods.

Franchisor grants franchisee a license that provides franchisee with the right to use franchisor’s trade name and sell its products for 10 years. Franchisor will receive a sales-based royalty of 5 percent of the franchisee’s sales for the term of the license as well as a fixed fee. Franchisor concludes that the nature of its promise is to provide a right to access the intellectual property throughout the license period, and the performance obligation is satisfied over time because franchisee simultaneously will receive and consume the benefit from franchisor’s performance of providing access to its intellectual property.

The staff thinks that allocating the royalties to the respective day in which it has the right to invoice could be consistent with the allocation objective. In this example, the formula and price are consistent throughout the license term, and the amount allocated to each day reasonably reflects the value/benefit to the customer of its access to the intellectual property for that day (reflected by the sales that access has generated for the customer).