in General IFRS Discussion by
Company Blue has signed a contract with Green Corp.,  a provider of computing services.  The contract gives Blue a license to use a cloud-based software application provided by Green.  Blue uses the software application for planning and controlling complex logistics processes: the software basically analyzes data and generates optimal solutions.    

The software runs ‘in the cloud’ and is, apart from minor pieces of software required for data-communication and access control, not installed on Blue’s computers.  The contract includes significant cloud data storage capacity.  The use of this cloud data storage is necessary for the software to function.  Green regularly offers data storage facilities to other customers, unrelated to this particular software application.

To use the application, Blue must upgrade its hardware at the start of the contract, which it does.  It must also develop new software of its own in order to extract and prepare data from its own systems in a way that it can be fed into Green’s application.  The expenses for the hardware upgrade and the software interface are paid by Blue.

Blue pays an upfront fee to Green at the start of the contract, and fixed monthly fees afterwards for the duration of the contract. The fixed fees include data storage up to a given limit. If this limit is exceeded in a given month, the fee for that month is adjusted according to a schedule in the contract.

 The contract is for five years. During this period it cannot be cancelled by either Green or Blue expect by paying a large penalty.  After five years, the contract will be extended every year for a one-year period until one of the parties announces, before a time specified in the contract, that it will no longer renew.  

At the start of the contract, Blue expects that it will renew at least a number of times after the five -year period, if only because of the costs of switching to a new system.  However, because of ongoing technological development, it is very likely that sometime between five and fifteen years after the start of the contract completely new software solutions become available so that either Green will stop offering the current software or Blue will want to switch to another solution and/or another supplier.

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