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The contract

Merrill Corporation (Merrill) grants its customer Darren Partners (Darren) a three-year term license to anti-virus software and promises to provide Darren with when-and-if available updates to that software during the license period. Merrill frequently provides updates that are critical to the continued utility of the software. Without the updates, Darren’s ability to benefit from the software would decline significantly during the three-year arrangement.

Assessment considerations

Merrill considered whether the software and the updates are each promised goods or services in the contract and are each capable of being distinct because Darren can derive economic benefit from the software on its own throughout the license period (that is, without the updates the software would still provide its original functionality to Darren), while Darren can benefit from the updates together with the software license transferred at the outset of the contract.

Conclusion

Merrill concludes that its promise to transfer the software license and to provide the updates, when-and-if available, are not separately identifiable because the license and the updates are, in effect, inputs to a combined item (anti-virus protection) in the contract.

The updates significantly modify the functionality of the software (that is, they permit the software to protect Darren from a significant number of additional viruses that the software did not protect against previously) and are integral to maintaining the utility of the software license with Darren.

The license and updates fulfill a single promise (one performance obligation) to Darren in the contract (a promise to provide protection from computer viruses for three years).

Merrill will account for the software license and the when-and-if available updates as a single performance obligation because it has concluded that the nature of the combined good or service it promised to transfer to its customer Darren is computer virus protection for three years.