It’s time for something different. One of the many hats I wear as part of running my own business is my accountant hat. Today, I took a break from development and spent some time documenting all of my accounting policies (you know, just in case of an audit). Don’t worry, I have a degree in Management Accounting, so I believe that I am competent enough to be doing the accounts for my limited company.
One question which keeps coming up and for which I have seen conflicting advice on the internet, is how to recognise revenue earned from Google Play and the Apple App Store. I will set out in this post how I handle this for my company and provide the IFRS analysis to support this approach.
Overview of How It Works
When a developer gets paid from either Google or Apple, they receive the amount charged to the end-user net of VAT and fees. As a concrete example, when a user pays £9.99 for a subscription, the developer gets paid £7.08 into their bank account. £1.66 of this is towards VAT and £1.25 is towards Google’s fees (this example is on the 15% fee schedule from Google for smaller developers).
The question that keeps arising is: which amount should be used for revenue calculations? The end user price is £9.99, Google lists £8.33 on their statement to me with a separate line item for the £1.25 fee, and then I receive £7.08 paid into my bank account.
The IFRS Analysis
To determine the correct accounting treatment, I need to establish who is the principal and who is the agent in these transactions under IFRS 15.
Evidence from the Contractual Structure
The contractual arrangements reveal a clear two-contract structure:
- Developer Distribution Agreement: I provide my app to Google/Apple for distribution
- User Terms of Service: Users contract directly with Google Commerce Limited/Apple
When users purchase content, Google’s terms explicitly state: “Content on Google Play is offered by Google Commerce Limited, and when you download, view, use, or purchase Content on or using Google Play, you will enter into a separate contract based on these Terms with Google Commerce Limited.”
There is no direct contractual relationship between me as the developer and the end user for the transaction itself.
Who Controls the Service Before Transfer?
Under IFRS 15, the key test is: who controls the specified good or service before it is transferred to the customer?
Evidence that Google/Apple are the principals:
- Merchant of Record Status: Google explicitly states in their VAT guidance: “As the merchant of record for transactions with customers in the United Kingdom, Google is responsible for determining, charging, and remitting VAT for all paid apps and in-app purchases.” This is definitive – the merchant of record is the principal in the transaction.
- Direct Customer Invoicing: When I request an invoice from Google for a subscription I made as a consumer, the invoice is issued by Google Ireland with a UK VAT number directly to me as the user. There is no mention whatsoever of the developer on the invoice.
- Customer Relationship Ownership: Google/Apple handle all billing disputes, refunds, subscription management, and customer service related to transactions. I have no access to customer payment information or direct relationship with purchasers.
- Control Over What Can Be Sold: Google and Apple exercise extensive control over what content can be distributed, with strict compliance requirements that go far beyond what a typical payment processor would impose.
- Risk and Reward: Google/Apple bear the credit risk – if customers fail to pay or issue chargebacks, this doesn’t affect payments to developers in the same period.
Revenue Recognition Implications
Since Google and Apple are the principals in these transactions, they purchase distribution rights from developers and then resell to end customers. This means:
- For Google/Apple: They should record gross revenue (the full £9.99) and cost of sales (the amount paid to developers)
- For Developers: We should record revenue net of the platform fee (the £7.08 received)
IFRS 102 Revenue Recognition
For developers, IFRS 102 Section 23.41 provides clear guidance:
“The transaction price is the amount of consideration to which the entity expects to be entitled in exchange for transferring goods or services promised to a customer, excluding amounts collected on behalf of third parties (eg some sales taxes).”
When I set my subscription price at £9.99, I already know that Google will take their fee. I know that I’m not entitled to that portion of the payment – I’m only entitled to receive £7.08. Therefore, according to IFRS 102, the revenue I should recognise is the net amount I receive.
The VAT component should also be excluded as it’s clearly collected on behalf of a third party (HMRC), and this exclusion is explicitly mentioned in the standard’s examples.
Practical Evidence Supporting This Treatment
Several practical factors confirm this analysis:
- No Customer Data: Neither Google nor Apple provides developers with customer information for transactions. The customer relationship exists entirely between the platform and the end user. (Believe me, I have to jump through hoops to try and figure out who my users are!!)
- Limited Transaction Control: While developers can set prices (within platform guidelines), we have no control over billing, refunds, or customer communications related to transactions.
- Platform Integration: The subscription services are deeply integrated into Google’s and Apple’s ecosystems, with customers managing subscriptions through their platform accounts, not through the developer.
- Government Recognition: The UK’s Competition & Markets Authority has acknowledged this structure, noting that “Apple and Google effectively act as the seller of the relevant in-app purchase and have the contractual link to the consumer.”
Conclusion
Based on the IFRS 15 analysis of who controls the service before transfer to customers, combined with the contractual evidence and practical realities, Google and Apple are clearly the principals in these transactions. As developers, we should therefore recognise revenue net of platform fees.
This means recording revenue of £7.08 in the example above, not £9.99. The platform fee is not a cost to be deducted from gross revenue – it represents the portion of the customer payment that we were never entitled to receive in the first place.
This treatment aligns with both the substance of the economic arrangement and the requirements of IFRS 102 for determining transaction prices.
Disclaimer: This analysis represents my own interpretation of the accounting standards based on my degree in Management Accounting. This should not be considered financial advice, and you should always consult with your qualified accountant for specific guidance on your circumstances.