Zenta Group Co Ltd

Fintech service fees – algorithm and big data

The Company enters into distinct fintech services agreements with its customers to provide algorithms and big data models for the customers’ use in return for a fintech service fee. There are two types of arrangement entered, i.e. (i) brokering the algorithms and big data models on behalf of the vendor and (ii) providing fintech services related to the algorithms and big data models directly to the customers.

Brokering the algorithms and big data models

The Company brokered the algorithms and big data models on behalf of the vendor until it acquired the related fintech solution from the vendor in August 2024. The Company enters into distinct fintech services agreements with its customer to provide algorithms and big data models developed by a vendor for the customer’s use in return for a fintech service fee.

The Company accounts for the fintech services related to the brokering of algorithms and big data models as a single performance obligation in accordance with ASC 606-10-25-14(b). This is because it provides a series of distinct services that are substantially the same by making the algorithms and big data models available for the customers’ use during a fixed period, and these services have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress — that is, a time-based measure of progress).

As stated in the agreement, the pricing structure for the fintech services related to the provision of algorithms and big data models includes a fixed component based on a predetermined amount of usage (i.e., a minimum usage requirement) and a variable component that is charged if the customer exceeds the predetermined amount (i.e., “overage fees”). In addition, if the customer does not meet the minimum usage requirement in any month, the shortfall is carried over to the following month.

Because the minimum usage requirements can change each month and the usage-based fees are related to a specific outcome, the allocation of the variable consideration to each distinct service period (e.g., each month) cannot meet the allocation objective. This means that the usage-based pricing may not represent the amount of consideration to which the entity expects to be entitled upon the transfer of each distinct service, which is based on each increment of time within the series. Therefore, any overage fees for a particular month may not (1) be solely associated with that month or (2) reflect the value of the specific outcome associated with the overage. Accordingly, the Company does not qualify to apply the variable consideration allocation exception set out under ASC 606-10-32-40 and is required to estimate the amount of variable consideration to which it would be entitled at contract inception.

The Company believes that the most likely amount method is the preferred method for predicting the amount of consideration to which it will be entitled. Under the most likely amount method, based on the Company’s best estimate, the Company does not expect that usage exceeding the predetermined amount will occur during the brokering services period. Therefore, the minimum usage requirement as determined in the agreement is the most likely amount that the Company would be entitled to.

The Company also considers the guidance in ASC 606-10-32-11 through 32-13 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration should be included in the transaction price. The Company considers the factors in ASC 606-10-32-12 and observes that the amount of consideration is highly susceptible to factors outside the Company’s influence (that is, inherently variable depending on future customer actions, and there is no historical data to support any of the estimates). As such, it cannot conclude that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Consequently, the Company believes that it should not include any variable consideration in the transaction price.

For the algorithms and big data models brokered by the Company, customer simultaneously receives and consumes the benefits as the services are rendered by the Company, i.e., access to and utilize the models according to the customers’ needs. Because the revenue generated from brokering the algorithms and big data models meets one of the criteria set out in ASC 606-10-25-27, the revenue from brokering the algorithms and big data models qualifies to be recognized over time, with the fixed consideration (i.e., the minimum usage payment) recognized ratably across the contract period.

According to the agreement, the customer is required to settle the actual usage amounts on a quarterly basis and make payment within 60 days from the date signed on the usage confirmation letter, and any shortfall against the minimum usage requirement within 90 days from the end of the contract term, i.e. September 30, 2024. The customer adheres to the payment term and pays before the due date.

The Company follows the rules and guidance set out under ASC 606 when determining whether it is acting as a principal or an agent in the contract with its customers. The core principle of ASC 606 requires an entity to determine whether the nature of its promise is a performance obligation to provide the services itself (that is, the entity is a principal) or to arrange for those services to be provided by another party (that is, the entity is an agent). The following steps are applied to achieve that core principle:

Under the agreement the Company has in place with its customer, the Company does not have primary responsibility for providing algorithms and big data models but brokering them from a vendor. The models are primarily controlled by the vendor, who sets the transaction price or income to be shared with the Company in separate documents. The Company has no control over the models and cannot determine the transaction price set by the vendor. Furthermore, it has been stated in the agreement that the models are run by the vendor, and the Company would be indemnified by the vendor for any issues, damages, and claims related to the services. The responsibility of the Company is simply to broker the algorithms and big data models from the vendor to its customer. The Company concludes it has no primary responsibility in the function but acts as an agent between its customer and the vendor. The Company recognizes revenue at the net amount after deducting the amount it is required to pay to the vendor.

Providing the algorithms and big data models directly to its customers

Since it acquired the related fintech solution from the vendor in August 2024, the Company provides the fintech services related to the provision of algorithms and big data models to its customers directly in return for fee income. The Company enters into distinct fintech services agreements with its customers to provide algorithms and big data models owned by the Company for the customers’ use in return for a fintech service fee.

The Company accounts for the fintech services related to provision of algorithms and big data models as a single performance obligation in accordance with ASC 606-10-25-14(b). This is because it provides a series of distinct services that are substantially the same by making the algorithms and big data models available for the customers’ use during a fixed period, and these services have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress — that is, a time-based measure of progress).

For contracts enacted before the acquisition of the related fintech solution, the pricing structure for the fintech services related to the provision of algorithms and big data models includes a fixed component based on a predetermined amount of usage and a variable component as detailed under “Brokering the algorithms and big data models” above. While the Company transitioned to directly providing these fintech services to customers in exchange for fee income after acquiring the related fintech solution, it continues to honor the existing pricing structure for contracts executed prior to the acquisition until those contracts are completed.

For contracts enacted after the acquisition of the related fintech solution, the previous pricing structure is no longer offered. As stated in the agreement, the pricing structure for the fintech services related to the provision of algorithms and big data models is based solely on usage (i.e., the actual usage payment) during the service period. The variable consideration allocation exception is applied as (1) the usage-based fees are related to a specific outcome and (2) allocation of the variable consideration to each distinct service period (e.g. each month) would meet the allocation objective (i.e., the usage-based pricing represents the amount of consideration to which the Company expects to be entitled upon the transfer of each and every distinct service, which is based on each increment of time within the series). Accordingly, the Company is not required to estimate the amount of variable consideration to which it would be entitled at contract inception and instead can recognize revenue as the customer’s usage occurs.

For the algorithms and big data models provided directly by the Company to its customers, customers simultaneously receive and consume the benefits as the services are rendered by the Company, i.e., access to and utilize the models according to the customers’ needs. Because the revenue generated from provision the algorithms and big data models meets one of the criteria set out in ASC 606-10-25-27, the revenue from the provision of algorithms and big data models qualifies to be recognized over time, with the variable consideration (i.e., the actual usage payment) recognized based solely on usage during the service period.

According to the agreement, the customers are required to settle the actual usage amounts on a quarterly basis and make payment within 60 days from the date signed on the usage confirmation letter. The customer adheres to the payment term and pays before the due date.

The Company follows the rules and guidance set out under ASC 606 when determining whether it is acting as a principal or an agent in the contract with its customers. The core principle of ASC 606 requires an entity to determine whether the nature of its promise is a performance obligation to provide the services itself (that is, the entity is a principal) or to arrange for those services to be provided by another party (that is, the entity is an agent). The following steps are applied to achieve that core principle:

Under the agreements the Company has with its customers, the Company has primary responsibility for providing algorithms and big data models. The fintech solution is fully owned and controlled by the Company, which has the authority to direct its use and derive substantially all of the remaining benefits from it. The Company also has full discretion to set the transaction prices in its agreements with customers. Furthermore, the Company is responsible for addressing and resolving any issues related to the models that are identified by customers. Based on these considerations, the Company concludes that it acts as a principal in its contracts with customers and recognizes revenue on a gross basis.