IFRS 15, which replaces IAS 18 Revenue, IAS 11 Construction Contracts and their associated interpretations, comes into effect for periods commencing on or after 1 January 2018. Earlier adoption is permitted.
Although the standard was originally published in May 2014, implementation issues were highlighted, so on 12 April 2016, the IASB published amendments to IFRS 15 to clarify some of its requirements and provide additional transitional relief.
What does this mean for you?
IFRS 15 sets out a single framework for revenue recognition. Its core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
This might sound as though your sales will be exactly as they are now, but in fact the new standard might change the amount of revenue you recognise, which period it is booked into and the classification of the income by type. This is particularly relevant where a transaction is paid for over time, because the time value of money is now accounted for not only when you provide a significant financing benefit to a customer but also when you receive such a benefit (by recognising an interest expense).
In addition, the allocation of the contract price between different elements of the contract may change, because the standard now has detailed guidance on how to allocate the contract price, including any discounts or other variable amounts. This may be different from the accounting policy you developed under IAS 18 or IAS 11.
Finally, the timing of recognition of revenue might change, since the sale point will be the moment that control passes to the customer rather than when the significant risks and rewards of ownership have transferred.
How will it impact you?
- Entities may wish to reconsider their current contract terms and business practice.
- Revenue may be accelerated or deferred, particularly for those:
- entities that provide a bundle of goods and services (eg mobile phone providers);
- provide licenses (eg software distributors); and
- whom consideration receivable is variable in nature (eg because of discounts), rebates and other price concessions, incentives and performance bonuses, penalties or other similar items.
- The timing of revenue recognition may change even when there is only one performance obligation, particularly for those involved in providing services. Entities will need to determine whether revenue should be recognised over time or at a point in time.
- The amount of revenue recognised may change if an entity receives a significant financing benefit.
- Existing accounting software may need to be adapted or replaced to ensure it is capable of capturing data to deal with the new accounting requirements; particularly for use in making estimates, establishing standalone selling prices, or supporting the extensive disclosure requirements.
- Estimates and judgements made under the existing standards may need to be revised to comply with the specific guidance in IFRS 15.
What action do you need to take?
IFRS 15 sets out five key steps:
Step 1: identify the contract(s) with a customer
Step 2: identify the performance obligations in the contract
Step 3: determine the transaction price
Step 4: allocate the transaction price to the performance obligations in the contract
Step 5: recognise revenue when (or as) the entity satisfies a performance obligation
You should consider whether this new model based on control rather than risks and rewards, changes your revenue recognition policies by fully understanding the specific guidance and rules contained in the new standard. Carefully consider the impact of the available transitional options and practical expedients to understand the impact they may have on reported profit, taxation liabilities, covenant arrangements, dividend policy, performance related remuneration and narrative reporting.
How we can help
RSM has the experience and expertise to:
- guide you through IFRS 15, highlighting where key judgements will be required and making you aware of practical alternatives (eg valuing customer options);
- compare and contrast the requirements of IFRS 15 with existing accounting policies;
- develop an implementation plan that will ensure a smooth and cost effective transition and, if required, assist in project managing the implementation;
- support you in the data capture of your contracts, processing and presentation of the results;
- explain the transition methods and practical expedients available when implementing IFRS 15, together with their comparative advantages and disadvantages and the disclosure implications;
- assist in reviewing material prepared for communication with stakeholders about the impact of implementing IFRS 15, including the costs of the implementation process; and
- if you have already started the implementation process, we can help you to determine whether the recent clarifications change the impact of IFRS 15 on your entity and therefore change your choices for transition.
For more information on IFRS 15, please get in touch with your usual RSM contact.