IFRS 15 contains comprehensive guidance for accounting for revenue and will replace existing international accounting standard requirements which are currently set out in a number of different standards and interpretations. It is applicable for periods beginning on or after 1 January 2018, but earlier application is permitted.
IFRS 15 contains significantly more prescriptive and precise requirements in comparison with existing IFRS. This means that for many entities, the timing and profile of revenue recognition will change. In some areas the changes may be very significant and will require careful planning, both for reporting and the wider commercial effects.
Revenue will now be recognized by a vendor when, or as, control over the goods or services is transferred to the customer. In contrast, IAS 18 based revenue recognition around an analysis of the transfer of risks and rewards; this now forms one of a number of criteria that are assessed in determining whether control has been transferred.
Some significant questions to consider
Our initial analysis of IFRS 15 indicates that the following areas may be of particular significance:
- Is revenue recognized at a single point in time, or over a period of time?
- If revenue is recognized over time, how should progress towards completion be measured and recognized?
- Will a contract need to be 'unbundled' into two or more components? Alternatively, will two or more contracts need to be 'bundled' into a single overall obligation?
- How should contracts which include variable amounts of consideration be dealt with?
- How should modifications to contracts be dealt with?
- Should costs associated with obtaining a contract be capitalized, or expensed immediately?
- What adjustments are required for the effects of the time value of money (a 'financing component')?
Disclosure requirements
Comprehensive disclosure requirements have been included in IFRS 15. Even if an entity concludes that the effect of the new standard on revenue recognition is not significant, changes to internal systems and processes may be required to enable the necessary information to be collected for disclosures.
In addition to the detailed guidance, an overall disclosure objective has been specified together with an explicit statement that immaterial information does not need to be disclosed and the disclosure requirements should not be used as a checklist. This again brings the need for careful planning, well in advance of adoption of the new requirements.
Other potential issues to consider
Different businesses will be affected by various elements of the standard depending on their individual circumstances, often driven by sector specific dynamics, and how they operate.
Action required
Most businesses should review the terms and conditions of existing and new contracts. In some cases, entities may wish to consider whether changes should be made to contracts.
We can carry out an independent impact assessment on the likely effects on our business, followed, if necessary, by a more detailed analysis.