Financial Reporting Brief

June 2015

Our featured article for June is 'Revenue – A Standard in Progress?' with Brendan Sheridan commenting on developments in relation to the Revenue Standard, IFRS 15, including proposed amendments and deferred implementation.

Revenue - A Standard in Progress?

One year has passed since we published our article ‘Revenue – Getting the Top Line Right’, following the publication of the Standard IFRS 15 ‘Revenue from Contracts with Customers’ by the International Accounting Standards Board (IASB) and an equivalent standard by the U.S. Financial Accounting Standards Board (FASB). At that time it seemed that an adequate transition time was being made available to IFRS – adopters with 1 January 2017 set in stone as the implementation date. Not so – the IASB has now tentatively decided to defer the implementation date until 1 January 2018. The FASB has taken similar action. Earlier application continues to be permitted, but it seems even less likely that ‘going early’ is a realistic prospect for corporates given the current state of change. This is also subject to EU endorsement.

Up to sixteen years from the beginnings of the thought process to implementation of a Standard must be a record gestation period. It is perhaps even more interesting when you consider that at least some of the original key objectives have fallen by the wayside during that time. These include convergence of U.S. GAAP with IFRS.

The former Chairman of the FASB recently expressed the view – ‘for good or for bad, in the U.S. we have become very comfortable with the idea that we’ll have U.S. GAAP. If there are things in IFRS that we kind of like or the markets like, maybe we’ll consider adopting those, but there is no systematic programme to converge at this point’. Something we have known for quite some time but in a few words, a prominent U.S. figure has highlighted the U.S. perspective and frame of mind.

It is against this background where perhaps there is some resistance amongst U.S. GAAP adopters against moving from their current codified and very detailed revenue accounting framework that the new Standard is coming on board. The Revenue Standard has been seen as a convergence success story – but perhaps the warmth of its welcome is not quite as evident in some ways as when first published.

IFRS 15 – May 2014
To reflect on the Standard, IFRS 15 was published in May 2014 with the core principle underlying the framework of the standard being that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Standard outlines a recognition model based on that passing of control from supplier to customer with a process which involves five steps:-

  1. Identify the contract(s) with customers
  2. Identify the performance obligations (distinct promises) in the contract
  3. Determine the transaction price
  4. Allocate the transaction price 
  5. Recognise revenue when a performance obligation is satisfied

There are scope limitations with regard to excluding certain classes and sources of revenue including, for example, insurance, leasing and financial instruments.

It is clear that ‘plain vanilla’ over the counter type sale transactions are not going to be significantly affected by IFRS 15 with regard to recognition and measurement, albeit that there is likely to be additional disclosure requirements. What is going to be affected are, for example, multiple element contracts with the identification of different performance obligations and the consequent price allocation issues. In this regard it is not just accounting which is of concern but also the capability of systems to track the performance obligations. More about this later.

Our article of June 2014, already referred to, together with our Deloitte Global publication 'IFRS in Focus' on the topic provide summaries of the main features of IFRS 15, as published in May 2014.

Transition Resource Group (TRG)
At or about the time that IFRS 15, and its equivalent US standard, were published, the IASB and the FASB created a Joint Transition Resource Group (TRG) which has the purpose of keeping them both informed on interpretive issues arising during the planning of the implementation of the converged Standard and to assist in determining what action may be needed to resolve diversity in practice.

To date four meetings of the TRG have been held and matters which have been discussed at those meetings, inter alia, include:-

  1. Determining whether an entity offering inter –net related goods and services arrangements is a principal or an agent
  2. Determining whether certain amounts billed to customers should be presented as revenue or a reduction of costs
  3. Sales-based and usage-based royalties in contracts with licences and goods or services other than licenses
  4. Inclusion of renewal periods for impairment testing of capitalised costs
  5. Customer options for additional goods and services and non-refundable upfront fees
  6. Presentation of contract assets and contract liabilities
  7. Determining the nature of a license of intellectual property
  8. Determining whether goods or services are ‘distinct in the context of a contract’

As intended, the TRG has not reached conclusions at their meetings with any matters arising being referred to the IASB and the FASB for consideration. It is clear that while both the IASB and the FASB considered themselves to be in a position to publish a Revenue Standard, there is still much to deal with.

Back on the Blocks
The IASB has recently announced that in view of the matters raised in discussions with the TRG, that it proposes to defer the effective date of implementation of IFRS 15 by one year to provide additional time for entities to implement an amended Standard. The IASB makes it clear that the substantial majority of the issues discussed by the TRG have been resolved without the need for standard-setting activity. However, the IASB has tentatively decided to propose targeted amendments to IFRS 15, which include clarifying the guidance on licences and adding examples illustrating the guidance on identifying performance obligations. The IASB also plans to discuss possible clarifications to the guidance on principal versus agent considerations. The targeted amendments to IFRS 15 to clarify particular aspects of the requirements will be included in a further Exposure Draft to be published later in 2015.

Such matters as the availability, or absence thereof, of information technology systems and the overall need for more time to plan for implementation are also identified by the IASB as major considerations of constituents.

The FASB is a step further along the road and has already issued proposed amendments to their standard, specifically the guidance on identifying performance obligations and the implementation guidance on licensing, which are consistent with what the IASB has under review.

A feature of the FASB proposed amendments which is particularly interesting and bothersome is identifying when promises represent performance obligations. The proposed FASB amendment refines the separation criteria for assessing whether promised goods and services are distinct, specifically the ‘separately identifiable’ principle and supporting factors. It proposes three factors that indicate that an entity’s promises to transfer goods or services to a customer are not separately identifiable in a manner consistent with the notion of separate risks. Accordingly, the focus is now on the bundle of goods or services instead of individual goods or services.

A long wait for IFRS 15 – a further wait for mandatory implementation – and now a further time lag of one year! While one tends to wonder why a project should take such a protracted period of time, one must bear in mind the scale of the challenges involved in moving to a globally accepted standard in such a hugely significant area for so many entities. Preparers, auditors, regulators, markets all look forward to a cohesive, transparent revenue accounting framework that will be acceptable to all.

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