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Financial Reporting Brief
Our featured article for June is 'Revenue – A New Standard for All' with Brendan Sheridan commenting on the move to IFRS 15 in 2018 and some implementation challenges.
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Revenue - A New Standard for All
Revenue – A New Standard for All
Hailed as a significant milestone in financial reporting, IFRS 15 is less than a year away from implementation.
The Star of the Show
Having taken up to fifteen years to come to fruition, the Standard on ‘Revenue from Contracts with Customers’ can be held up as a truly aligned Standard between the US and International standard developers – the star of the show. Not only will IFRS 15 lead to better alignment between company’s revenue and performance in the vast majority of situations, but it will also in large measure provide a one-stop shop for revenue accounting for companies that use IFRS and U.S. GAAP, regardless of which sectors or capital markets they operate in. This, in turn, will help investors in their analysis and comparison of companies and their accounting for revenues.
Previous articles in our Financial Reporting Brief series, most recently those of June 2015 and May 2016, have focused on some of the more detailed aspects of the Standard and also referred to the various publications on the topic on IasPlus, our global website.
The challenge is now whether companies are ready for implementation.
The final countdown!
With little over six months to go, companies need to be sure that sound foundations are in place for implementing the requirements of the standard. The European Securities and Markets Authority (ESMA) has called in its public statement for consistent and high quality implementation of IFRS 15 and the need for transparency regarding its impact on financial statements. ESMA calls on issuers to take great care in ensuring that there is appropriate disclosure of both the qualitative and quantitative considerations involved in introducing the new Standard, and the manner in which accounting policies may change.
With many companies about to enter into interim reporting season it will be the last opportunity for them to ensure investors and other stakeholders are fully informed about the implementation of IFRS 15. Investors and others will have a realistic expectation that the full picture will be made clear before transition to the new Standard.
What Will Change?
IFRS 15 contains a new set of principles on when and how to recognise and measure revenue, based on the principle of ‘control’ rather than the ‘risk and rewards’ approach under the current standards. While in some circumstances the impact of the implementation may be limited (e.g. straightforward retail transactions), for other transactions, such as long-term contracts and multiple element arrangements, the impact on the amount and/or timing for recognising revenue may significantly differ from current practice. Even with what appear to be straightforward retail transactions, one needs to be alert to any additional features such as financing of transactions, possible rebates, sales support, extended warranty etc.
The core principle underlying the new model is that an entity should recognise revenue in a manner that depicts the pattern of transfer of goods and services to customers. The amount recognised should reflect the amount to which the entity expects to be entitled in exchange for those goods and services.
As the Standard requires issuers to allocate the transaction price to all the identified performance obligations included in a contract and to recognise revenue when (or as) the performance obligations are satisfied, issuers may need, for example to: (i) change the methodology in place to identify the performance obligations included in a contract and, also, to assess whether there is a significant financing component, (ii) adjust their internal procedures to assess the progress towards satisfaction of performance obligations, and to recognise revenue over time, (iii) determine variable considerations, and (iv) assess the impact on the recognition of revenue derived from licences.
IFRS 15 makes available to entities a number of different options on transition. The options chosen may have a significant impact in such areas as accounting for contracts which pre-date transition.
Judgements and Estimates
Under IFRS, IAS 1 deals with distinct requirements relating to disclosure of the judgements and estimates made by management that have the most significant effect on the amounts recognised in the financial statements with regard to:
• Disclosure of the judgements that management has made in the process of applying the entity’s accounting policies
• Disclosure of information about the assumptions the entity makes about the future and other major sources of estimation uncertainty.
Examples of potential areas where judgement may arise that require disclosure include revenue recognition, for example, (1) in complex cases such as those involving multiple element arrangements, (2) assumptions regarding the value and recoverability of assets under customer contracts, (3) the impact of variable consideration, and (4) recognition of revenue for warranties, and many other matters.
Whereas previously IFRSs allowed significant room for judgement in devising and applying revenue recognition policies and practices, IFRS 15 is more prescriptive in many areas. Applying the new standard may result in significant changes to the profile of revenue and, in some cases, cost recognition.
Practical Matters for Consideration
In addition to preparing the market and educating analysts on the impact of the new standard, entities will need to consider wider implications. These may include such matters as:
• Changes to key performance indicators and other key metrics
• Changes to the profile of tax cash payments
• Availability of profits for distribution
• Impact on employee compensation and bonus plans
• Potential non-compliance with loan covenants
Other issues that could arise in implementing the new Standard may include:
• Contracts may not be as ‘standard’ as expected – the terms and conditions of the customer contract are critical to applying the IFRS 15 accounting model. Many companies are finding that their contracts are less then straightforward and they may, inter alia, need legal interpretation
• The volume of data can be very challenging, with possible shortcomings of legacy systems compounding the difficulties
• The Standard deals with both revenue and the incremental costs of obtaining a contract
• Education is needed throughout the company on new systems and processes.
Final Steps on the Road
Some companies may still need to make significant progress to get to the finish line in time and may be lagging behind in their preparations. It is important that all companies keep stakeholders informed and provide informative disclosures about the status of their efforts. Matters that may need to be considered include, for example:
• Careful evaluation of detailed information regarding the nature, design and economic substance of the contract with the customer
• While in some cases the presentation of revenue may remain the same as under today’s revenue guidance, the evaluation will need to be based on the new standard and its new concepts
• Companies may need to exercise more judgment under the new standard than they do currently with potential consequences for internal control processes over financial reporting
• Companies should provide useful disclosures to investors about the impact of adopting the new standard.
Even if the extent of change for a particular company is slight, the related disclosures to describe revenue streams may not be. IFRS 15 addresses comprehensive disclosures about contracts with customers, including the significant judgements made.
IFRS 15 is a major change for companies, the full extent of which will depend on the class of business, nature of activity and the complexities involved. Time and resources must be invested by companies to ensure their readiness for implementation of the standard, and to avoid any unwelcome surprises.
There is significant material available on our Global website to assist with the implementation process and related matters. This includes a series of guides to implementation for different industries.
What's New - Monthly Reporting Pack - June 2017
Irish/UK GAAP & Related Developments
- Amendment to FRS 102 (May 2017): Directors’ loans – optional interim relief for small entities
- FRC Lab’s Framework for future digital reporting
- The FRC Pre-Emption Group publishes Monitoring Report
- Independent review of Financial Reporting Council sanctions: call for submissions
- The Accountancy Profession: Playing a Positive Role in Fighting Corruption
- Investment Association publishes guidance on long-term reporting
- Latest UK Charity Commission review highlights wider lessons for trustees, auditors and independent examiners
- IAASA publishes 2016 Profile of the Profession
IFRS & Related Developments
- IASB issues new insurance contracts standard – IFRS 17
- Post Implementation Review of IFRS 13 to be substantiated by a literature review
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Legal & Regulatory Developments
- Companies Accounting Act 2017 awaits Ministerial Commencement Order
- Mandatory Electronic Filing in CRO of Accounts from June 1
- European Banking Authority publishes final guidance on accounting for expected credit losses
- European stakeholders come strongly down in favour of the current endorsement process
- What do the new EU data protection rules mean for you?
- CBI Annual Report and Annual Performance Statement for 2016 published
- goAML - FIU's new IT software solution – anti-money laundering
- IFRS in Focus — IASB issues IFRS 17 – Insurance Contracts
- IFRS in Focus — Spotlight on key judgements and estimates disclosures
- IFRS on point
- The Connected Worker – Clocking into the Digital Age
- Over the horizon: Blockchain and the future of financial infrastructure
- What challenges do insurers face with the implementation of the new IFRS?
- Strengthening internal audit’s impact and influence
Financial Reporting Brief
- May 2017: Financial Instruments Accounting – A New Age
- April 2017: The New Standards - Busy Times Ahead
- Quarterly Financial Reporting Brief: April 2017
- March 2017: Long–Term Value Focus - ESG Reporting
- February 2017: Financial reporting - Incremental Improvement
- January 2017: The Future of Financial Reporting
- Quarterly Financial Reporting Brief: January 2017
- December 2016: 2016 Reporting - The Challenges
- November 2016: Financial Reporting – The Supervisors’ Views
- October 2016: A New Challenge – The Companies Accounting Bill
- Quarterly Financial Reporting Brief: October 2016
- September 2016: Corporate Reporting - Where to now?
- August 2016: Uncertainty – The Accounting and Reporting Challenge
- July 2016: Non-GAAP Measures – Focus of Attention
- Quarterly Financial Reporting Brief: July 2016
- June 2016: The Challenges of a New Leasing Standard
- May 2016: Revenue Standard - Moving Towards Implementation