IFRS 15: How a New Accounting Standard Impacts your Business
Are you ready for a successful transition?
When to recognize revenue? This simple question is one of the most controversial issues in accounting. Why? Well, it’s simple and easy when you sell goods, but how about long-term contracts with multiple elements or some other complex services? The timing of revenue recognition is about to change and implementing the new accounting standard has an impact which is much greater than you might expect.
The new standard mostly impacts businesses which enter into long term contracts that consist of multiple elements. Think of Telecom operators, software companies, health science and construction companies. The five step model under IFRS 15 requires organizations to make a distinction between the different elements in the contract, and recognize revenue for each of them based on a separate pricing. This was not required before and will ask a lot from a data collection and system perspective.
Furthermore, the change in timing of the revenue recognition affects bonuses, targets, KPIs, corporate income tax, external relations, loan covenants, regulatory requirements and more. Note that industries who do not enter into long term contracts will also be impacted as extensive disclosures are required for which the data is currently not available such as a movement schedule of contract balances. As a result, new and more extensive requirements on companies IT systems and underlying processes will occur.
The new revenue recognition standard will be effective as per January 1, 2018 subjective to EU endorsement. Two transition options are permitted, either fully retrospective or modified retrospective. Either way, do not underestimate the throughput time, start in time for a smooth and successful transition.
How Deloitte can help with IFRS 15
Deloitte works with a multidisciplinary team that integrates accounting and finance with the system and business process expertise required for the change. We have focused on this topic for a long time issued IFRS industry insights for IFRS 15 as part of Deloitte’s Clearly IFRS series. Furthermore, we have facilitated and chaired roundtable discussions with large US and European clients.
We understand the system and process aspects of these changes through our relationships with software providers. Moreover, we know how other clients are responding and we are working with a number of them to think through its challenges and implement a response.
Implementing IFRS 15
Implementing IFRS 15 starts with creating awareness for key stakeholders with an emphasis on having both stakeholders from the business as from finance in the room during an awareness lab. Next is the assessment phase during which contracts, accounting rules, processes and systems are analyzed and solutions defined. In this phase we built used case scenario as input for the designing the system solution.
The deployment phase covers building and testing the system solution, migrating the data, updating accounting policies and reports, and execute dry runs and go-lives. Usually, also a PMO function and a plan of approach are set up during this phase.
In the deployment phase we give special attention to change management and more specific on communication, training and change impact and readiness assessments. After implementation the quality and output is ensured by monitoring the compliance with IFRS 15 going forward.
More information on IFRS 15?
Would you like to know more about IFRS 15 and revenue recognition? Please contact Olivier van Thuijl, Eric de Weerdt or Anthony Maalste.