Is your Data Architecture ready for IFRS 15?
A data perspective on revenue recognition
The objective of the new IFRS 15 standard is to implement a more consistent approach to recognize revenue and associated contract costs. The new standard can have significant impact on the data architecture and data processing depending on the internal and external environment the entity operates in. This article provides several examples of the potential impact of IFRS 15. Is your Data Architecture ready for IFRS 15?
IFRS 15 is a new standard for the recognition of revenue from contracts and associated contract costs with customers and supersedes existing IFRS standards and interpretations, such as IAS 18. The objective is to define a more consistent method to recognize revenue and increase comparability between reported revenue and contract costs in e.g. annual reports. This new standard provides more prescriptive guidance with regard to revenue recognition and capitalization of contract costs.
The impact of the new standard will vary per entity depending on the type of contracts and transactions and the current accounting policies embedded in the entity. For example: the impact of IFRS 15 for an entity with revenue streams from a consumer retail business could be very limited, while an entity engaged in the business-to-business segment with multi-year contracts can be extensive.
Some entities may have already implemented most of the revenue recognition and associated contract costs procedures as defined by IFRS 15, including underlying data requirements, but other entities may need to upgrade their data architecture and data processing to effectively implement IFRS 15. In other words, IFRS 15 does not only affect finance but also IT, as these two areas are intertwined.
Within the context of IT we expect the most significant impact on Data Architecture and data processing. The Data Architecture is defined as “the design of any complex object or system” and provides the infrastructure to capture and store data. Data processing is responsible for moving and transforming data from source to target.
The impact of IFRS 15
IFRS 15 introduces a five-step model for revenue recognition (see figure 1). Each step has specific challenges from a data architecture and data processing perspective. Furthermore IFRS 15 introduces additional disclosure requirements which means there is a need for more extensive reporting capabilities.
If compliance to specific requirements in IFRS 15 is required, the entity needs to determine whether it is more effective to (1) manually adjust the revenue recognition for each closing period or (2) implement (significant) changes to IT systems to adequately recognize revenue. An assessment tailored to the specific situation of the entity is needed to determine the most effective solution to comply with IFRS 15 measured along the dimensions of time, cost and complexity.
A data perspective on IFRS 15
The impact of IFRS 15 thus far has been presented as a simple one dimensional choice, i.e. do nothing, manually adjust afterwards or change the Data Architecture and IT-systems. In reality however the solution might not be that simple. Even if the entity chooses to manually adjust the revenue recognition, it might necessary to capture more data in operational systems to be able to perform periodic manual adjustments.
The current generation of Data Architectures and accounting systems are not sufficiently sophisticated to technically implement IFRS 15. The technical complexity of the new standard becomes even more apparent as a number of software companies, such as Aptitude and Oracle, have developed IFRS 15 calculation engines. In general these calculation engines can be plugged in between the contract & order management applications and the General Ledger. In other words, existing architectures and systems might currently not have the capability to implement the requirements of IFRS 15.
Impact of IFRS 15
IFRS 15 likely requires the entity to record more data points, retain more historical data, use more instances of open item accounting and / or implement more complex rules to calculate the revenue. Depending on the complexity of the calculation, data volume and judgement required it is more effective to automate the recognition of revenue or manually calculate the revenue.
If the entity expects an immaterial type of performance obligation to become material, the design of the Data Architecture should also incorporate these types of performance obligations. Changes to the Data Architecture of an entity can be non-trivial and required historical data cannot be rebuilt if this data was not previously recorded in IT-systems or databases. In this specific context it might be more efficient to pre-emptively change the Data Architecture. If a class of performance obligations is clearly immaterial to the financial statements of the entity, the requirements in the IFRS 15 standard are not applicable. Efforts to implement the standard for these specific classes of performance obligations are then probably not worthwhile.
From a controlling and / or audit perspective the revenue calculation logic, the approximation models and open item balances for revenue should be tested if revenue is recognized in a complete, accurate and timely fashion. As the revenue calculation logic is based upon assumptions and approximations based on historical data, the results of the revenue calculation should also be specifically analyzed. To be able to analyze the revenue calculation, adequately logged data and audit trail on transaction level should be available to trace potential errors. Otherwise the revenue calculation and additional disclosures will become an un-auditable ‘black box’.
In our next article regarding IFRS 15 we will provide specific examples of potential changes in the Data Architecture of an entity.
Would you like more information on IFRS 15? Please contact Frank Boerkamp via +31 (0)88 288 7285.
Note to the reader
This article contains a high level analysis regarding the implementation of IFRS 15 from a data architecture and data processing perspective. IFRS 15 is a complex subject which can have various consequences depending on specific considerations applicable to the entity. An assessment is required to determine the impact of IFRS 15 on individual entities.