Accounting Alert June 2014

A new view of revenue

IASB issues new revenue standard

The International Accounting Standard Board (IASB) has published its new revenue Standard, IFRS 15: Revenue from Contracts with Customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, superseding current revenue recognition guidance which is found currently across several standards and interpretations. The standard is the result of a convergence project between the IASB and the US standard setter the Financial Accounting Standards Board (FASB). The FASB issued its equivalent revenue standard at the same time resulting in a largely converged approach to revenue recognition.

The new standard is more detailed and more prescriptive than the existing guidance, includes enhanced disclosure requirements, and introduces new complexities. For some entities, the profile of revenue and profit recognition may change significantly, and substantial changes to processes, IT systems and internal controls may be required to implement the new model and address increased disclosure requirements. 

The process of reviewing the impact of the new standard for a particular entity, including the required disclosures, should not be underestimated. In particular, if changes to systems or processes are required, these may take time to implement, making it important that the analysis of this new standard is performed early.

Core principle

The core principle is that an entity recognises revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. A five step model has been introduced to implement this principle. The five steps are:

• Identify the contract with the customer,
• Identify the performance obligations in the contract,
• Determine the transaction price,
• Allocate the transaction price to the performance obligations in the contracts,
• Recognise revenue when (or as) the entity satisfies a performance obligation.

In summary:

• The standard applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts.
• There is new guidance on whether revenue should be recognised at a point in time or over time, which replaces the previous distinction between goods and services.
• Where revenue is variable, a new recognition threshold has been introduced by the standard. This threshold requires that variable amounts are only included in revenue if, and to the extent that, it is highly probable that a significant revenue reversal will not occur in the future as a result of re-estimation. However, a different approach is applied for sales and usage-based royalties from licences of intellectual property; for such royalties, revenue is recognised only when the underlying sale or usage occurs.
• The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications and accounting for the time value of money.
• Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, principal versus agent considerations, licensing, and bill-and hold arrangements.
• The standard also introduces new guidance on costs of fulfilling and obtaining a contract, specifying the circumstances in which such costs should be capitalised. Costs that do not meet the criteria must be expensed when incurred.
• The standard introduces new, increased requirements for disclosure of revenue in an IFRS reporter’s financial statements.

Effective date

The standard is effective for reporting periods beginning on or after 1 January 2017 with early application permitted. Entities can choose to apply the Standard retrospectively or to use a modified transition approach.

The 2017 effective date has been chosen, in part, to allow time for entities to make changes to systems and processes that may be needed in order to comply with the new Standard.

The New Zealand Accounting Standards Board has yet to consider the standard for release in New Zealand.

Additional information

Deloitte global guidance – available on www.iasplus.com

•  Overview of the project history
• Summary of IFRS 15 Revenue from Contracts with Customers
•  IFRS in Focus – giving an overview of the new requirements
•  Heads Up newsletter summarising the joint guidance
•  The Bruce Column – Recognising the achievement