IFRS 15, the new revenue standard, generally becomes effective for entities reporting at 31 December 2018 or later. Organised entities started their transition projects in 2014 when the standard was first issued; setting up project teams, educating sales forces and legal teams, reviewing contracts to establish to what extent they can be standardised, and requesting Human Resources (HR) to analyse the impact on employee reward schemes and Key Point Indicators (KPIs). However, many entities have still not started work, believing that the standard will only have a negligible impact on their financial statements.
The standard is extremely detailed, and unless you have read it from cover to cover, a quick skim may have led you to believe there won’t be any major impact for your entity. Given that the standard is 60 pages long, with 168 pages of basis for conclusions and 64 pages of illustrations, it is highly unlikely that any entity will escape unscathed.
Let me flag a few key areas that create top concerns for entities:
- When determining the unit of accounting, IFRS 15 provides detailed guidance on determining the “distinct performance obligations”. The transaction price must then be allocated to each obligation. IAS 18 also required an allocation to be made, where a contract contained multiple deliverables, but provided no guidance on HOW to allocate. IFRS 15 requires allocation to be based on the stand-alone selling price of each obligation, hence disregarding whatever pricing is printed in the contract. Where obligations are not sold separately, there is no exemption on cost or reliability grounds, and a standalone selling price must be estimated. This might be based on competitors’ prices adjusted for your costs/margin and must maximise the use of observable inputs.
- Where different prices are charged to different customers then care must be taken to determine a suitable standalone selling price for each class of customer based on all reasonably available data points. These prices will then need to be monitored and updated for new arrangements to reflect shifts in pricing negotiations, customer base, etc.
- The transaction price is no longer the contract price. It must reflect the time value of money where payments are received in advance or arrears, and an estimate of variable consideration such as discounts, rebates or incentive payments. This requires new data to be captured at source and internal control procedures to be introduced to ensure completeness and accuracy of the significant estimates.
- The timing of revenue recognition is no longer linked to whether the sale is of goods or services. For revenue to be spread, an entity must now meet certain conditions. This may mean that revenue previously recognised over time under IAS 18/ IAS 11 (e.g. the old revenue standards) is now delayed until the end of a contract. Where spreading of revenue continues to be appropriate, guidance on determining how to spread is far more detailed in the new standard.
- Whether to adopt a full retrospective approach, or a modified approach where comparatives are not adjusted and a cumulative catch-up through retained earnings is posted. Although the latter sounds an obvious choice, it requires IAS 18/ 11 comparatives to be provided for the current year.
Auditors will be expecting to see evidence that each aspect of the standard has been considered and benchmarked against current practice, and each contract type reviewed in order to establish to what extent it is IFRS 15 compliant. Without a comprehensive analysis how will you know? Despite the detail in the standard, adopters need to design their preliminary accounting policies and obtain approval from the auditors, especially as experience with using the standard develops.
Finally, entities need to take a detailed and timely look at the new disclosure requirements, which are far more onerous than those found in IAS 18/IAS 11. Some of these disclosures include information not previously collated, and so entities need to look to updating their accounting systems to cope and consider the impact on sharing commercially sensitive information.
Many entities I have trained have a wide range of contracts, and no standard terms. Prices and terms of trade vary considerably between customers, markets and geographies, making the implementation of IFRS 15 challenging. Given the lack of detail found in IAS 18, current accounting policies are not always clear leading to a lack of consistency across an entity when accounting for similar transactions, making the impact assessment even more challenging.
Claire Dean is a freelance trainer based in London and has worked with entities across a wide range of sectors helping them to understand the detailed requirements of IFRS 15. She delivers public courses at Quorum Training in the form of half-day workshops, the next running on 31 August.
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