I am sure that we are all aware that the new standard prescribing the accounting treatment of revenue is about to be in effect soon, if not, I suggest you get in touch with an IFRS (International Financial Reporting Standards) expert – of which the Training and Advisory Services (TAS) would be your best bet, in my biased opinion.
The International Accounting Standards Board (IASB) issued the standard in 2014, with an original effective date of 1 January 2017. If you have not started preparing for the change from current IFRS you may be cutting it a little too close, don’t you think? However, you are in luck, as the IASB has now deferred the effective date to 1 January 2018 giving you more time to prepare for the transition.
What are the differences between the current IFRSs, and this new standard on revenue? The new IFRS 15 supersedes the following standards: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13, IFRIC 15, IFRIC 18, and SIC 31. If you were planning to early adopt the new leases standard (IFRS 16) before its effective date, you cannot do so before the adoption of IFRS 15, this is because the new leases standard refers to certain principles in IFRS 15 and would require a system aligned to the new revenue standard to have been implemented. The following may be noticeable upon adoption of IFRS 15:
- IFRS 15 employs the more use of principles as compared to the prescriptive accounting in current IFRS;
- The standard provides more detailed application guidance and detailed requirements than current standards;
- The switch will require entities to assess their current revenue recognition and disclosure systems and policies; and
- Possible changes in an entity’s revenue recognition (timing of recognition of revenue, expanded disclosures, and change in the number of performance obligations to name a few)
The core principle of the standard is based on the entity recognising revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This introduces the five step for revenue recognition:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognise revenue when (or as) an entity satisfies a performance obligation.
This model may complicate revenue recognition for many entities as allocating the transaction price could prove difficult if goods or services are not provided to customers separate from each other but are usually provided as complete package. However, this model solves the requirement to classify revenue transactions as either sale of goods or rendering of services which is sometimes tricky and result in the same transaction being classified differently in the same industry.
For example: XYZ Construction Ltd has been contracted by a local ABC Realty to build a shopping mall, and the only deliverable in the contract is ABC Mall in ten years’ time. Under the current standards, XYZ may recognise the revenue at different stages during construction. Under the new IFRS 15 XYZ may only recognise this revenue at the end of the contract (10 years) i.e. upon satisfying the only performance obligation in the contract (delivering a fully built ABC Mall to ABC Realty).
Revenue is deeply embedded in daily business processes for all different types of businesses, from supermarkets to schools, and hospitals. This means that changes to the prescription for, or the principles behind accounting for revenue would affect numerous areas in the business. The areas affected would include internal controls, the accounting for taxes, revenue recognition, and information systems (for identifying and tracking performance obligations) just to name a few. Industries that will be affected to a larger extent than others are those in which entities rely on contracts with customers. The aforementioned sectors include pharmaceuticals, mining, construction, and telecommunications. This list is not exhaustive, but aims to point out some the sectors most affected by the change.
If not managed properly, the transition could be very costly, time consuming, and complex. This would require entities to have a dependable change management structure in place. The switch may not be complex at all if an entity – for instance – has a short revenue cycle, a single line of business (selling only one type of product or service), has a centralised system, or only operates domestically. Examples of situations in which the switch would be complex include when the entity has complex and longer term contracts, multiple and diverse lines of business, a decentralised system, and operates globally.
What to do in preparation for transition to IFRS 15:
- Identify the key affected areas;
- Involve your external auditors early on in the transition phase;
- Assess and consider changes to your information systems (identifying and tracking performance obligations);
- Evaluate and implement changes to revenue recognition and disclosure systems and processes;
- Involve your lawyers in the renegotiating of current contracts, and the wording of any new contracts thereafter;
- Training staff on use of new systems, and understanding the new revenue standard (include lawyers in process for understanding for the purpose of penning or renegotiating contracts);
- Consider finding out how other players in your sector are handing the transition;
- Plan your budget and resource (human and financial) needs for the transition process; and
- Manage communications with stakeholders informing them how the changes will affect key performance indicators such as profitability ratios.
You will find that given the above, the transition may take a large amount of time, which is why it is advisable to start now if you have not done so already. There may also be other factors to consider aside from those mentioned, and some issues that may be sector-specific.
So I ask again, have you started preparing?
How can TAS help YOU?
We can assist in the following ways:
- Helping you understand the requirements of the new revenue standard through technical advisory and training seminars for staff;
- Advisory on which transition method to implement for your organisation;
- Assessment of the impact on the business as a whole;
- Advice on managing the change;
- Assessing the effect on current contracts and providing advice on renegotiation, and penning of future contracts; and
- Assistance in understanding the effect on different revenue streams, and subsequent impact on: revenue measurement and timing, disclosures and taxation.