From the IFRS Institute - May 2017
Implementing IFRS 15, Revenue from Contracts with Customers, is the 2017 hot topic for many IFRS preparers in the run-up to the January 1, 2018 effective date for calendar year-end companies. In a December 2016 survey among financial reporting executives,1 two-thirds of their organizations remained in the assessment phase. Respondents cited resource constraints, system gaps and other issues that have impeded their progress.
One of the factors of prolonged projects has been the volume and complexity of technical challenges identified when trying to apply the final standard to a diverse array of transactions – this was foreseeable, but no less disruptive. Accounting interpretation has been building fast since the standard was published. This process has helped preparers overcome many of the issues, though some are still open today. Further application challenges may yet be identified.
With fewer than seven months remaining before the effective date of IFRS 15, there is an urgent need to move on to the implementation phase – technical issues awaiting a final answer should no longer delay implementation.
Recognizing that their final approach may change as interpretations and the opinions of their regulators develop, IFRS 15 adopters need to be prepared to adopt preliminary positions on challenging technical issues. Building as much flexibility as possible into any solutions adopted on the basis of this preliminary position and continuing to monitor relevant interpretations and the views of their regulators is key. By doing this, preparers can put the bulk of the assessment phase behind them and move on to the implementation phase.
As complicated as the assessment phase has proven to be, the implementation phase brings with it a new set of complexities and challenges and, given the rapidly approaching adoption date, these need to be overcome as efficiently as possible. With that in mind, we’ve developed the following list of top priorities when moving toward full adoption of IFRS 15.
IFRS 15 represents much more than a change in technical accounting guidance. The requirements of the standard have broad ranging implications for technology, data requirements, processes, controls and reporting. While many companies have delved into the accounting gaps that will affect their business, many assessments have not considered the additional company-wide effects and process overhaul required to adopt IFRS 15.
Our tip: As a gap assessment is the foundation for the subsequent design and implementation phases, a holistic perspective in this phase will facilitate an effective, efficient and sustainable adoption of IFRS 15. A smooth transition starts with a holistic assessment of the business-wide effects of the standard. It’s not too late to start or refine your revenue gap assessment process.
IFRS 15 requires entities to assess their revenue streams and underlying contracts to determine what distinct performance obligations are present. A performance obligation is distinct when the good or service is capable of being distinct and is distinct within the context of the contract. Companies have encountered significant difficulty related to judgments for determining whether a performance obligation is distinct.
Our tip: Identifying distinct performance obligations timely for each revenue stream is integral to the new five-step revenue model, because this influences the determination of transaction price, how the transaction price is allocated to the performance obligations, and the timing of revenue recognition.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. To determine the transaction price under IFRS 15, entities are required to estimate the variable consideration to be received, subject to a constraint. Many companies have underestimated the incremental effort to do this. Current technology and policies may not be capable of making such estimations or updating them on a continuous basis.
Our tip: A few examples where variable consideration should be estimated are construction contracts with performance bonuses tied to specified finish dates, or commission fees earned as an agency places media for a customer. As this number will be audited and incorporates forward-looking estimates, many companies have used this requirement to refine their budget and forecasting processes to align with the expectations established under IFRS 15.
IFRS 15 provides alternative transition methods for adopting the new standard. Many companies we’ve talked to initially preferred a full retrospective approach for adoption, which would show all comparative periods restated in compliance with IFRS 15. On becoming more familiar with the implications of each transition method, many companies have revisited this decision and are opting for the modified retrospective approach. While less cumbersome from a historical presentation perspective, this option still requires a cumulative catch-up adjustment and disclosures supporting those calculations at a level of disaggregation not previously presented. Additionally, companies will need to consider their approach for transitional discussions in the MD&A section of their annual report when comparing year-over-year numbers under two sets of standards.
Our tip: It is crucial to have a clear understanding of the options available and their underlying implications, as this provides a backdrop for all assessment, design and implementation phase activities as you move toward full compliance.
One of the objectives of the new revenue standard is to provide more useful information to users of financial information through improved disclosures. Most of the disclosure requirements for IFRS 15 are new. Two of these disclosures may be particularly challenging because they require data not previously recorded, thereby creating a need for a system approach:
- remaining performance obligation; and
- disaggregation of revenue.
Our tip: Prioritizing these disclosures will enable you to have a more robust understanding of the data and process changes necessary to comply with IFRS 15. In addition, by viewing the disclosures from an investor’s perspective, you will be better equipped to communicate the effects of the standard during the transition period. IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, requires disclosures on forthcoming accounting standards that have not yet been adopted to be included in the notes to the financial statements.
The implications of adopting IFRS 15 are proving to be challenging given the scope and breadth of its effect within an organization. We hope that the above five practical tips will help you further navigate through the process of a successful and timely implementation.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.