IFRS 15: Revenue from Contracts with Customers

IFRS 15 was issued by the International Accounting Standards Board (the IASB) to provide a single global standard prescribing how a reporting entity would recognize revenue from a contract with a customer. 

Although the IASB and the Financial Accounting Standards Board (FASB) held meetings to determine how IFRS 15 would be implemented, consensus was not attained and both the FASB and the IASB agreed to defer the effective date of the new standard to annual periods commencing on or after January 1, 2018, with early adoption permitted.

To understand why a consensus was not reached, we need to look at what IFRS 15 was proposing.

The Five Step Model Framework:

IFRS 15 proposed a five-step framework to recognize revenue.

Step 1: Identify the contract with the customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations. Contracts may be combined and accounted for as a single contract if they were entered into at or near the same time with the same customer and they comply with certain conditions.

Step 2: Identify the performance obligations in the contract
At the inception of a contract, the entity should assess the goods or services that have been promised to the customer and identify the performance obligations in the contract. For some contracts, there may be multiple performance obligations and the entity needs to determine what method or methods could be used to measure satisfaction of the performance obligations.

Step 3: Determine the transaction price
The transaction price is the consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. In determining the transaction price, an entity should consider past customary business practices and whether there is non-cash consideration or elements of variable consideration that arises (if the consideration is contingent on the occurrence of a future event or as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items).

Step 4: Allocate the transaction price to the performance obligations in the contract
If there are multiple performance obligations in a contract, an entity needs to allocate the transaction price to each performance obligation by referencing the relative standalone selling price of the performance obligation.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, either over time or at a point in time. Revenue would be recognised over time if certain criteria are met; otherwise, revenue would be recognised when control is passed at a specified point in time.

To assist with the implementation of this standard, the IASB and FASB have formed a Joint Transition Group for Revenue Recognition to solicit, analyze, and discuss stakeholder issues arising from the implementation of IFRS 15 and its US counterpart, ASU Topic 606. The purpose of this is to inform the IASB and FASB about implementation issues, which will help the boards determine what, if any, action will be needed to address those issues. This process has resulted in some issues being forwarded to the boards for their consideration. The IASB has completed its exposure draft process proposing certain clarifications and is drafting changes to IFRS 15. The clarifications are expected to deal with performance obligations, principal versus agent, and licencing.

Comments:

On first read, IFRS15 may not seem too controversial but a closer read of the standard raises questions on how the steps would be applied in practice. Specifically, companies that are required to follow IFRS need to comply with the recommendations set out in IFRS 15 and document how they have complied with the standard. Auditors of the financial statements of those companies need to assess whether the companies have recognized revenue in compliance with the standard.

Another complicating factor is the difference between U.S. GAAP and IASB standards. U.S. GAAP tends to provide detailed guidance on the application of standards while IFRS tends to provide underlying principles, then leave it up to companies and their auditors to apply professional judgement in deciding how the standards should be applied.

Stay tuned as the boards continue to grapple with this complex issue.

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