14 December 2017

ESMA Statement Highlights Key Areas Of IFRS 15

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In its October 2017 statement on enforcement priorities, the ESMA drew attention to the potentially significant impacts that IFRS 15 may have on timing and revenue recognition.
Luxembourg Accounting and Audit
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In its October 2017 statement on enforcement priorities, the European Securities and Markets Authority (ESMA) drew attention to the potentially significant impacts that IFRS 15 may have on timing and revenue recognition. IFRS 15 is set to replace IAS 18 Revenue and IAS 11 Construction Contracts. Most companies will be affected by it, with the industries of telecom, engineering, real estate, construction, and software perhaps facing the biggest change. In the statement, ESMA singles out certain areas that are important depending on the company's business model and current practice. Read on for further info on these areas.

Non-refundable upfront fees

The regulator emphasises that, under the new IFRS 15 requirements, the identification of performance obligations (see paragraphs IFRS 15.22-30) could lead to differences from current practices, particularly regarding non-refundable upfront fees. ESMA stresses the use of paragraphs B48-B51 to assess if the non-refundable upfront fees are related to a transfer of goods or services.

Measurement method

ESMA requests that paragraph B15 be respected when determining the measurement method. This is to ensure that any work-in-progress or finished good controlled by the customer is included in the measurement of the output at the reporting date.

Agent/principal distinction

IFRS 15 marks a shift in the underlying concepts of principal and agent, moving the distinction from a "risks and rewards" to a "control" concept. Here, ESMA emphasises that a party's being classified as an agent or a principal could mean variations in the amount and timing of revenue recognition.

Determining the transaction price

The regulator notes that certain variables in a customer contract could, in an IFRS 15 context, affect companies greatly—depending on their current practices. ESMA particularly highlights paragraphs 50, 53, 56, and 57, which offer some guidance.

Significant financing component

IFRS 15 requires that companies assess whether contracts include a significant financing component when determining the transaction price. The criteria for whether a financing component is significant to the contract are defined in paragraphs 61 and 62 of the standard. ESMA points out that companies must have a specific policy on the recognition and measurement of significant financing components.

Revenue from licenses and intellectual property

Regarding the recognition of revenue from licenses or intellectual property, ESMA mentions that specific guidance is given in IFRS 15, i.e. in paragraph B58, in which the criteria for having the right to access intellectual property is listed.

Contract costs

ESMA also highlights the fact that IFRS 15 includes more guidance on contract costs (paragraphs 91 and 95). It emphasises that these costs shall, in some cases, be capitalised, and adds that IFRS 15 is not applicable for costs covered by other standards.


ESMA urges companies to provide those reading their financial statements with entity-specific assessments of the requirements' expected impacts.


The changes in revenue recognition that IFRS 15 brings will not only affect finance teams, but the entire business. Analysts and investors will want to see clear estimates—they'll be especially interested in the adjustment numbers in the disclosures of 2017 financial statements.

If you haven't begun the transition yet, we'd recommend getting off the ground now, given that the new standard will come into effect in a matter of days.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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