IASB and FASB issue new, converged revenue standards
The International Accounting Standard Board (IASB) has today published its new revenue Standard, IFRS 15 'Revenue from Contracts with Customers'. At the same time, the US-based Financial Accounting Standards Board (FASB) has published its equivalent revenue standard, ASU 2014-09 'Revenue from Contracts with Customers' (Topic 606).The standards are the result of a convergence project between the two Boards. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18 'Revenue', IAS 11 'Construction Contracts' and a number of revenue-related interpretations. Application of the standard is mandatory for all IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts.
The joint revenue project commenced in 2002 and the key objectives of the project were to:
- remove inconsistencies and weaknesses in existing revenue requirements;
- provide a more robust framework for addressing revenue issues;
- improve comparability of revenue recognition practices across entities, jurisdictions and capital markets;
- provide more useful information to users of financial statements through improved disclosure requirements; and
- simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer.
The first discussion paper was published in December 2008, and the first Exposure Draft was issued in June 2010. Subsequent to the comment period, a decision was made by the Boards to re-expose the updated proposals. A second Exposure Draft was published in November 2011. The Boards received many comments from respondents and engaged in extensive outreach on their proposals, all of which was taken into account in their re-deliberations. These have resulted in some important changes in the final standards.
IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.
- The new standard provides a single, principles based five-step model to be applied to all contracts with customers. The five steps are:
- Identify the contract with the customer,
- Identify the performance obligations in the contract,
- Determine the transaction price,
- Allocate the transaction price to the performance obligations in the contracts,
- Recognise revenue when (or as) the entity satisfies a performance obligation.
- There is new guidance on whether revenue should be recognised at a point in time or over time, which replaces the previous distinction between goods and services.
- Where revenue is variable, a new recognition threshold has been introduced by the standard. This threshold requires that variable amounts are only included in revenue if, and to the extent that, it is highly probable that a significant revenue reversal will not occur in the future as a result of re-estimation. However, a different approach is applied for sales and usage-based royalties from licences of intellectual property; for such royalties, revenue is recognised only when the underlying sale or usage occurs.
- The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications and accounting for the time value of money.
- Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, principal versus agent considerations, licensing, and bill-and hold arrangements.
- The standard also introduces new guidance on costs of fulfilling and obtaining a contract, specifying the circumstances in which such costs should be capitalised. Costs that do not meet the criteria must be expensed when incurred.
- The standard introduces new, increased requirements for disclosure of revenue in an IFRS reporter’s financial statements.
IFRS 15 must be applied in an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2017. Application of the Standard is mandatory and early adoption is permitted. An entity that chooses to apply IFRS 15 earlier than 1 January 2017 must disclose this fact.
The 2017 effective date has been chosen, in part, to allow time for entities to make changes to systems and processes that may be needed in order to comply with the new Standard.
- ASU 2014-09:
- Section A — Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers
- Section B — Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables
- Section C — Background Information and Basis for Conclusions
- Three-part video series discussing the objectives, changes, and disclosure requirements in the new standard
- Joint webcast: Being held 5 June 2014 at 3:00 p.m. BST
- Overview of the project history
- Summary of IFRS 15 Revenue from Contracts with Customers
- IFRS in Focus – giving an overview of the new requirements
- Heads Up newsletter summarizing the joint guidance
- The Bruce Column – Recognising the achievement
- Short video – discussion of key impacts for certain industries
- Longer video – fuller discussion of the different elements of the Standard, and the associated issues, impacts and challenges
Additional Deloitte guidance
Adopting the new standard will involve a significant amount of work for many entities. Moreover, the impacts of the standard may be very different for different industries and different entities. In some cases, the profile of revenue and profit recognition may change significantly. However, even where this is not the case, the process of reviewing the impact of the new guidance for a particular entity, including the required disclosures, should not be underestimated. In particular, if changes to systems or processes are required, these may take time to implement, making it important that the associated analysis is performed on a timely basis.
Deloitte has produced guidance relating to the new standard, and further guidance will be issued over the next few months.
- IFRS industry insights – highlighting potential impacts for various industries:
- Available now:
- Coming soon: Mining, Oil and Gas, Shipping.
Further guidance to be issued in due course will include:
- IFRS industry implementation guides – a more in-depth analysis of the potential implications for various industries
- IAS 11 — Construction Contracts
- IAS 18 — Revenue
- IFRS 15 — Revenue from Contracts with Customers
- IFRIC 13 — Customer Loyalty Programmes
- IFRIC 15 — Agreements for the Construction of Real Estate
- IFRIC 18 — Transfers of Assets from Customers
- SIC-31 — Revenue – Barter Transactions Involving Advertising Services