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IFRS 15 continues to redefine your revenue profile

Pencils

Published on May 27, 2016

As discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The Standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.

Since its initial release, a group of revenue recognition specialists, including members of the IASB and the FASB, formed the Transition Resource Group (TRG), the primary purpose of which was, and remains, to discuss issues arising from implementation of the Standard given the complexity of this new comprehensive framework. The ongoing discussions of the TRG have resulted in the IASB issuing two significant amendments to IFRS 15. The first was issued in September 2015 relating to the one-year deferral of IFRS 15’s mandatory effective date to January 1, 2018. The second amendment was the April 2016 issuance of Clarifications to IFRS 15, Revenue from Contracts with Customers (Clarifications). The Clarifications are not meant to change the underlying principles of IFRS 15, but rather to clarify how the principles should be applied.

What do the Clarifications say?

The Clarifications focus on how to determine:

  • when a promised good or service is separately identifiable – meaning, determining when a performance obligation is distinct within the context of a contract. An entity has to determine whether the nature of its promise is to transfer each good or service separately, or a bundle of goods or services – this determination will impact the timing of recognition of revenue;
  • whether an entity is a principal (and therefore recognizes revenue on a gross basis) or an agent (recognizes revenue on a net basis). Under IFRS 15, an entity is a principal if it controls a promised good or service before it is transferred to the customer. The Clarifications assist in determining whether a right to goods or services is controlled before it is transferred to the customer. The indicators that an entity is acting as a principal have been rewritten to tie them more closely to the concept of control; and
  • whether revenue from granting a licence of intellectual property (IP) should be recognized at a point in time or over time. License revenue is recognized over time when the IP will evolve or change throughout the license period because the entity undertakes activities that significantly affect the IP to which the customer has rights. License revenue is recognized at a point in time when the entity has a right to use the IP as it exists when the license is granted and the IP has significant stand-alone functionality.

The amendments also include additional transitional relief provisions for completed and modified contracts. These amendments are intended to reduce the cost and complexity for entities when they first apply IFRS 15. For further information, please refer to our recently issued , Clearly IFRS: IASB introduced clarifications to IFRS 15 and view our webcast Clarifications to IFRS 15, Revenue from Contracts with Customers – Understanding the final standard which will be available on June 14, 2016.

Are further amendments expected?

In January 2016, the IASB announced that it has completed its process related to clarifying the new revenue standard and that the Board does not plan to schedule any further IASB TRG meetings for IFRS constituents[i].The IASB stated, “the Board is now of the view that stakeholders need to know that they can continue their implementation process with the confidence that IFRS 15 will not be subject to further changes[ii].” So if you have delayed your implementation plan with the expectation that the new revenue standard will continue to evolve, be aware that at this time no further changes are expected.  

The FASB, however, has scheduled three FASB-only TRG meetings for 2016 (members of the IASB staff will participate as observers). While those meetings are FASB-only, entities applying IFRS 15 can look to the FASB TRG meetings for insights regarding the application of the Standard[iii].

Time is ticking!

In a recent speech by James V. Schnurr (Chief Accountant, US Securities & Exchange Commission’s Office of the Chief Accountant), Mr. Schnurr noted that implementation efforts appear to be lagging at many companies. Mr. Schnurr referenced a survey conducted in the fall of 2015, which found 75% of responding companies had not completed their initial impact assessment and, of those, 27% had not begun their assessment at all[iv]. These observations are consistent with the results of recent Canadian polls.

The implementation of the new Standard may have significant impacts on the amount, timing, uncertainty and presentation of revenue and therefore understanding and communicating the effects early on is imperative. Implementing the new Standard is not merely a financial reporting exercise; entities will need to consider the wider implications. Accounting for and the disclosure of rev­enue recognition spans beyond the fi­nan­cial re­port­ing func­tion as it is driven by the activities of the many groups within an or­ga­ni­za­tion, in­clud­ing sales, mar­ket­ing, and op­er­a­tions. The changes also need to be considered in the context of modifications required to processes, internal controls, in­for­ma­tion tech­nol­ogy, tax, human resources, and many other key functions of a business.

Consider the following in developing your implementation plan for the Standard:

  • Identify significant revenue streams and products to focus near term efforts. Consider the activities of your entity’s various business units, including joint arrangements and associates.
  • Identify, evaluate and summarize contract types for significant revenue streams. This will facilitate a targeted high level gap analysis to identify potential changes in accounting for revenue and costs.  For example, contracts may be segregated by duration (long-term, short-term contracts), by whether they include standard or non-standard terms and conditions, whether they include several promises, are subject to frequent amendment/modification or in accordance with their terms and conditions such as variable consideration, financing components, etc. At this stage it may be wise to involve individuals responsible for drafting and executing contracts.
  • Evaluate and document new accounting policies – Review existing policies and document new and/or modified accounting policies reflecting the adoption of IFRS 15. In support of new accounting policies, documentation should provide details of significant judgments and estimates made, including performance obligations identified and timing as to when performance obligations are satisfied; how transaction prices are determined and allocated; triggers for recognition of revenue and any alternatives or policy choices made, where they exist. Documentation should address transition considerations as entities will most likely be required to perform dual tracking of revenue balances during the adoption period.  Management will need to establish the timing for when new accounting policies and procedures should be designed and implemented.
  • Identify data gaps and process/control requirements – New significant judgments or estimates may be necessary as a result of applying the new revenue standard’s requirements, including those related to identifying performance obligations, allocating revenue, estimating variable consideration and the constraint, estimating standalone selling prices, measuring progress towards completion, etc. Systems and processes associated with capturing detailed information required for the application of the new revenue standard may need to be modified to capture additional data elements that may not currently be supported by legacy systems. Can existing IT systems be enhanced or will new systems need to be procured? Establish clear role definitions so that individuals understand the role they will play in capturing and disclosing the financial and other impacts of the Standard. Evaluate the entity’s current control environment. Do current internal controls address new processes or procedures that will be required post implementation? What new internal controls need to be designed and implemented?
  • Evaluate transition methods and practical expedients – The Standard provides the option of using either a full retrospective or a modified retrospective transition method and allows for the application of certain optional practical expedients under each method. Consider the advantages/disadvantages of each transition method and related practical expedients. Entities should assess the population and nature of their contracts as well as confer with stakeholders and peer groups in deciding which transition method to use.
  • Capture and define tax issues – Changes in the amount or timing of revenue or expense recognition for accounting purposes may impact the recognition of current or deferred taxes, and possibly cash tax payments. Do further or amended tax planning arrangements or corporate structures need to be considered? Is communication required with tax authorities to maintain or change current tax accounting methods?
  • Develop a communication strategy – Consider whether key performance indicators need to be amended to reflect the impact of the Standard – how will the changes be communicated to users of the indicators? Discuss with the board of directors and audit committee their expectations of how management will update them on adoption of IFRS 15, thus enabling them to perform their governance role over the implementation.
  • Analyze and determine additional disclosure requirements – IFRS 15 includes a significant number of additional disclosure requirements, entities may require new processes and controls to capture the additional data so as to ensure the new disclosure requirements are met – role definition is key.  Entities are expected to provide information to investors, analysts, regulators and others about the expected impact of the new revenue standard and their implementation efforts. How will the impact of adoption be communicated to the public? National Instrument 51-102F1,  Continuous Disclosure Obligations – Management’s Discussion & Analysis sets out the specific disclosure requirements for accounting policies that will be adopted at a future date, including the “potential effect on the entity’s business, for example technical violations or default of debt covenants or changes in business practices” [v]. It is expected that based on the pervasive impact of the Standard, Canadian regulators will require detailed disclosures/ communications prior to the issuance of the first set of financial statements in which IFRS 15 is adopted – a sentiment that has already been addressed by the SEC’s Office of the Chief Accountant.

We believe that implementation of the new revenue standard should be a priority for management and the audit committee in 2016, including a change management project plan and an assessment of the resources needed to execute the plan.

To remain informed, we en­cour­age you to visit the IFRS 15 sec­tion of our Centre for Financial Reporting web­site, it in­cludes a num­ber of links to our lat­est pub­li­ca­tions in our Clearly IFRS se­ries and webcasts. As well, our IFRS 15 webpage includes links to a num­ber of other re­sources that can as­sist you in bet­ter un­der­stand­ing the new Stan­dard. Lastly, we en­cour­age you to reach out to any mem­bers of our team of ex­pe­ri­enced pro­fes­sion­als who can as­sist your or­ga­ni­za­tion in de­vel­op­ing an ac­tion plan to im­ple­ment the new Stan­dard and an­swer any ques­tions you may have.


[i] The IASB will nevertheless continue to monitor the Standard and implementation issues that arise; IFRS constituents can continue to submit issues on the IASB website for consideration by the IASB. In addition, the IASB has indicated that their TRG has not been disbanded and may be called upon at a later date as necessary. http://www.ifrs.org/Features/Pages/Ian-Mackintosh-talks-about-clarifying-amendments-to-the-Revenue-Standard.aspx

[iii] In a recent speech, James Schnurr (Chief Accountant, US Securities & Exchange Commission’s Office of the Chief Accountant) remarked that foreign private issuers will need to consider the FASB TRG discussions as the SEC expects domestic and foreign private issuer registrants would have consistent reporting outcomes for identical transactions.

 

Contacts

Maryse Vendette, Partner
Maryse Vendette is a partner for Deloitte Canada’s National Office and co-leader of the IFRS Canadian Centre of Excellence. She is recognized nationally as a specialist in revenue recognition, business combinations and IFRS in general, and contributes to the development of the firm’s views on complex accounting issues. Prior to joining the National office, Maryse was a member our advisory group, where she provided financial reporting services to clients in a variety of industries.

Alexia Donoghue, Senior Manager | National Accounting and Securities Services
Alexia is responsible for monitoring quality standards for Deloitte’s public company client filings.  Alexia also provides consultative advice to attest and non-attest clients on general securities filings and financial reporting matters.

 

Ontario

Sean Morrison
Partner
416-601-6296As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.
Cindy Veinot
Partner
416-643-8752As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.
Mark Wayland
Partner
416-601-6074As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.

Quebec

Nick Capanna
Partner
514-393-5137As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.
Maryse Vendette
Partner
514-393-5163As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.

Prairies

Atlantic

British Columbia

Steve Aubin
Partner
403-503-1328As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.
Geoffrey Cochrane
Partner
506-663-6696As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.
Kari Lockhart
Partner
604-640-4910As you are aware and as discussed in our February 2015 editorial, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have worked to establish a single, comprehensive framework for revenue recognition. The standard, Revenue from Contracts with Customers (IFRS 15 or ASU 2014-09 (Topic 606) under U.S. GAAP) was issued in May of 2014.

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