Input on IASB project

Date recorded:

Post-implementation Review of IFRS 15 Revenue from Contracts with Customers (Agenda Paper 4)

The IASB decided to start the PIR of IFRS 15 in September 2022 and it is at phase 1 of the PIR process (i.e. outreach and information gathering) and expected to publish public request for information in H1 of 2023. The purpose of the PIR is to assess whether the effects of applying new requirements on users of financial statements, preparers, auditors and regulators are as intended when the IASB developed those requirements. The nine areas that the IASB would like to consult on includes each of the steps in five-step revenue recognition model, contracts costs, disclosure, transition and application guidance for principal vs agent and licencing. The staff paper provided detailed information to support outreach for each area consulted. The purpose of the discussion is to ask the Committee members to share views on the implementation and ongoing application of IFRS 15, including the matters that the Committee members think the IASB should consider in the PIR of the Standard. The questions for discussion include the followings:  

  1. What is your overall assessment of IFRS 15?
    • Does IFRS 15 achieve its objective of establishing the principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers?
    • Do you find the core principle of IFRS 15 and supporting five-step revenue recognition model clear and helpful in making revenue accounting decisions?
  2. What are the application matters that you think the IASB should examine during Phase 1 of the PIR and why? It would be most helpful if for each matter you could explain:
    • How prevalent is the matter?
    • What is the cause and what is the effect of the matter?
    • Which companies are affected?
    • Is this matter new, or did it exist under previous revenue requirements?
    • What steps could the IASB take to resolve the matter?
  3. How challenging was the transition to IFRS 15 (see slide 24)?
    • Which industries found the transition most challenging and why? Are their issues ongoing?
    • In your experience, how often did companies use a modified transition method? Was it more prevalent in some industries than others? Were disclosures provided in the year of application sufficient to explain the transition?
  4. Paragraphs BC454–BC493 of the Basis for Conclusions on IFRS 15 set out the IASB’s analysis of the likely benefits and costs (effects) of implementing and applying the Standard.
    • Have actual effects differed from the expected effects?
    • Have you observed any other effects of IFRS 15 that were not identified in the effects analysis, for example, effects on the companies’ internal controls or on the way the companies conduct their business?

IFRS IC discussion

Committee members expressed their comments on the overall assessment of IFRS 15. They generally considered that IFRS 15 is successful in meeting its objective, is working as intended and is a good framework for analysing revenue. A number of the Committee members considered that IFRS 15 made huge improvements in increasing consistency and comparability in analysis of revenue across different industries and jurisdictions. The 5-step approach is a clear thinking process and is helpful in distinguishing different fact patterns. On the other hand, a few Committee members commented that judgement is involved in the application of the IFRS 15 and this may result in diversity in practice. One Committee member said that IFRS 15 might not be easily understandable for preparers and suggested that the IASB add more guidance and examples in the Standard.

The Committee then discussed application matters that they considered the IASB should examine during Phase 1 of the PIR. A number of Committee members suggested to give guidance on how IFRS 15 interacts with other Standards and which standard takes over to account for a transaction at a certain point in time. Particularly, they asked how the transaction price (e.g. contract assets/liabilities) interacts with IFRS 3 purchase price adjustments, and how IFRS 15 interacts with a corporate wrapper in IFRS 10. They also asked  how to determine when the control passes and how the requirements in IFRS 15 are satisfied for a sale and leaseback transaction to pass as a sale. There was also mention of the disclosure requirements in IFRS 15 and how they interact with IAS 34 for interim reports. A few Committee members requested more guidance on the consideration payable to a customer, including how to determine whether a particular payment (e.g. customer incentive) is a reduction of revenue, applying the guidance for consideration payable to customer, or whether it is a marketing expense of the entity. They also asked how to determine whether the service is distinct. Principle vs agent considerations and disclosure requirements were other areas raised by Committee members as requiring further guidance.

The Committee also discussed the benefits and costs of implementing and applying IFRS 15. As for what are the benefits of IFRS 15, a few Committee members thought that the application of IFRS 15 improved the collaboration between the accounting team and the sales team. The accounting team now has more insights in the entities’ business when identifying performance obligations in revenue contracts. It also improved the quality and consistency of the accounting treatment of revenue among industries. As for what are the costs of IFRS 15, some Committee members said it was costly and intensive to implement the Standard, and entities would need to allocate resources for upgrading their system to capture information required for measurement and disclosure purposes. One Committee member commented that some entities considered the resources allocated to gathering information for disclosures may not be worthy given the revenue amount does not change no matter how comprehensive the disclosure is. That is why some financial institutions would rather omit those requirements even if they are considered a disclosure deficiencies by their auditors in view. They think that these are not useful to users in that industry.

Regarding the challenges faced on the transition to IFRS 15, only a few Committee members commented that only some practical expedients on transition and the modified approach of disclosure requirements were used by entities. One Committee member wished for more practical expedients for entities to ease the transition process.

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