IFRS 15 ‘Revenue from Contracts with Customers’
The thematic review focused on those areas which gave the FRC greatest cause for concern in its thematic review of October 2019. The bulk of the review was focused on certain aspects of revenue reporting by a sample of 22 companies but also covered ‘quick reviews’ of 50 companies to substantiate and further inform the findings from the 22 more detailed reviews.
Although the FRC found some good company-specific explanations about accounting for revenue it still identified disclosures that it indicates ‘do not meet the FRC’s quality threshold”. Many of the areas identified for improvement relate to the new requirements introduced by IFRS 15 specifically variable consideration and costs to obtain and fulfil a contract. The FRC notes that “often it was difficult to assess the appropriateness of the accounting in these areas as limited information was provided in the accounts”. Additionally with respect to more familiar areas such as the timing of revenue recognition and the explanation of significant judgements made by management the FRC found that “disclosures continue to lack clarity”. The FRC indicates that companies should “critically review their revenue-related disclosures to ensure they provide a clear understanding of how they have applied the requirements of the standard to their own particular circumstances”
The principal findings from the IFRS 15 thematic review were:
- Some companies are still not clearly communicating when their performance obligations are satisfied and thus when revenue is recognised. Where revenue is recognised over time, often the specific method used to measure progress is not provided.
- Disclosures about the nature of variable consideration and how it is estimated and constrained were sparse, if provided at all. The FRC also found a few instances where disclosures about the related risks were poorly articulated and potentially misleading.
- In general, companies provided helpful disaggregated revenue disclosures but, in some instances, the categories selected could have better illustrated how the nature, amount, timing and uncertainty of revenues and related cash flows are affected by economic factors.
- Information about significant judgements relating to revenue sometimes lacked clarity about the specific judgements made by management. Quantitative disclosure, such as sensitivities or ranges of potential outcomes, was often not provided for judgements involving estimation uncertainty.
- There is scope to improve disclosures about material contract balances, particularly in relation to how they arise and explanation of year-on-year variances. Better disclosures clearly explained the relationship between the delivery of performance obligations and the timing of cash flows.
- The FRC are concerned that some companies have overlooked the accounting requirements under IFRS 15 for costs to obtain or fulfil a contract when these appear relevant to the companies’ activities. Only a small proportion of companies included a policy for these costs and even fewer provided any quantitative information.
The review includes examples of disclosures falling short of the FRC’s expectations and those it considers as better practice which companies can benchmark their own disclosures against. The FRC indicates that it will challenge companies whose disclosures fail to match its expectations.
IFRS 16 ‘Leases’
The thematic review focuses on the disclosures made by a sample of twenty companies following the first year of adoption of IFRS 16 and is a follow up to the FRC’s report published in November 2019 which focused on disclosures made by interim reporters.
The FRC found that most of the sample provided “sufficient information to enable readers to understand the impact of adopting IFRS 16”. A number of opportunities for companies to improve disclosures were identified and the review includes a number of better practice disclosures.
The principal findings from the IFRS 16 thematic review were:
- Accounting policies - Many companies relied on boilerplate language, with insufficient entity-specific information, when explaining their accounting policy for leases. The FRC highlights that better examples explained the policy using language specific to the company’s circumstances. It expects companies to tailor the descriptions of their leasing accounting policies to match their particular circumstances and to cover all material areas.
- Judgements - Descriptions of judgements made by management in the application of the company’s accounting policy were absent or inadequate – for example judgements made about the lease term or scope of the standard. In several instances, significant differences were identified from the IAS 17 Leases disclosure of lease commitments with little or no explanation for these, even though some appeared to reflect potentially significant judgements. The FRC expects companies to provide detailed information about the significant judgements affecting their accounting for leases.
- Disclosures – the FRC identified that only a few companies provided the broader disclosures required by paragraph 59 to help readers understand the exposure to future cash outflows from leases. This would include the nature of variable lease payments, or the impact of extension options not recognised in the lease liability. Explanations were not given where the exercise of extension options was identified as a significant judgement made by management. Additionally whilst most of the disclosures required by paragraph 53 were provided, these were often not provided in a single note or cross referenced as required by the standard. The FRC expects companies to include sufficient detail to enable a good understanding of the financial reporting effects of their leasing arrangements on their financial position, financial performance and cash flows.
The FRC will continue to review compliance with IFRS 16 through its routine work.
A press release and the full thematic reviews (IFRS 15 and IFRS 16) are available at the FRC website.