Background
On 28 May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. After issuing the new revenue standard, which is substantially the same as the FASB's ASU 2014-09, the IASB and the FASB formed the joint Revenue Transition Resource Group (TRG) to support the implementation of the new standard. The substantial majority of the issues discussed by the TRG were resolved without the need for standard-setting activity. However, five topics (identifying performance obligations, principal versus agent considerations, licensing, collectability, and measuring non-cash consideration) were identified as requiring consideration by the Boards. In addition, some stakeholders asked for practical expedients. After considering the five topics and possible practical expedients, the IASB proposed in July 2015 targeted amendments in three areas of IFRS 15 as well as some transition relief. The proposals in the exposure draft have now been finalised.
Changes
The amendments in Clarifications to IFRS 15 'Revenue from Contracts with Customers' address three of the five topics identified (identifying performance obligations, principal versus agent considerations, and licensing) and provide some transition relief for modified contracts and completed contracts. The IASB concluded that it was not necessary to amend IFRS 15 with respect to collectability or measuring non-cash consideration. In all its decisions, the IASB considered the need to balance helping entities with implementing IFRS 15 and not disrupting the implementation process.
Identifying performance obligations. IFRS 15 requires an entity to identify performance obligations on the basis of distinct promised goods or services. To clarify the concept of 'distinct', the IASB has added the clarification that the objective of the assessment of a promise to transfer goods or services to a customer is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs.
Principal versus agent considerations. When another party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it is the principal in the transaction or the agent on the basis of whether it controls the goods or services before they are transferred to the customer. To clarify how to assess control, the IASB has amended and extended the application guidance on this issue, and especially stresses:
- that an entity determines whether it is a principal or an agent for each specified good or service promised to the customer and could be a principal for some specified goods or services and an agent for others;
- that the indicators provided for assessing control are not a conclusive list; and
- that the indicators provided may be more or less relevant to the assessment of control depending on the nature of the specified good or service and the terms and conditions of the contract so that different indicators may provide more convincing evidence in some contracts than others.
Licensing. When an entity grants a licence to a customer that is distinct from other promised goods or services, the entity has to determine whether the licence is transferred at a point in time or over time on the basis of whether the contract requires the entity to undertake activities that significantly affect the intellectual property to which the customer has rights. To clarify when an entity's activities significantly affect the intellectual property, the IASB has amended the application guidance and stresses that the activities significantly affect the intellectual property if
- the activities are expected to significantly change the form or the functionality of the intellectual property; or
- the ability of the customer to obtain benefit from the intellectual property is substantially derived from, or dependent upon, those activities.
Additionally, the IASB has extended the application guidance with respect to the application of the royalties constraint.
Transition relief. The IASB has provided two additional practical expedients (both optional):
- An entity need not restate contracts that are completed contracts at the beginning of the earliest period presented (for entities that using the full retrospective method only).
- For contracts that were modified before the beginning of the earliest period presented, an entity need not retrospectively restate the contract but shall instead reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented (also for entities recognising the cumulative effect of initially applying the standard at the date of initial application).
Alternative view
One Board member voted against the publication of the amendments. This Board member supports all clarifications and the additional transition relief, but disagrees with the proposal to require an entity to apply the amendments retrospectively as if those amendments had been included in IFRS 15 at the date of initial application as this would be inconsistent with allowing early application of IFRS 15.
Interaction with the FASB
The FASB has adopted a more piecemeal approach to amending its revenue standard and has decided to publish more extensive amendments. Final amendments to the application guidance on principal versus agent considerations were published in March 2016, amendments on identifying performance obligations and licensing are expected soon, and other narrow scope amendments and practical expedients on transition are expected slightly after that.
Also, while the IASB has announced that it will no longer attend TRG meetings as it is 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, the FASB declared in February that it will continue to address implementation issues and has scheduled three TRG meetings for 2016.
Additional information
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