IFRS 15 is coming: prepare now
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We explain the change in Revenue Recognition principles with the new IFRS15 regulation and the impact it has on your financial technology systems.
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IFRS 15 is coming: prepare now
- 1. IFRS 15 Revenue from Contracts with Customers
- 2. Today’s experts Bindi Palmer PARTNER Agile ambitious accounting practice Award-winning client service Accountancy, tax, audit and business advisory services Top UK Microsoft Dynamics partner & Presidents club 2016 Over 620 years of combined Dynamics experience Over 700 Dynamics implementations globally Derek Walton C F O
- 4. Background o Harmonisation of IFRS and US GAAP o Revenue Recognition is one of the biggest differences o Removes the industry and transaction specific requirements under US GAAP o It replaces all the old revenue standards including IAS 18 (Revenue) and IAS11 (construction contracts) o IFRS 15 is more prescriptive than the old standards – it provides much less room for your own accounting policy decisions & prescribes a 5 Step model o For some industries IFRS 15 may be more complex o FRS 102 similar to IAS 18/IAS 11
- 5. Steps to consider INTERPRETING THE STANDARD GATHER DATA MANAGING THE PROJECT ASSESSING SYSTEMS CHOOSING THE TEAM
- 6. o An entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer o This may affect timing and amount of revenue recognised o IFRS 15 introduces a 5 step model Step 1 Identify the contract Step 2 Identify the performance obligations Step 3 Establish the transaction price Step 4 Allocate the transaction price Step 5 Recognise revenue 5 Step Model
- 7. o The new standard has an implementation date for IFRS entities for accounting periods commencing on or after 1 January 2018 o Report by KPMG - the impact of the standard will vary by industry. Certain industries are summarised in the table below: Industry Steps 1 2 3 4 5 Aerospace and defence Asset managers Building and construction Contract manufacturers Health care (US) Licensors (media, life sciences, franchisors) * Real estate Software Telecommunications (mobile, networks, cable) Source: KPMG* In particular, life sciences Implementation and Industries
- 8. o Judgement and legal position to determine legal enforceable rights exist. o As soon as performance begins? o Or when contract is signed by both parties if later. o E.g. software licence delivered before contract is signed by both parties. When does contract exist? At point of delivery or at later date when contract signed? o Assessment of collectability o Probable that the entity will collect the consideration o That the customer will and has the intention to pay. o May be different from the contractual price if there are implied price concessions. o Contract Modifications o Part of original contract or create a separate contract. o e.g number of hours modified in customising an accounting package may create adjustment to timing in recognising original revenue. Step 1 : Identify the contract
- 9. o Promised goods and services represent separate performance obligations if they are: • Distinct or • Part of a series of distinct goods and services that are substantially the same and have a similar pattern of transfer to the customer. o Software o Software commonly involves the delivery of multiple goods and services, such as a software licence, unspecified or specified future upgrades and enhancements, maintenance and other professional services. Step 2 : Performance Obligations
- 10. o Licences o Distinct o Combined with other promised goods or services o Post contract support services o Upgrades o Enhancements o Judgement required Step 2 : Identify the performance obligations
- 11. o Transaction Price is the amount of consideration to which an entity expects to be entitled in exchange for promised goods or services. o Includes variable amounts o Could be different to contract price. o Transaction price determined at inception of contract. o Judgement and consistency required. Step 3 : Determine the Transaction Price
- 12. oAllocate the transaction price to the performance obligations in proportion to their stand-alone selling prices oExample oSoftware entities will need to establish methods to estimate their stand- alone selling prices Step 4 : Allocate the transaction price
- 13. i. Contract to provide installation and 12 month support o Price is £100,000 o 2 performance obligations o Installation recognised over period of installation o Support over 12 months o Stand-alone selling price £70,000 installation, £50,000 support, total £130,000. o £100,000 would be allocated o £58,333 on completion of installation, o £41,667 support over 12 months ii. Contract to provide licence and anti-virus support for 12 month period o Price is £60,000 o 1 performance obligation o Revenue recognised £60,000 over 12month period Step 4 : Example
- 14. o An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to the customer….. o Either o over time o at a point in time Step 5 : Recognise revenue
- 15. oReported revenue oKPI’S oRatios oCompensation oTax oBank Covenants oContracting processes oIT systems update Commercial Impact
- 16. IFRS 15 Revenue from Contracts with Customers
Hinweis der Redaktion
- Seminar Objectives: What is IFRS 15: Revenue from Contracts with Customers and should I worry about it? Identify the historic differences between US GAAP v IFRS v UK GAAP and why the standard setters want to harmonise the rules in each jurisdiction. What impact does IFRS 15 have on Revenue Recognition? In detail - what are the new rules? IFRS 15 Core Principals Using the 5 step Model: Identify & Understand the Contract Performance Obligations Determine the Transaction Price Allocate the Transaction Price Recognise the Revenue Having understood the new rules what does this mean for me and how do I prepare our ERP and other systems for the changes required, if any. We will take you through the new regulations, getting into the detail where required, to give you a high level view of what changes you will need to make to your financial reporting on revenue recognition
- In May 2014, the US FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) issued new revenue recognition standards which harmonise revenue recognition standards for companies reporting under US GAAP and International Financial Reporting Standards. The new standard eliminates most industry-specific GAAP and significantly changes revenue recognition rules, especially for US GAAP reporting entities. The standards will become effective in fiscal years beginning after December 15, 2017 (calendar year 2018) for public U.S. companies, which is essentially the same for companies reporting under IFRS. Private companies are allowed a one-year delay. The effects of the new Revenue Recognition standards extend beyond Accounting and potentially into Human Resources, Sales & Marketing, Legal and Procurement. The systems and data that support these areas are also impacted. Should processes be automated or manual? How many systems are impacted? Should existing systems be modified or replaced? Will new systems need to be selected? How will these changes be implemented? Can it be done in time? Systems that could be affected: OPERATIONAL: Core systems that manage accounting transactions, data and information GOVERNANCE: Ancillary systems that house and track contractual documents and intellectual property REPORTING: Tools used to pull, analyse and report data from other systems
- For some context : The “rules” currently relied upon for accounting treatment in US GAAP are being replaced by principles, which require more judgments and estimates. Even though many transactions may be reflected similarly in the financial statements, the increased subjectivity necessitates changes in financial processes, increased controls, and extensive documentation. It’s not that finance executives are uncomfortable with their ability to make such judgments; rather, they are concerned as to how auditors and regulators will scrutinize them, particularly with the benefit of hindsight.
- SOURCE : CFO 1. Interpreting the Standard. The technical assessment and gap analysis are certainly challenging, and not just because the guidance is still changing in some areas. The “rules” currently relied upon for accounting treatment in US GAAP are being replaced by principles, which require more judgments and estimates. Even though many transactions may be reflected similarly in the financial statements, the increased subjectivity necessitates changes in financial processes, increased controls, and extensive documentation. It’s not that finance executives are uncomfortable with their ability to make such judgments; rather, they are concerned as to how auditors and regulators will scrutinize them, particularly with the benefit of hindsight. 2. Gathering Data. When embarking on their assessments, some companies may be unsure as to whether they have a complete population of contracts and amendments to assess. Contracts may be hard copy or electronic, may be kept at corporate or in business units, and may be in multiple languages. Some contracts may not be fully documented, and some may have been modified with amendments or side letters. The level of effort involved in assessing contracts will depend on whether provisions are standardized across contracts and revenue streams, the number and length of contracts, contract duration, and the difficulty in locating the contracts. For many companies, this means that compliance in 2018 requires contracting policy changes now, i.e., increased internal controls around contract review, including extra review at corporate if contracts meet certain metrics of materiality or complexity. 3. Managing the Project. Depending on the extent of the effort expected based on the initial gap analysis, creating a project office to manage the implementation can help ensure a successful, on-time completion. Project management should scope a detailed plan for designing and implementing a solution to meet the deadline, and ultimately produce a project roadmap that details the key milestones and activities necessary to achieve them, working back from the required go-live date. Communication and focus are key to coordinating all the activities and people necessary to wrap this up. 4. Assessing Systems. Some companies will be able to modify their current systems to reflect the new revenue recognition standard, while others might see the accounting change as a catalyst for implementing systems that are better able to manage the complexity of the new standard. Finance teams currently relying on manual processes and Excel spreadsheets will once again be asked to consider the risks that these carry, which is being increased further by the complexity and administrative reassessment burden of the new standard. For those who are currently using manual processes, an automated solution offers a more sustainable path forward. 5. Choosing a Team. Your dedicated team will make or break any effort to implement the new revenue recognition standard. Many finance professionals are already overwhelmed by day-to-day activities and special projects, so for some companies, implementing a new accounting standard (or several) could represent a tipping point. It is therefore essential that project management lead a frank discussion about the company’s ability to execute the project, including a discussion of whether external advisors should help with one or more work streams. Regardless of whether the project is executed internally or with outside help, many levels of the finance organization, and the business, will need to be trained to act in concert with new revenue recognition processes.
- Promised goods and services represent separate performance obligations if they are: • Distinct • Part of a series of distinct goods and services that are substantially the same and have a similar pattern of transfer to the customer. Software Software entities may reach different conclusions about separate performance obligations under IFRS 15 than they do under current IAS. Software entities will need to carefully consider whether the good or service is separable from other promises in the contract. This may be challenging and requires judgement
- Licences An example of a distinct software licence is a software package that can be used on its own without customisation or modification. Additionally, future upgrades are not necessary for the customer to retain continued functionality of the software for a reasonable period of time after the initial free maintenance period. However, software licences that are not distinct are combined with other promised goods or services in delivery until a separate performance obligation is identified: In some contracts, the customer can benefit from the licence only with another good or service that is promised (explicitly or implicitly) in the contract. For example, installation of software requires significant customisation to interface with other applications. In this case, the licence and the installation would be one performance obligation. For post contract support services, upgrades & enhancements…. These may form a separate and distinct performance obligation or may not. If they are required to provide the functionality of the software as promised then they may change the nature of the performance obligation. In this case, Judgement required: An entity may conclude that such software licences are not capable of being distinct because the customer cannot obtain the benefit from the software without also obtaining the subsequent upgrades. In these situations, the software licence, together with the unspecified upgrades, will form a single distinct performance obligation. Eg anti virus software
- Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for promised goods or services. This seems fairly obvious right? …..but it is not the full story. There could be a number of other factors which may change the amount the supplier actually receives from the customer, and if these are contractual then the transaction price, or recognised revenue, needs to be changed accordingly This means the transaction price includes variable amounts like amendments to schedule of works, rebates, implied concessions, discounts and this needs to be calculated/estimated UP FRONT. Transaction price can be different to the contract price. Transaction price is determined at inception of contract. Judgement and consistency required. The number of potential variables and the need for consistency is a significant cause for concern, and finance teams need to be ready for the change and to systemise the back office to be ready to report.
- Step 4. Once the Performance Obligations have been identified and the Transaction Price has been determined, an entity is required to allocate the Transaction Price to the Performance Obligations, generally in proportion to their stand-alone selling prices Example: Software companies will need to establish methods to estimate their stand-alone selling prices and Additionally the will need the ability to store and recall robust documentation of the calculations. There could be hundreds of SKU’s and a myriad of variations to individual customer contracts
- So, where does that leave us: An company can only recognise revenue when it satisfies a Performance Obligation by transferring control of a promised good or service to the customer Revenue will be recognised either (i) over time of (ii) at a point in time For example Licences: Right to access: Revenue recognised over a period of time Right to use: Revenue recognised at a point in time ie when delivered or when installation is complete
- Seminar Objectives: What is IFRS 15: Revenue from Contracts with Customers and should I worry about it? Identify the historic differences between US GAAP v IFRS v UK GAAP and why the standard setters want to harmonise the rules in each jurisdiction. What impact does IFRS 15 have on Revenue Recognition? In detail - what are the new rules? IFRS 15 Core Principals Using the 5 step Model: Identify & Understand the Contract Performance Obligations Determine the Transaction Price Allocate the Transaction Price Recognise the Revenue Having understood the new rules what does this mean for me and how do I prepare our ERP and other systems for the changes required, if any. We will take you through the new regulations, getting into the detail where required, to give you a high level view of what changes you will need to make to your financial reporting on revenue recognition