IFRS 15: Key facts

IFRS 15: Key facts  (Just an abstract) 

What's in the new IFRS 15?

A new global framework for revenue recognition, The new revenue standard introduces a new framework that will change the way companies account for revenue.Almost all companies are affected by IFRS 15, but if you are in the telecom, software, engineering, construction or real estate industries, then you are likely to see more significant changes.

As part of IFRS-15 /606

• A five-step model is applied to determine when to recognise revenue, and at what amount.
• Revenue is recognised when (or as) a company transfers control of goods or services to a customer at the amount to which the company expects to be entitled.
• Depending on whether certain criteria are met, revenue is recognised either over time, in a manner that best reflects the company’s performance, or at a point in time, when control of the goods or services is transferred to the customer

The 5-step model in the standard requires companies to:

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when or as the entity satisfies a performance obligation

The analysis required under the 5-step model will introduce new judgement and estimates into the revenue line item in the financial statements.The new standard will require analysis of all sales contracts to ensure the promises to the customer are identified and accounted for appropriately. Implementation efforts and costs may be significant for companies that earn the majority of their revenues under long-term contracts, particularly when those contracts include multiple goods and services.

Importantly, all companies will be subject to extensive new disclosure requirements. The standard also provides guidance on accounting for costs to obtain and costs to fulfill contracts with customers, which may change the timing of recognition for those costs

The impacts may be felt across the organization

• Revenue recognition may be accelerated or deferred
• Sales and contracting content and processes may be reconsidered
• IT systems may need to be updated or new modules added to calculate revenue
• Accounting processes and internal controls will need to be changed and documented
• Extensive new disclosures will be required, including the expected timing and amounts of future revenues
• Revisions may be needed to tax planning, covenant compliance and sales incentive plans
• Expected impacts leading up to adoption and changes reported upon transition will need to be explained to internal and external stakeholders.

Sector specific challenges of IFRS 15

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