IFRS 15 Revenue from Contracts Customers has been released by the International Accounting Standards Board and its release by the Australian Accounting Standards Board (AASB) is expected by the end of 2014.
Now that we can see the standard in its entirety, will it make any fundamental difference to accountants?
Having completed a few engagements for proactive entities wanting to determine the impact of IFRS 15, I have to admit that IFRS 15 will introduce to revenue practices in Australia for-profit entities.
Performance obligations
The performance obligations discussed in the diagram below are the promises that an entity makes to its customer in the contract. These may be similar to the current milestones identified in existing contracts, or they may need to be developed.
My experience has shown that steps or processes identified in contracts may not satisfy the definition of a performance obligation, which means that revenue is delayed. This is particularly prevalent where some of the steps or processes are set-up/administrative activities.
Contract costs
These are required to be capitalised and will be expensed as the revenue is recognised. This means that entities with significant up-front costs will be able to defer the recognition of the expenses until revenue is recorded.
Variable consideration
Entities are required to consider variable consideration, estimate the value of the revenue they are likely to receive and record revenue based on this estimate. This will need to be revised at each reporting date.
Refund obligations
Estimates of refund obligations must be made and revenue is cut by the amount of the refund expected; again, this is revised at each reporting date.
IFRS 15 is (and we expect AASB 15 will be) effective for annual reporting periods beginning on or after 1 January 2017. However, retrospective application means that entities need to be accounting under this standard from 1 January 2016.
To plan for the implementation of IFRS 15/ AASB 15, it is essential to consider it prior to the effective date. Early planning will allow the necessary communications and revisions to contracts to take place.
My action items for preparers are below. As we apply IFRS 15 to individual entity circumstances, more surprises are likely.
Five action items for preparers:
. Review current contracts and identify milestones.
. Determine whether these meet the definition of performance obligations under IFRS 15/AASB 15.
. Determine the accounting treatment under IFRS 15/ AASB 15, based on the current contracts in place and the impact on opening retained earnings.
. Determine whether changes to contracts/policies/processes/systems are needed to record the appropriate information.
. Review the required disclosures under IFRS 15/AASB 15 and ensure that the systems are in place to record the relevant information.
. Determine the level, form and content of communication with stakeholders to explain the impact of IFRS 15/AASB 15 on the reporting position and performance of the entity.
