Similarities and Differences

Transcription

1 Similarities and Differences A comparison of IFRS and JP GAAP 2016 April 2016

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3 Contents Preface... 2 How to use this publication... 3 First-time adoption... 5 Revenue recognition... 9 Expense recognition-share-based payments Expense recognition-employee benefits Assets-nonfinancial assets Assets-financial assets Derivatives and hedge accounting Liabilities-taxes Liabilities-other Financial liabilities and equity Consolidation Business combinations Other accounting and reporting topics Index PwC 1

4 Preface International Financial Reporting Standards (IFRS) is rapidly advancing its global position from a set of accounting standards used by investment markets in specific geographic areas such as Europe, to one now used commonly in more than 100 countries and territories around the world. Awareness is heightening especially in Asian and Oceanian territories. These territories have gained a prominent position in the eyes of the International Accounting Standards Board (IASB) along with the economic growth in these areas. In Japan, based on the Tokyo Agreement between the Accounting Standards Board of Japan (ASBJ) and the IASB signed in August 2007, convergence between Accounting Principles Generally Accepted in Japan (JP GAAP) and IFRS is in progress and voluntary application of IFRS started from the fiscal year ended in March Additionally, The Japan Revitalisation Strategy (revised in 2014) Japan s challenge for the future, approved by the cabinet in June 2014, explicitly stated promotion of an increase in the number of companies voluntarily adopting IFRS as a target for the first time as a decision by the Cabinet. The cabinet is expected to commit to continuing to promote voluntary adoption of IFRS in the 2015 revision in its strategy. In response to this government policy, the Financial Services Agency conducted a survey of companies that have voluntarily adopted IFRS and published the IFRS Adoption Report in April 2015 compiling how companies that have voluntarily adopted IFRS overcame any challenges they faced during the transition to IFRS and the advantages that their shift to IFRS has brought about. This survey was meant to serve as a useful reference for companies considering adopting IFRS. Further, in September 2015, Tokyo Stock Exchange, Inc. (TSE) released its analysis of disclosure in "Basic Policy Regarding Selection of Accounting Standards" for companies with fiscal years ended Mar. 31, 2015 (including early adoption). Basic Policy Regarding Selection of Accounting Standards" has been disclosed by the listed companies in TSE in their financial statement summaries for the year ended in March The analysis found that together with 68 companies already adopting IFRS and 23 companies deciding to adopt it, a total of 112 companies are embracing IFRS, and the combined market capitalization of these companies is JPY 147 trillion, 24% of the entire listed market capitalization (JPY 607 trillion). Due to these circumstances, the number of Japanese listed companies that had adopted IFRS increased by 13 to 38 in the fiscal year ended March 2015, compared with the last fiscal year. The number of entities that (currently or scheduled to) apply IFRS on a voluntary basis exceeded 50 by the end of We believe the number of entities which voluntary apply IFRS will keep increasing, as entities take into account their global business activities and strategies or mid-to-long term business plans. Therefore, IFRS is expected to become more and more relevant, not only to practitioners and experts in Japanese accounting and finance, but also to the management and investors of Japanese companies. Based on these circumstances, this publication focuses on explaining the major differences among IFRS and JP GAAP. This publication is not all-encompassing. However, it focuses on those differences that we generally consider to be the most significant or most common. We hope that this publication will be useful in identifying the key differences between the two accounting frameworks and help you gain a broad understanding of IFRS. Hiroyuki Suzuki Territory Senior Partner PwC Japan Group Note: PwC Japan Group refers to the member firms in Japan of the PwC global network and their affiliates. Each member firm conducts its activities as an independent legal entity for which the PwC Japan Territory Senior Partner plays a coordinating role. 2 PwC

5 How to use this publication In each chapter, the first section provides a summary of the similarities and differences between IFRS and JP GAAP. It refers to the subsequent section of the document where key differences are highlighted and explained in more detail. In addition, the Recent developments at the last section of each chapter provide the overview of the new standards and exposure drafts. No summary publication can do justice to the many differences of detail that exist among IFRS and JP GAAP. This publication focuses on the accounting most commonly found in practice. When using this publication, readers should consult all the relevant accounting standards and, where applicable, their national law. Listed companies should also follow relevant securities regulations for example, requirements regulated by the Financial Services Agency in Japan or local stock exchange listing rules. This publication takes account of authoritative pronouncements and other developments under IFRS and JP GAAP up to March 31, However, it is not all encompassing. We have noted certain recent developments or exposure drafts within the detailed text; however, not all recent developments or exposure drafts have been included. PwC 3

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7 IFRS first-time adoption 5

8 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IFRS first-time adoption IFRS 1, First-Time Adoption of International Financial Reporting Standards, is the standard that is applied during preparation of a company s first IFRS-based financial statements. IFRS 1 was created to help companies transition to IFRS and provides practical accommodations intended to make first-time adoption cost-effective. It also provides application guidance for addressing difficult conversion topics. What does IFRS 1 require? The key principle of IFRS 1 is full retrospective application of all IFRS standards that are effective at the end of reporting period of the first IFRS financial statements. IFRS 1 requires companies to: Identify the first IFRS financial statements Prepare an opening statement of financial position at the date of transition to IFRS Select accounting policies that comply with IFRS effective at the end of the first IFRS reporting period and apply those policies retrospectively to all periods presented in the first IFRS financial statements Consider whether to apply any of the optional exemptions from retrospective application. Apply the seven mandatory exceptions from retrospective application. Two exceptions regarding classification and measurement periods of financial assets and embedded derivatives relate to amendments to IFRS 9, which is effective for annual reporting periods beginning on or after January 1, 2018 Make extensive disclosures to explain the transition to IFRS IFRS 1 is regularly updated to address first-time adoption issues. There are optional exemptions (IFRS 1.18, Appendix C and Appendix D) to ease the burden of retrospective application. These exemptions are available to all first-time adopters, regardless of their date of transition. Additionally, the standard provides for short-term exemptions (IFRS 1.18, Appendix E), which are temporarily available to preparers and often address transition issues related to new standards. There are also certain mandatory exceptions (IFRS , Appendix B) for which retrospective application is not permitted. As referenced above, the exemptions provide limited relief for first-time adopters, mainly in areas where the information needed to apply IFRS retrospectively might be particularly challenging to obtain. There are, however, few exemptions from the disclosure requirements of IFRS, and companies may experience challenges in collecting new information and data for many retrospective footnote disclosures. Many companies will need to make changes to existing accounting policies to comply with IFRS, including in key areas such as revenue recognition, inventory accounting, financial instruments and hedging, employee benefit plans, impairment testing, provisions, and stock-based compensation. When to apply IFRS 1 Companies will apply IFRS 1 when they transition from their previous generally accepted accounting principles (GAAP) to IFRS and prepare their first IFRS financial statements. These are the first financial statements to contain an explicit and unreserved statement of compliance with IFRS. 6 PwC

9 IFRS first-time adoption The opening IFRS statement of financial position The opening IFRS statement of financial position is the starting point for all subsequent accounting under IFRS and is prepared at the date of transition, which is the beginning of the earliest period for which full comparative information is presented in accordance with IFRS. For example, preparing IFRS financial statements for the two years ending March 31, 2017, would have a transition date of April 1, That would also be the date of the opening IFRS statement of financial position. IFRS 1 requires that the opening IFRS statement of financial position: Include all of the assets and liabilities that IFRS requires Exclude any assets and liabilities that IFRS does not permit Classify all assets, liabilities, and equity in accordance with IFRS Measure all items in accordance with IFRS Be prepared and presented within an entity s first IFRS financial statements These general principles are followed unless one of the optional exemptions or mandatory exceptions does not require or permit recognition, classification, and measurement in line with the above. Important takeaways The transition to IFRS can be a long and complicated process with many technical and accounting challenges to consider. Experience with conversions in Europe and Asia indicates that Japanese companies may face some challenges in making the change to IFRS, including: Consideration of data gaps Preparation of the opening IFRS statement of financial position may require the calculation or collection of information that was not previously required under JP GAAP. Companies should plan their transition and identify the differences between IFRS and JP GAAP early so that all of the information required can be collected and verified on a timely basis. Consolidation of additional entities IFRS consolidation principles differ in part from those of JP GAAP, and those differences might cause some companies either to deconsolidate entities or to consolidate entities that were not consolidated under JP GAAP. Subsidiaries that previously were excluded from the consolidated financial statements are to be consolidated as if they were first-time adopters on the same date as the parent. Companies also will have to consider the data to be collected from investees to comply with IFRS informational and disclosure requirements. Consideration of accounting policy A number of IFRS standards allow companies to choose between alternative policies. Companies should select carefully the accounting policies to be applied to the opening statement of financial position and have a full understanding of the implications to current and future periods. Companies should take this opportunity to evaluate their IFRS accounting policies with a clean sheet of paper mind-set. Although many accounting requirements are similar between JP GAAP and IFRS, Companies should consider the opportunity to explore alternative IFRS accounting policies that might better reflect the economic substance of their transactions and enhance their communications with investors. PwC 7

10 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 Recent developments Recent changes-ifrs IFRS 14, Regulatory Deferral Accounts In January 2014, the IASB has issued IFRS 14, Regulatory Deferral Accounts, an interim standard on the accounting for certain balances that arise from rate-regulated activities ( regulatory deferral accounts ). IFRS14 is only applicable to entities that apply IFRS 1 as a first-time adopter of IFRS and meet certain criteria. It permits such entities can continue to apply their previous GAAP accounting policies for the recognition, measurement and impairment of regulatory deferral accounts when IFRS is adopted. The interim standards also provide additional presentation and disclosure requirements. There is currently no standard that specifically addresses rate-regulated activities. The objective of the interim standard is to allow entities adopting IFRS to avoid major changes in accounting policy until completion of the IASB project to develop an IFRS on rate-regulated activities. IFRS 14 is effective from 1 January Early adoption is permitted. 8 PwC

11 Revenue recognition 9

12 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 Revenue recognition In May 2014, the IASB issued the standard on revenue recognition converged with US GAAP, IFRS 15, Revenue from Contracts with Customers. The new revenue recognition model employs an asset and liability approach, the cornerstone of the IASB s and FASB s conceptual frameworks. The current revenue standard, IAS18, Revenue, defines income as the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. The standard provides comprehensive guidance on the recognition, measurement and disclosure of revenue. The boards believe a more consistent application can be achieved by using a single, contract-based model where revenue recognition is based on changes in contract assets (an entity s rights to consideration in exchange for goods or services that the entity has transferred to a customer) and liabilities (an entity s obligations to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer). In applying the new model, entities would follow this five-step process below: (1) Identify the contract 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. (5) Recognise revenue when (or as) each performance obligation is satisfied. IFRS 15 will be effective for the first interim period within annual reporting periods beginning on or after 1 January Earlier adoption is permitted. There is also specific guidance in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. On the other hand, under JP GAAP Business Accounting Principles, revenue is recognised upon the sale of goods or rendering of services based on the Realisation principle and revenue is recognised on a realisation basis. Although there is specific guidance for software transactions and construction contracts under this principle, there is no general comprehensive guidance for revenue. According to the Statement of opinion for adjustments between tax law and Business Accounting Principles published by the subcommittee of Business Accounting Council of Economic Stabilisation Board in 1952, it is interpreted that completion of transfer of goods or rendering of services and receipt for corresponding consideration (e.g. in the form of cash or receivables) are criteria for revenue recognition. In addition, the Discussion Paper, Conceptual Framework of Financial Accounting, published by the ASBJ in 2006 defines revenue as items that result in increases in net income or minority interests share in earnings, and represents the portion of the amount corresponding to increases in assets or decreases in liabilities that have occurred as at the end of a particular period and where there is no further investment risk. Further details on the foregoing and other selected current differences are described in the following table. 10 PwC

13 Revenue recognition IAS 11, Construction Contracts; IAS 18, Revenue; IFRIC 13, Customer Loyalty Programmes; IFRIC 15, Agreements for the Construction of Real Estate; and others. IAS 11 Revenue recognition method of construction contracts When the outcome of the construction contract can be estimated reliably, the percentage-of-completion method is applied. When the outcome of the construction contract cannot be estimated reliably, revenue is only recognised to the extent of the contract costs incurred that are expected to be recovered and the rest of the contract costs are recognised as an expense in the period in which they are incurred. The completed contract method is prohibited. If the certainty of the outcome of the construction contracts (the total amount of construction revenue, total amount of construction costs and the percentage of completion for the portion progressed at the closing date) can be confirmed, the percentage-of-completion method is applied. If the above criterion is not met, the completed contract method is applied. (IAS 11.22, 32) IAS 11 Subsequent measurement of construction contract revenue when the outcome of the construction contract cannot be estimated reliably When the uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, the percentage-of -completion method is applied. (IAS 11.35) If the completed contract method is applied due to uncertainties that prevent estimating the outcome reliably, the method cannot be changed subsequently to the percentage-of-completion method only because the uncertainties no longer exist. When the undecided item in the construction arrangement which is supposed to be determined at the commencement of the construction work is subsequently determined, a change in the measurement method is required. IAS 17 IAS 18 Accounting by an intermediate lessor when both the head lease and the sub-lease are finance leases There are no specific requirements. Revenue of an intermediate lessor is accounted for individually based on the requirements of a principal and an agent in IAS 18. (IAS 18.8) Interest paid, sales, cost of sales and other items are not recorded and the difference between the lease payment received as a lessor and lease payment paid as a lessee is allocated to each period and presented as a separate line item as the sub lease profit margin in the income statement. IAS 18 Determining whether an entity is acting as a principal or as an agent (gross vs. net) Depending on whether an entity is acting as a principal or an agent, revenue is presented gross for a principal and net for an agent. An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. There are no specific requirements. Indicators that an entity is acting as a principal include the following: The entity has the primary responsibility for providing the goods or services. The entity has inventory risk. The entity has latitude in establishing prices. The entity bears the customer s credit risk. One feature indicating that an entity is acting as an agent is whether the amount the entity earns is predetermined, being either a fixed fee or a stated percentage (IAS 18.8, IE21) PwC 11

14 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IAS 18 Accounting for indirect taxes (including excise tax for liquor, gasoline and tobacco) Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account, and thus amounts collected on behalf of third parties such as sales taxes and other indirect taxes should be excluded from revenue. (IAS 18.8) For some indirect taxes (including excise tax for gasoline and liquor), revenue is presented gross, but there are no specific requirements. For consumption taxes, it is appropriate that revenue is presented net, but it is also acceptable that revenue is presented gross if an entity determines that such presentation is reasonable from the entity s business type, category and other factors. IAS 18 Accounting for sales incentives Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates. Sales incentives are deducted from revenue. There are no specific requirements. In practice, sales incentives may be deducted from revenue or expensed as selling, general and administrative expenses. (IAS 18.9, 10) IAS 18 Accounting for cash rebates Revenue is measured at the fair value of the consideration received or receivable (taking into account the amount of any discounts and volume rebates). Cash rebates are deducted from revenue. Cash rebates are presented as non-operating expenses. (IAS 18.9, 10) IAS 18 Accounting for consideration that is collected over a long period of time (more than one year) When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest and revenue is recognised upon sale. The difference between the fair value and the nominal amount of the consideration is recognised as interest revenue by using the effective interest method. There are no specific requirements. (IAS 18.11) IAS 18 Accounting for instalment sale transactions When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest and revenue is recognised upon sale. The difference between the fair value and the nominal amount of the consideration is recognised as interest revenue by using the effective interest method. There are no specific requirements. In principle, revenue is recognised when goods are delivered. However, it is permitted to recognise revenue for instalment sales transactions when cash is collected or when payment is due. (IAS 18.11, IE8) 12 PwC

15 Revenue recognition IAS 18 Accounting for exchange transactions When goods or services are exchanged for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. On the other hand, when goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. There are no specific requirements. (IAS 18.12) IAS 18 Accounting for multiple-element arrangements It is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. In addition, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. There is no general guidance on multiple-element arrangements, but for such transactions related to software, the entity is required to allocate the transaction price to separate components of a transaction appropriately and recognise revenue. (IAS 18.13, IFRIC 13.5) IAS 18 Timing of revenue recognition for sale of goods (including export transactions) Revenue should be recognised when all the following criteria are met. The entity has transferred to the buyer the significant risks and rewards of ownership There are no specific requirements. Revenue is recognised based on the Realisation principle. The entity does not retain continuing managerial involvement nor effective control over the goods sold The amount of revenue can be measured reliably It is probable that the economic benefits will flow to the entity The costs incurred can be measured reliably (IAS 18.14) IAS 18 Timing of revenue recognition for transactions with a probability of return When an entity assesses the probability of return, the entity should consider that the entity has transferred the significant risks and rewards of ownership. If the entity retains only insignificant risks of ownership, revenue is recognised at the time of sale provided the seller can reliably estimate future returns based on previous experience and other relevant factors and recognises a liability for returns. (IAS 18.14, 16(d), 17) In Note 18 of Business Accounting Principles (BAP), an allowance for sales return is considered as one example of a provision where no specific requirement exists. Allowances are recognised based on its general principles of the provision in Note 18 of BAP. In practice, the amount of gross margins for expected sales returns on and after the end of the reporting period is recognised as an allowance for sales returns, if the amount is reasonably estimated based on actual returns in prior periods. PwC 13

16 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IAS 18 Revenue recognition method for the rendering of services When the outcome of a transaction can be estimated reliably, revenue associated with the transaction should be recognised by reference to the stage of completion of the transaction. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: There are no specific requirements. When the certainty of outcome for the portion progressed of a construction contract can be confirmed, the percentage-of-completion method is applied. the amount of revenue can be measured reliably; it is probable that the economic benefits will flow to the entity; the stage of completion of the transaction can be measured reliably; and the costs can be measured reliably. When the outcome of the transaction cannot be estimated reliably, revenue shall be recognised only to the extent of the costs recognised that are recoverable. (IAS 18.20) IAS 18 Dividends Dividends should be recognised when the shareholder s right to receive payment is established. (IAS 18.30(c)) For shares with a quoted market price, the accrued dividend is recognised on ex-dividend date and if there is a difference between the estimated and actual dividends paid, the difference is adjusted in the accounting period in which it arises. It is also acceptable for an issuer to account for dividends with the same procedures for shares without a quoted market price as shown below, provided that such accounting is applied consistently. For shares without a quoted market price, dividends are recognised in the accounting period in which a resolution to pay the dividend is made by the decision making body such as a general meeting of the shareholders. It is also acceptable to recognise the dividends in the accounting period in which the dividends are received if such payment is within a length of time necessary to make payment after the resolution becomes effective, provided that such accounting is applied consistently. IAS 18 Accounting for bill and hold sales Revenue is recognised only when the buyer takes title, provided all of the following conditions are satisfied: There are no specific requirements. it is probable that delivery will be made, the item is on hand, identified and ready for delivery to the buyer, the buyer specifically acknowledges the deferred delivery instructions, and The usual payment terms apply (IAS 18.IE1) 14 PwC

17 Revenue recognition IAS 18 Timing of revenue recognition for a transaction subject to installation and inspection If installation and inspection are significant components of a sales transaction, revenue is recognised when the installation and inspection are complete. There are no specific requirements. (IAS 18.IE2(a)) IAS 18 Timing of revenue recognition for goods on approval If there is uncertainty about the possibility of return, revenue is recognised when the shipment has been formally accepted by the buyer or the goods have been delivered and the time period for rejection has elapsed. Revenue is recognised when a customer indicates his intention to purchase the goods or services. (IAS 18.IE2(b)) IAS 18 Timing of revenue recognition on consignment sales Revenue is recognised by the shipper when the goods are sold by the recipient to a third party. (IAS 18.IE2(c)) In principle, similar to IFRS. However if a sales statement is sent from the consignee each time the consignee sells, the consignor can recognise revenue when it receives the sales statement as a practical expedient. IAS 18 Accounting for a sale and repurchase agreement When the seller agrees to repurchase the same goods at a later date, or when the seller has a call option to repurchase, or the buyer has a put option to require the repurchase of the goods by the seller and the seller retains the risks and rewards of ownership, even though the legal title has been transferred, revenue is not recognised. The seller has to analyse the terms of the contract and consider accounting for it as a financing arrangement. There are no specific requirements. An entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date; in such a case, the two transactions are dealt with together. (IAS 18.13, IE5) IAS 18 Accounting for sales to intermediate parties When the buyer is acting, in substance, as an agent, the sale is treated as a consignment sale. There are no specific requirements. (IAS 18.IE6) IAS 18 Accounting for installation fees Installation fees are recognised as revenue by reference to the stage of completion of the installation. However if they are incidental to the sale of a product, revenue is recognised when the goods are sold. There are no specific requirements. (IAS 18.IE10) IAS 18 Accounting for non-refundable initiation and membership fees If the fee permits only membership, the fee is recognised as revenue when no significant uncertainty as to its collectability exists. There are no specific requirements. If the fee entitles the member to various benefits to be provided during the membership period, it is recognised on a basis that reflects the timing, nature and value of the benefits provided. (IAS 18.IE17) PwC 15

18 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IAS 18 Accounting for franchise fees Franchise fees cover the supply of initial and subsequent services, equipment and other tangible assets, and know-how. Franchise fees are recognised as revenue on a basis that reflects the purpose for which the fees were charged. There are no specific requirements. In addition, the franchisor does not recognise revenue on transactions where the franchisor is acting as an agent for the franchisee (e.g. the franchisor orders supplies and arranges for their delivery to the franchisee at no profit). (IAS 18.IE18) IAS 18 Accounting for fees from development of customised software Fees are recognised as revenue by reference to the stage of completion of the development, including completion of services provided for post-delivery service support. (IAS 18.IE19) If the certainty of outcome for the portion progressed based on the contract can be confirmed, revenue is recognised by the percentage-of-completion method. However if the criteria are not met, revenue is recognised by the completed contract method. IAS 18 Accounting for revenue on licence fees and royalties Revenue on licence fees and royalties is recognised at the time of sale or over the life of the agreement in accordance with the substance of the agreement. There are no specific requirements. (IAS 18.IE20) IFRIC 13 Accounting for customer loyalty programmes such as points (customer award credits) Customer loyalty programmes are accounted for as multiple-element arrangements. The entity allocates some of the consideration to the award credits and defers the recognition of revenue until such award credits are redeemed or forfeited. (IFRIC 13.5, 6) There are no specific requirements. In general, the entity recognises the gross amount of revenue at initial recognition including the award credits, and accounts for the estimated future cost of supplying the awards at the end of the reporting period as a provision with corresponding debit to selling, general and administrative expenses. IFRIC 15 Accounting for the construction of real estate Percentage-of-completion method When the agreement for the construction of real estate meets the definition of a construction contract within IAS 11 and its outcome can be estimated reliably, revenue is recognised with reference to the stage of completion of the contract activity. If the arrangement does not meet the definition of a construction contract and is for the rendering of services in accordance with IAS 18, the entity recognises revenue by reference to the stage of completion; or if the agreement is for the sale of goods, the entity recognises revenue in accordance with IAS When the agreement for the construction of real estate meets the definition of a construction contract, Accounting Standard for Construction Contracts (refer to pg. 11 under Revenue recognition method of construction contracts) is applied. There are no other specific requirements. (IFRIC ) 16 PwC

19 Revenue recognition IFRS15, Revenue from Contracts with Customers IFRS 15 The core principle The core principle of IFRS 15 is that an entity recognises revenue to depict a transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognised by applying the following 5 steps: There are no comprehensive accounting standards for revenue recognition. Revenue is recognised based on the Realization principle, in which the related revenue is recognised only when goods or services are delivered. Step 1: Identify a contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine a transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies the performance obligation (IFRS 15.IN7) IFRS 15 Accounting for non-monetary exchanges (barter transactions) IFRS 15 would not apply to non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers (for example, a contract between two oil companies that agree to an exchange of oil to fulfill demand from their customers in different specified locations on a timely basis). There are no specific requirements. (IFRS 15.5) PwC 17

20 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IFRS 15 Identifying the contract A contract is an agreement between two or more parties that creates enforceable rights and obligations. Contracts can be written, oral or implied by an entity s customary business practices. There are no specific requirements. An entity shall account for a contract with a customer only when all of the following criteria are met: the parties to the contract have approved the contract and are committed to perform their respective obligations, the entity can identify each party s rights regarding the goods or services to be transferred, the entity can identify the payment terms for the goods or services to be transferred, the contract has commercial substance, and it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. (IFRS 15.9, 10) IFRS 15 Collectability Revenue is recognised to the extent that it is probable that an entity will collect the consideration for goods or services that will be transferred to a customer. In evaluating collectability, the entity should consider the customer s ability and intention to pay that amount of consideration when it is due. There are no specific requirements. One of the criteria of Realization principle is to determine the amount of consideration received or receivable. If the consideration includes a variable amount because of price concessions and others, the entity should estimate the transaction price. Variable considerations should be included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. (IFRS 15.9, 50, 56, Example 1) 18 PwC

21 Revenue recognition IFRS 15 Combination of contracts An entity should combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met: the contracts are negotiated as a package with a single commercial objective; the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation in accordance with guidance for identifying performance obligations. (IFRS 15.17) IFRS 15 Contract modifications A contract modification exists when the parties approve a modification that either creates new or changes existing enforceable rights and obligations. A contract modification could be approved in writing, oral agreement or implied by customary business practices. An entity should account for a contract modification as a separate contract if both of the following conditions are present: the scope of the contract increases because of the addition of promised goods or services that are distinct; and the price of the contract increases by an amount of consideration that reflects the entity s stand-alone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. If a contract modification is not accounted for as a separate contract, it should be treated as follows: If the remaining goods or services are distinct from the goods or services transferred on or before the date of contract modification, the contract modification should be accounted for as a termination of the existing contract and the creation of new contract; or If the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification, an adjustment to revenue should be recognised on a cumulative catch-up basis. (IFRS 15.18, 20-21) There is no specific requirement on identifying the contract. The unit of account for construction contract accounting should be on a transaction basis in order to reflect the substance of the mutual agreement in the construction contract. A transaction in multiple contracts may need to be combined. There are no specific requirements. If modification of construction contracts are substantively agreed by the parties to the contract (and the modification are not recognised in a different unit of account from the original construction contract), such modification should be accounted for as changes in estimate. In such a case the effects of changes should be recognised as gain or loss in the period when such changes are made. The modification is made in terms of consideration of the contract only when the substantive agreement between the parties to the contract exists and the consideration is reliably estimated in accordance with the agreement. PwC 19

22 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IFRS 15 Identifying performance obligation An entity should assess goods or services promised in a contract with a customer and should identify as a performance obligation each promise to transfer a good or service to the customer. If a good or service that is promised to a customer in a contract is distinct, it is a separate performance obligation. A good or service is distinct if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and The entity s promise to transfer the good or service is separately identifiable from other promises in the contract. There is no specific requirement on multiple-element agreements. When multiple software transactions with different timings of revenue recognition are combined in a contract and the details and prices of each good or service sold are specified in that contract and such arrangements are understood between an entity and its customer, revenue would be recognised when each good is delivered or for the contractual period when each service is provided. The unit of account for construction contract accounting should be on a transaction basis in order to reflect the substance of the mutual agreement in the construction contract. However, a series of distinct goods or services should be identified as a separate performance obligation as a whole, if they are substantially the same and if both of the following criteria are met: each distinct good or service in the series that the entity promises to transfer to the customer would be a performance obligation satisfied over time; and the same method would be used to measure the entity s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer. A performance obligation can be a unit of account for revenue recognition. (IFRS 15.22, 23, 27, 31) 20 PwC

23 Revenue recognition IFRS 15 Principal versus agent considerations An entity is a principal if the entity controls a promised good or service before the entity transfers the good or service to a customer. However, an entity is not necessarily acting as a principal if the entity obtains legal title of a product only momentarily before legal title is transferred to a customer. On the other hand, an entity is an agent if it does not control a promised goods or service and its performance obligation is to arrange for the provision of goods or services by another party. There are no specific requirements. It is considered not to be appropriate that revenue for software transaction recognised in the gross amount if the entity is not exposed to various risks in the course of ordinary purchases and sales activities (e.g. guarantee against defects, inventory risk, credit risk, etc.) Accounting for these arrangements should be the following: a principal recognises revenue in the gross amount of consideration, and, an agent recognises revenue in the net amount of consideration. Indicators that an entity is an agent (and therefore does not control the good or service before it is provided to a customer) include the following: another party is primarily responsible for fulfilling the contract; the entity does not have inventory risk before and after the goods have been ordered by a customer, during shipping or on return; the entity does not have discretion in establishing prices for the other party s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited; the entity s consideration is in the form of a commission; and the entity is not exposed to credit risk of a customer (IFRS 15.26, B34-B37) Note: The IASB s amendment, Clarifications to IFRS 15, issued in April 2016, reorganised these indicators from the viewpoint of a principal and removed the fourth and fifth indicators. PwC 21

24 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IFRS 15 Determination timing of revenue recognition An entity should recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits (i.e. potential cash inflows or savings in outflows) from, an asset. There are no specific requirements. The percentage-of-completion method should be applied when the outcome of the construction activity is deemed certain during the course of the activity, otherwise the completed-contract method should be applied. Transfer of control of goods or services by an entity falls into the following two categories and revenue should be recognised in different ways. An entity should determine in which of the following its performance obligation should be categorised: a performance obligation satisfied at a point in time; or a performance obligation satisfied over time. An entity satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs the entity s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced); or the entity s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If none of the above criteria is met and it is determined that the performance obligation is satisfied at a point of time, revenue would be recognised at a point of time. (IFRS 15.31, 33, 35, 38) 22 PwC

25 Revenue recognition IFRS 15 Timing of revenue recognition for sale of goods Sale of goods usually does not qualify for a performance obligation satisfied over time. Consequently, it will often be accounted for as a performance obligation satisfied at a point of time. There are no specific requirements. Revenue is recognised based on the Realization principle. In this case, an entity recognises revenue when control of goods has been transferred. Indicators of the transfer of control include, but are not limited to, the following: The entity has a present right to payment for the asset The customer has legal title to the asset The entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership of the asset The customer has accepted the asset Assessment from similar viewpoints will also be necessary for sales on trial and consignments. (IFRS 15.31, 32, 38) IFRS 15 Revenue recognition for services providing arrangements An arrangement that provide service usually qualifies for a performance obligation satisfied over time. Consequently, it will often be accounted for as such. In this case, an entity should revenue recognised by measuring the progress towards complete satisfaction of that performance obligation. The progress should be measured to depict an entity s performance in transferring control of goods or services promised to a customer. Methods that can be used to measure such progress include the following: There are no specific requirements. If an entity provide services continually under a certain contract, revenue should be recognised based on the passage of time. The percentage-of-completion method should be applied when the outcome of the construction activity is deemed certain during the course of the activity. For the certainty of the outcome to be confirmed, all of the following should be estimated reliably: Output method: revenue is recognised on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract (for example, units produced or units delivered, milestones in the contract, or surveys of performance completed to date, etc.) Input method: revenue is recognised on the basis of the entity s efforts or inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation (for example, costs incurred, labour hours expended, time elapsed or machine hours used, etc.) total amount of construction revenue, total amount of construction costs, and percentage of completion for the portion progressed at the balance sheet date If any of the above criteria is not satisfied, the completed contract method should be applied. However, if the progress cannot be measured reliably even though the costs are expected to be recovered, the entity should recognise revenue only to the extent of that cost incurred. (IFRS 15.IN7(e), 35-37, 39, 41, 45, B14-B15, B18) PwC 23

26 Similarities and Differences - A comparison of IFRS and JP GAAP 2016 IFRS 15 Timing of revenue recognition for sales with a right of return An entity should recognise revenue for transferred products in the amount of consideration to which the entity expects to be entitled, therefore, revenue would not be recognised for the products expected to be returned. A refund liability should be recognised for the amount expected to be returned to customers. An entity should update the measurement of the refund liability for changes in expectations about the amount of refunds at the end of each reporting period. In Note 18 of Business Accounting Principles (BAP), an allowance for sales return is considered as one example of a provision but no specific requirement exists. Allowances are recognised based on its general principles of the provision in Note 18 of BAP. In practice, the amount of gross margin for sales return on and after the end of reporting periods is usually recognised as an allowance for sales returns based on actual returns in prior periods and other relevant factors. An entity should recognise an asset for its right to recover products from customers and corresponding adjustment to cost of sales. The right should be measured by reference to the former carrying amount of the product less any expected costs to recover the products. An entity should update the measurement of the asset at the end of each reporting period. An entity would recognise revenue only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty about the right of return is subsequently resolved (e.g. until the right of return lapses). (IFRS 15.38, 55, 56, B22-B25) IFRS 15 Accounting for indirect taxes (on liquor, gasoline, tobacco, etc.) The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (including indirect taxes on liquor, gasoline, and tobacco taxes etc.). (IFRS 15.47) For some indirect taxes (including excise tax for gasoline and liquor) revenue is presented gross, but there are no specific requirements. For consumption taxes, it is appropriate that revenue is presented net, but it is also acceptable that revenue is presented gross if an entity determines that such presentation is reasonable from the entity s business type, category and other factors. IFRS 15 Customer options for additional goods or services If, in a contract, an entity grants a customer the option to acquire additional goods or services, and the option provides a material right to the customer (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market), the option should be treated as a performance obligation. There are no specific requirements. In practice, sales incentives may be deducted from revenue or expensed as selling, general and administrative expenses. Such option includes sales incentive, customer royalty program, customer award credits (or points), contract renewal options or other discounts for future purchase, etc. In this case the customer in effect pays the entity in advance for future goods or services. Therefore, an entity recognises revenue for the transaction price allocated to the option, when those additional goods or services are transferred to customers or when the option expires. (IFRS 15.26, 74, B39, B40, B43) 24 PwC