The new IFRS on revenue recognition

Transcription

1 The new IFRS on revenue recognition 9 September 2014 Financial Reporting Faculty webinar Introduction Marianne Mau Technical Manager, Financial Reporting Faculty 1

2 Introduction Phil Barden Partner Deloitte Eddy James Technical Manager Financial Reporting Faculty Ask a question Participate in today s webinar send us a question Audio problems if you experience poor sound quality you may benefit from selecting Use Telephone from your Audio Mode settings 2

3 Downloading the slides /FRFwebinars (/FRFwebinarresources) Contents Introduction The five step approach to recognising revenue Capitalising contract costs Application guidance Effective date and transition 3

4 The new IFRS on revenue recognition INTRODUCTION A principles-based standards IFRS 15 is a new principles-based revenue recognition standard IFRS 15 is almost completely converged with US GAAP IFRS 15 supersedes IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31 4

5 Who will be affected and to what extent? For some entities timing of revenue and profit recognition may be significantly affected For most entities need to consider impact on existing systems and processes Don t underestimate implementation / transition and disclosure challenges Poll Have you started to think about how you will implement IFRS 15? 5

6 The new IFRS on revenue recognition THE FIVE STEP APPROACH TO RECOGNISING REVENUE The five step approach Core principle A company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services Steps in applying the core principle contract(s) with the customer obligations in the contract Determine the Allocate the Recognise revenue when or as a obligation is satisfied 6

7 Step 1 contract(s) with the customer contract(s) with the customer obligations in the contract Determine the Allocate the Recognise revenue when or as a obligation is satisfied A contract creates enforceable rights and obligations It may be written, verbal, or implied by customary business practice A contract must have commercial substance It must be more likely than not that an entity will collect consideration from the customer It may be necessary to combine two or more contracts entered into at or near the same time with the same customer and account for them as a single contract As a practical expedient, an entity may apply the standard to a portfolio of contracts with similar characteristics IFRS 15 also provides guidance on contract modifications Step 2 obligations in the contract contract(s) with the customer obligations in the contract Determine the Allocate the Recognise revenue when or as a obligation is satisfied A contract may contain one or more obligations ie, promises to transfer what are known as distinct goods or services to a customer It is often necessary to break individual contracts down into a series of distinct goods and services Goods and services are distinct if: the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer ie, the goods or services are capable of being distinct; and the entity s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract ie, the goods or services are distinct in the context of the contract 7

8 Step 3 Determine the contract(s) with the customer obligations in the contract Determine the Allocate the Recognise revenue when or as a obligation is satisfied An entity must consider the terms of the contract and its customary business practices to determine the In many cases it will simply be the specified by the contract, excluding any amounts collected on behalf of third parties such as sales taxes While the will usually be easy to determine when it is a fixed amount at the time of sale, it will be more complicated in other cases, for example when the amount could vary in the future based on contract terms or if consideration is in forms other than cash The is adjusted for the time value of money when a contract contains a significant financing component The is not otherwise adjusted for collectability Step 4 Allocate the contract(s) with the customer obligations in the contract Determine the Allocate the Recognise revenue when or as a obligation is satisfied When a contract contains more than one obligation, it will be necessary to allocate the to each of these This is usually done in proportion to the stand-alone selling of the goods or services underlying each obligation If a stand-alone selling is not directly observable, it should be estimated by considering all information that is reasonably available The standard specifies that an entity should allocate a discount to all promised goods or services in the contract unless the entity has observable evidence that the discount relates to one or more, but not all, obligations in the contract The standard also contains guidance on whether variable consideration should be allocated to the entire contract or to specific parts thereof 8

9 Example An entity offers a 'free' phone with a standalone selling of 200 to a customer who signs a two-year contract paying 30 a month or 720 in total over the life of the contract for telecoms services The standalone selling of the telecoms services is estimated as 25 a month or 600 in total over the life of the contract Under its current practice the entity recognises no revenue upfront and simply recognises 30 a month over the life of the contract Under the new standard the entity would have to allocate the total revenue to the phone and the telecoms services in proportion to their stand-alone selling s Current practice IFRS 15 Phone 0 recognised upfront 180 recognised upfront ie, (200/( ))* 720 Telecoms services Recognise 30 a month over the life of the contract The remaining 540 is allocated to the telecoms services & recognised at a month over the life of the contract Step 5 Recognise revenue when or as a obligation is satisfied contract(s) with the customer obligations in the contract Determine the Allocate the Recognise revenue when or as a obligation is satisfied Performance obligations are settled by transferring the goods or services to the customer This occurs when the customer obtains control of the goods or services ie, when the customer has the ability to direct the use of and obtain the benefits from the goods or services At the inception of the contract an entity will need to determine whether control is transferred and revenue recognised over time or at a point in time 9

10 Over time or at a point in time? An entity recognises revenue over time if one or more of the following criteria is met The customer simultaneously receives and consumes the benefits of the entity s as the entity performs Otherwise revenue is recognised at the point in time when control is transferred to the customer The entity has a present right to payment for the asset The customer has legal title to the asset The entity s creates or enhances an asset that the customer controls as the asset is created or enhanced The entity s does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for the completed to date 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 Alternative use When an entity s creates an asset with an alternative use to the entity, the entity could readily direct the asset to another customer and, therefore, the customer would not control the asset as it is being created In such circumstances revenue should not be recognised over time An entity in the automotive sector building a standard vehicle for a customer could easily sell that car to another customer. In other words, the part-built vehicle has an alternative use to the entity and, as such, revenue would be recognised at the point in time when control is transferred to the customer. If a firm of consultants is carrying out services that will culminate in it issuing a professional opinion, their work to date is unlikely to have alternative use and as such is likely to qualify for revenue recognition over time if the enforceable right to payment criterion is met 10

11 The new IFRS on revenue recognition CAPITALISING CONTRACT COSTS Capitalising contract costs Costs of obtaining a contract Many such costs will be expensed as incurred as they would have been incurred regardless of whether the contract was obtained However, such costs will be recognised as an asset when they are either incremental (eg, sales commissions) or are explicitly chargeable to the customer regardless of whether the contract is obtained Costs of fulfilling a contract Such costs will often be within the scope of another standard eg, IAS 2, IAS 16 or IAS 38 Following the publication of IFRS 15, an entity is now also required to recognise an asset for the costs of fulfilling a contract that are not within the scope of another standard when those costs relate directly to a contract or a specific anticipated contract generate or enhance resources that will be used in satisfying obligations in the future; and are expected to be recovered 11

12 The new IFRS on revenue recognition APPLICATION GUIDANCE Application guidance Goods with a right of return Warranties Principal vs. agent Customer options to buy additional goods or services for free or at discount Customers unexercised rights Non-refundable upfront fees Consignment arrangements Bill and hold arrangements 12

13 The new IFRS on revenue recognition DISCLOSURES Disclosures Additional qualitative and quantitative disclosures The required disclosures include, among other things, information about: revenue recognised from contracts with customers, including the disaggregation of revenue into appropriate categories; contract balances, including opening and closing balances of receivables, contract assets and contract liabilities; obligations, including when the entity typically satisfies its obligations, the amount of the that is allocated to the remaining obligations in the contract and when the entity expects to fulfil those remaining obligations; the significant judgements, and changes in judgements, made in applying the standard to those contracts; and any assets recognised from the costs to obtain or fulfil the contract with the customer. 13

14 Poll To what extent do you expect to be affected by IFRS 15? The new IFRS on revenue recognition EFFECTIVE DATE AND TRANSITION 14

15 Effective date and transition Effective for annual periods beginning on or after 1 January 2017 Early adoption generally permitted Choice of transition methods Optional practical expedients can be applied on first time adoption Any questions? 15

16 Ask a question Participate in today s webinar send us a question Click here to see questions Find out more download the faculty s IFRS 15 factsheet 16

17 IFRS standards tracker /frfifrsstandardstracker Download the Financial Report Faculty app Financial Reporting Faculty iphone, ipad and Android App free to download 17

18 Follow the Financial Report Faculty on Questions Phil Barden Partner Deloitte Eddy James Technical Manager Financial Reporting Faculty 18

19 Future webinars and events Webinars 2 December IFRS 9 for nonfinancial institutions /webinars Events Autumn roadshow series 9 December IFRS conference /frfevents THANK YOU FOR ATTENDING Contact the Financial Reporting Faculty +44 (0) frfac@ Please take the time to fill out our short survey 19

20 A world leader of the accountancy and finance profession 20