IFRS 15. Revenue from Contracts with Customers

Transcription

1 IFRS 15 Revenue from Contracts with Customers 17 February 2017

2 Why IFRS 15 is important? What does it mean for entities? Revenue recognition principles will change P/L may vary to a certain extent IT Systems, Accounting Policies, Internal Processes and Controls may be subject to change Entities Key facts What is it? More detailed guidance on revenue recognition which involve significant judgments Effective on 1/1/2018 with retrospective application IFRS 15 Key challenges What do I need to know now? New estimates & judgments required Retrospective application includes associated data gathering analysis Change of systems, processes and internal controls Key challenges Auditors What does it mean for auditors? Identify the key impacts on your clients Early discussion with clients on the key impacts and help your clients prepare for the changes 1

3 Overview the core principle Recognize revenue to depict the transfer of 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. Five-step model to apply the core principle: Identify the contract with a customer (Step 1) Identify the performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the performance obligations (Step 4) Recognize revenue when each performance obligation is satisfied (Step 5) Control approach (differs from the risks and rewards approach under IAS 18) 2

4 Applying the 5 step model Example Identify the contract (Step 1) Identify the performance obligations (Step 2) Determine the transaction price (Step 3) Allocate the transaction price (Step 4) Recognize revenue (Step 5) Deliver equipment CU 100 Point in time Provide training services CU 5 Over time Contract with customer CU 110 Provide support services CU 4 Over time Provide extended warranty CU 1 Over time 3

5 Step 1: Identifying the contract Step 1 Step 2 Step 3 Step 4 Step 5 A legally enforceable contract (incl. oral or implied) must meet all of the following requirements: Contracts are approved and the parties are committed to perform. Each party s rights can be identified. Payment terms can be identified. A contract is outside the scope if: Commercial substance. It is probable that the entity will collect the consideration to which it will be entitled. Collectability threshold The contract is wholly unperformed AND Each party can unilaterally terminate the contract without compensation 4

6 Step 2: Identifying performance obligations Step 1 Step 2 Step 3 Step 4 Step 5 Identify all (incl. implicit) promised goods/services in the contract Is the good/service distinct? CAPABLE OF BEING DISTINCT DISTINCT IN CONTEXT OF CONTRACT New Can the customer benefit from the good or service on its own or together with other readily available resources? AND Is the good or service separately identifiable from other promises in the contract? YES NO Account for as a separate performance obligation Combine two or more promised goods or services 5

7 Step 3: Determining the transaction price Step 1 Step 2 Step 3 Step 4 Step 5 What is the transaction price? What does it include? Variable consideration Estimated and potentially constrained e.g., discounts, rebates, refunds, etc. Definition Consideration amount to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. Exception for sales/ usage based royalties of IP Fixed consideration The amount is fixed and not contingent on the outcome of future events. Consideration payable to customers Reduces transaction price unless payment is made for a distinct good/service. Transaction price Excluding credit risk The transaction price would not be reduced for the effects of customer credit risk. Significant benefit of financing If identified, leads to adjustment in transaction price. Practical expedient available. Non-cash consideration Consideration in a form other than cash Shall be measured at FV Exception 6

8 Step 4: Allocating the transaction price Step 1 Step 2 Step 3 Step 4 Step 5 Determine standalone selling price Estimate the price if unobservable Acceptable methods: > Adjusted market assessment approach > Expected cost plus a margin approach > Residual approach Maximize the use of observable inputs and apply consistently Only allowed in limited circumstances Allocate the transaction price Allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. Allocate discounts proportionally to all performance obligations unless certain criteria are met. Allocate variable consideration and changes in transaction price to all performance obligations unless two criteria are both met. Do not reallocate changes in standalone selling price after inception. 7

9 Step 5: Recognizing revenue Step 1 Step 2 Step 3 Step 4 Step 5 Performance satisfied over time = Revenue recognized over time The seller s performance creates or enhances an asset controlled by the customer. OR The customer simultaneously receives and consumes the benefit of the seller s performance as the seller performs. OR The seller does not create an asset that has an alternative use to the seller and the seller has the right to be paid for performance to date. IF NOT Revenue recognized at a point in time 8

10 Step 5: Recognizing revenue Step 1 Step 2 Step 3 Step 4 Step 5 Revenue recognized at a point in time Indicators that control transfers include: Present right to payment Legal title of goods and services Transferred physical possession Significant risks and rewards of ownership The customer has accepted the asset 9

11 What are the key changes? Key areas: Recognition of revenue at a point in time or over time Unbundling of contracts Allocation of total revenue to the unbundled parts Uncertain revenue or contingent revenue More extensive disclosure requirements 2017 Deloitte & Touche (M.E.). All rights reserved. IFRS 15 Revenue from Contracts with Customers 10

12 Key impact on revenue recognition Actual impact will depend on specific customer contracts and what the clients did before Step 2 Step 3 Determine the transaction price Step 4 Allocate the transaction price to performance obligations Step 5 Recognize revenue when each performance obligation is satisfied Step 1 Identify the contract with a customer Identify the performance obligations in the contract Collectability Unbundling of Uncertain revenue or Allocation of total Recognition of contracts contingent revenue revenue to the revenue at a point in Healthcare Technology Telecom Software Automotive Life Science Consumer & Industrial Products unbundled parts Telecom time or over time Contract Manufacturer Real estate 11

13 Example - Contract Manufacturing Industry Customer-specific parts, large quantities, repetitive basis No other customers Entity X Customer A Right to payment even if customer A cancels the contract Question Should the revenue be recognized over time or at a point of time? Answer Revenue should be recognized over time Deloitte & Touche (M.E.). All rights reserved. IFRS 15 Revenue from Contracts with Customers 12

14 Example Software Industry Software is highly customized and the addon service are necessary to utilize the software These services could be provided by a different supplier Entity A Sells a software license and provides consulting services for customizing the software CU600,000 Customer Y Current practice: Entity A might unbundle the licence from the add-on services. New practice: Entity A will need to use judgement to determine whether to combine the licence and some or all of the professional services as one perfomance obligation and recognize revenue over time Deloitte & Touche (M.E.). All rights reserved. IFRS 15 Revenue from Contracts with Customers 13

15 Example Real Estate An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of similar size, but for example the location of the unit within the complex is different. The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during construction. Current practice: Recognize revenue when apartment is handed over. New practice: Possibly recognize revenue over time will depend on facts and circumstances Deloitte & Touche (M.E.). All rights reserved. IFRS 15 Revenue from Contracts with Customers 14

16 This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.) would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte & Touche (M.E.) accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients most complex business challenges. To learn more about how Deloitte s approximately 245,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter. Deloitte & Touche (M.E.) is a member firm of Deloitte Touche Tohmatsu Limited (DTTL) and is a leading professional services firm established in the Middle East region with uninterrupted presence since Deloitte provides audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,300 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has also received numerous awards in the last few years which include best employer in the Middle East, best consulting firm, the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW), as well as the best CSR integrated organization Deloitte & Touche (M.E.). All rights reserved.