IFRS 15 Revenue from contracts with customers putting theory into practice 23 March 2017

Transcription

1 IFRS 15 Revenue from contracts with customers putting theory into practice 23 March 2017 Download the slides to accompany the webinar from the resources panel on the left of your screen

2 IFRS 15 Revenue from contracts with customers putting theory into practice 23 March 2017

3 Introduction Marianne Mau Technical Manager, ICAEW

4 Today s presenters Phil Barden Partner, Deloitte Eddy James Technical Manager, ICAEW

5 Ask a question or download resources VAT Changes in 2015 Audio problems? Ensure your volume is turned on If you experience poor sound quality you may benefit from refreshing your page Download resources here OR: FRF members: /frfwebinars Non-faculty members: /frfwebinar resources

6 Contents Introduction The five step approach to recognising revenue Recognising over time or revenue at a point in time Application guidance Disclosures Effective date and transition

7 IFRS 15 putting theory into practice INTRODUCTION

8 Introduction The IASB issued IFRS 15 in May 2014 Clarifications issued in April 2016 Effective for annual periods beginning on or after 1 January 2018, with earlier application permitted Establishes a comprehensive framework for determining when revenue should be recognised and how it should be measured Requires extensive new qualitative and quantitative disclosures

9 Poll 1 How far advanced are you when it comes to implementing IFRS 15?

10 IFRS 15 putting theory into practice THE FIVE STEP APPROACH TO RECOGNISING REVENUE

11 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 Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price Recognise revenue when or as a performance obligation is satisfied

12 Step 1 Identify the contract(s) with the customer Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price Recognise revenue when or as a performance 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

13 Step 2 Identify the performance obligations in the contract Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price Recognise revenue when or as a performance obligation is satisfied A contract may contain one or more performance 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 What is meant by distinct in the context of the contract was clarified by the April 2016 amendments

14 Step 3 Determine the transaction price Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price Recognise revenue when or as a performance obligation is satisfied An entity must consider the terms of the contract and its customary business practices to determine the transaction price In many cases it will simply be the price specified by the contract, excluding any amounts collected on behalf of third parties such as sales taxes While the transaction price 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 transaction price is adjusted for the time value of money when a contract contains a significant financing component The transaction price is not otherwise adjusted for collectability

15 Step 4 Allocate the transaction price Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price Recognise revenue when or as a performance obligation is satisfied When a contract contains more than one performance obligation, it will be necessary to allocate the transaction price to each of these This is usually done in proportion to the stand-alone selling price of the goods or services underlying each performance obligation If a stand-alone selling price 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, performance 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

16 Example An entity offers a 'free' phone with a standalone selling price 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 price 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 prices 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

17 Step 5 Recognise revenue when or as a performance obligation is satisfied Identify the contract(s) with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price Recognise revenue when or as a performance 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

18 IFRS 15 putting theory into practice RECOGNISING REVENUE OVER TIME OR AT A POINT IN TIME

19 Recognising revenue over time Performance satisfied over time if any of: Para 35(a) Customer simultaneously receives and consumes benefits as seller performs Para 35(b) Seller s performance creates or enhances an asset that is controlled by customer as it is being created / enhanced Para 35(c) Seller does not create an asset with alternative use to seller and seller has an enforceable right to be paid for performance to date Example Cleaning services Example Building constructed on customer land Examples Some original equipment manufacturers Some professional services IF NOT = Performance satisfied at a point in time

20 Alternative use When an entity s performance 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 even if the enforceable right to payment criterion is met.

21 Recognising revenue at a point in time Revenue is recognised 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 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

22 Poll 2 To what extent do you expect to be affected by IFRS 15?

23 IFRS 15 putting theory into practice APPLICATION GUIDANCE

24 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

25 IFRS 15 putting theory into practice DISCLOSURES

26 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; performance obligations, including when the entity typically satisfies its performance obligations, the amount of the transaction price that is allocated to the remaining performance obligations in the contract and when the entity expects to fulfil those remaining performance 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.

27 Poll 3 Will you have to change your systems to cope with implementing IFRS 15?

28 Disclosure prior to adopting IFRS 15 Highlights requirement in IAS 8 to disclose impact of standards not yet adopted ESMA guidance Sets out ESMA s view on what should be included in 2016 annual reports, 2017 interim reports and 2017 annual reports ESMA together with national competent authorities will monitor the level of transparency that issuers provide in their financial statements about the implementation of IFRS 15, changes in accounting policies resulting from this implementation and information relevant to assessing its possible impact on the issuers financial statements in period of initial application

29 ESMA s disclosure expectations 2016 annual reports Detailed description and explanation on how key IFRS 15 concepts will be implemented along the different revenue streams. Where relevant, highlight the differences to the current approaches. Explanation of the timeline for implementing IFRS 15, including expected use of any of the transition practical expedients. If known or reasonably estimable, quantification of the possible impact of the application of IFRS 15. When the quantitative information is not disclosed because it is unknown or not reasonably estimable, additional qualitative information enabling users to understand the magnitude of the expected impact on the financial statements of the issuer.

30 ESMA s disclosure expectations 2017 interim reports While IAS 34 does not require specific disclosure requirements related to updates of information provided in the latest annual financial statements in relation to a new IFRS Standard that has been issued but has not yet come into effect, ESMA is of the view that, where significant, issuers could provide an update of information provided in the 2016 IFRS financial statements (as referred above) in the interim financial statements. In particular, an issuer could provide quantitative information on the impact of the transition to IFRS 15 on its interim financial statements in the following cases: The issuer expects a significant impact from the application of IFRS 15 but is unable to provide reliable information on it in the 2016 annual financial statements and reliable quantitative information on the impact becomes available before the publication of the 2017 interim financial statements; or The issuer is able to provide significantly more specific information in the 2017 interim financial statements compared to the one provided previously.

31 ESMA s disclosure expectations 2017 annual reports ESMA notes that as the annual financial statements for 2017 will be published after IFRS 15 has become effective, issuers should provide a quantitative assessment of the impact of IFRS 15 on their financial statements as of 1 January Consequently, ESMA expects that the 2017 annual financial statements provide the quantitative impact of the application of IFRS 15 and explain the changes to the amounts reported under IAS 11 and/or IAS 18, disaggregated as appropriate. Moreover, ESMA expects that the information already provided in previous financial statements is further developed and elaborated taking into account the actual implementation of IFRS 15.

32 IFRS 15 putting theory into practice EFFECTIVE DATE AND TRANSITION

33 Effective date and transition Effective annual periods beginning on or after 1 January 2018 Early adoption generally permitted Choice of transition methods Optional practical expedients including one introduced in April 2016 can be applied on first time adoption

34 IFRS 15 putting theory into practice QUESTIONS

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38 Questions Phil Barden Partner, Deloitte Eddy James Technical Manager, ICAEW

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