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Revenue Under IFRS 15 – What’s New and What’s Not

By Helen Lloyd

Companies preparing IFRS accounts have had a reasonably quiet time over the past few years, with not many changes to IFRS.

But for 2018, the landscape has seen a dramatic shift, with a set of three new standards arriving: IFRS 15 on revenue and IFRS 9 on financial instruments, both effective for periods beginning on or after 1 January 2018, and IFRS 16 on leasing coming in one year later. In this piece we will look at the main changes in revenue accounting, with others to follow on the other two new standards.

First, we can notice that the structure of the guidance on revenue has changed. IFRS 15 now covers all revenue accounting, so that means no more IAS 18 (Revenue), IAS 11 (Construction contracts) or the Interpretations that went with them.  Where before, the way to approach the accounting depended on what kind of income stream it was, all revenue sources are now treated under the same five step model:


  1. Identify the contract with a customer
  2. Identify all the individual performance obligations within the contract
  3. Determine the transaction price
  4. Allocate the price to the performance obligations
  5. Recognise revenue as these obligations are fulfilled

While all of the steps seem straightforward, each has complicated elements. For instance in step 1, two legally separate contracts might need to be treated as one for accounting purposes, and in step 2 there could be many distinct performance obligations, some of which can be clearly identified separately and some of which are inextricable from each other. The transaction price (in step 3) is usually quite simple to determine, though IFRS 15 gives rules on how to treat discounts and related arrangements. But allocating the price to separate obligations can be very difficult, for instance when a product is sold with a maintenance agreement: this is quite simple if the product is often also sold as a standalone item, because that gives a clear price for that component, but if it is always sold bundled with some type of contract or with other products, then skilled work is needed to split the two out. And this matters for step 5, since revenue for delivering a product will be recognised as soon as the obligation is met (i.e. the product is delivered) but for a maintenance contract it will need to be spread in some way over the period.

Spreading revenue is itself another can of worms, so companies providing services need to look at whether these are delivered at distinct points over the period, or continuously over the time of the contract (e.g. providing backup at four board meetings a year versus making available a 24/7 phone line for a year).

The sector most likely to need to make substantial changes is the construction industry, where an obligation to build a house (for instance) is probably not met until the point it is finished. So although work may be performed over a sustained period, and under IAS 11 revenue would usually have been recognised through that period, the default under IFRS 15 would be not to recognise that income until the work is complete and the performance obligation (delivering a completed house) is satisfied. This is a simplification, of course, and shows how important it will be to understand exactly what the obligations to the customers are (and whether, for instance, the customer would have right to take ownership of a half-built house part way through the process).

Even for those with less dramatic likely changes though, revenue policies will need careful review and there will be a challenging time for preparers and auditors getting used to this different way of thinking.

 

May 2018 

 

Disclaimer
This article is published with the understanding that SWAT UK Limited is not engaged in rendering legal or professional services. The material contained in this article neither purports, nor is intended to be, advice on any particular matter. This article is an aid and cannot be expected to replace professional judgment. SWAT UK accepts no responsibility or liability to any person in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article.