Growth oriented businesses are expanding outside their domestic borders to tap into the growing global markets. A natural progression of financial reporting standards is therefore necessary in providing more useful revenue information to financial statements users across different jurisdictions and markets.
It is no surprise that the International Accounting Standards Board (“IASB”) and the Financial Accounts Standards Board (“FASB”), in the US, joined forces to develop a new standard when it comes to revenue reporting and disclosures, as often revenue is the most crucial number to users of financial statements.
My summary highlights below focus on the revenue standard under International Financial Reporting Standards “(IFRS”).
IFRS 15 – Revenue from Contracts with Customers; being effective for annual periods beginning on or after January 1, 2018.
IFRS 15 will replace the following existing standards and interpretations:
- IAS 11 Construction Contracts
- IAS 18 Revenue
- IFRIC 13 Customer Loyalty
- IFRIC 15 Agreements for Construction of Real Estate
- IFRIC 18 Transfers of Assets from Customers
The new standard is broken down into a five step model:
Step 1 – Identify the contract with the customer
- The standard outlines five criteria that must be met to be identified as a contract under the standard
- The contract is approved by both parties
- Has commercial substance
- Each party’s rights and obligations can be identified
- Payment terms have been outlined
- Collectability of revenues is probable
- One key change to note is that unlike under the current IFRS 18 revenue standard, collectability is considered at the initiation of a contract
Step 2 – Identify the performance obligation(s)
- An entity must identify all distinct goods or services within a contract; IFRS 15 recognises that performance obligations can be explicit or implicit within contracts
- The standard provides specific guidance on what constitutes a distinct performance obligation
Step 3 – Determine the transaction price
- The standard outlines that the transaction price is the amount that an entity expects to receive in exchange for the transfer of all goods or services
- There is guidance and examples within the standard that deals with any variable consideration (i.e. discounts, rebates)
Step 4 – Allocate the transaction price
- An allocation of the transaction price must be made to each performance obligation in proportion to the standalone selling price of the performance obligation
Step 5 – Recognise revenue
- Recognition of revenue under IFRS 15 is based on the transfer of control rather than the transfer of risks and rewards as is the current revenue standard
- An entity must make an assessment as to when control is transferred; this includes an assessment of the transfer of risks and rewards as just one piece of the puzzle
With a new standard also comes new disclosure requirements and IFRS 15 is no different. The required disclosures will increase significantly under this standard and can be extensive.
Where are you currently with your transition plan? Are you prepared? To help CPA Canada has resources to assist in getting you prepared for the application and required disclosures under the standard. These resources can be accessed through the following link:
At parker simone, we have begun preparing for the changes by reading and understanding the new revenue standard, training our professionals, considering the impact on our clients and holding discussions with those clients regarding the impact on their financial reporting and putting the necessary systems in place to assist in the transition. We would welcome the opportunity in advising you on how these changes may impact your business and financial reporting and assisting with your transition process.
Monie Grewal, CPA, CA, is a Senior Accountant at parker simone LLP. Prior to joining parker simone he gained valuable experience in the mining, software and technology industries. Monie’s interests in weightlifting and sports stretch beyond the gym; bringing that competitive edge and desire to always be improving, to his professional life.
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