Understanding the IFRS Rules for Revenue Recognition

Although its actual implementation has been delayed to 2018, buying us all another year to study it in full, the new IFRS 15 revenue standard is something you should be making yourself aware of sooner rather than later.

The Revenue from Contracts with Customers standard specifies both how and when to recognise revenue, with a requirement for more informative, relevant disclosures in financial statements. The new standard is based on a five-step model framework that is intended to be applied to all customer contracts:

  • Identify the contract with the customer. This requires documented approvals and clear payment terms.
  • Identify the performance obligation in the contract. Both goods and services qualify as obligations.
  • Determine the transaction price, which includes new rules for variable consideration.
  • Allocate the transaction price to each performance obligation, which requires adjustments for estimates and financing
  • Recognize revenue when each performance obligation is satisfied, which helps to define revenue based on when control is passed.

While IFRS 15 may have little effect on some business, it will require significant changes for others, especially since it redefines revenue to include certain costs associated with fulfilling a sale. Understanding the standard is one thing, but the IASB and FASB have recognized that understanding how to implement it is another thing entirely – hence the delay from January 2017 to January 2018.

At a high level, business will be required to reassess whether they recognize revenue over time or at a fixed point in time. Depending on that acceleration/deceleration, everything from earn-outs, to tax payments, to employee incentives may be impacted. Your standard terms and conditions will likely need to be amended, and your accounting systems will need to be updated. What may pose even more of a challenge for businesses is the adoption of the new disclosure rules, which are extensive and may expose potentially sensitive information.

So, if it’s so complex, why the change? The new standard is designed to eliminate inconsistencies and weaknesses in current revenue requirements, improve comparability across entities, expand the usefulness disclosure requirements, and ultimately simplify the preparation of financial statements.

Getting to that point may require consulting with experts, and that’s why you cannot afford to wait. Contact NuVest Management Services to see how we can help you. 

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