IFRS 15: Revenue from contracts with customers
By Allan Mundell, Nolands SA
IFRS 15 is effective for accounting periods that start on or after 1 January 2018. As with various other recent amendments and new standards issued by the International Accounting Standards Board, the standard provides choices of the process to follow on transition.
The usual retrospective transition method can be applied, which requires that the accounting policy determined in accordance with IFRS 15 is applied to comparative periods in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This transition approach requires a restatement of information presented in the prior periods so that the information disclosed for the comparative periods in the year of adoption is as if IFRS 15 was applicable to these periods. Thus, where an entity has long term contracts which are not complete at the date of adoption, the accounting treatment applied to them under IAS 18 would need to be undone, and the accounting treatment required under IFRS 15 would need to be applied. This may be problematic for entities if they have not gathered all the necessary data from these contracts which would enable them to do the necessary accounting as required by IFRS 15, or to provide the disclosures as is required by IFRS 15.
As an alternative to the retrospective transition method, there is what is known as the ‘modified retrospective’, or prospective transition method. This allows for an entity to adjust its opening retained earnings in the year of adoption, and prior period disclosures remain unchanged. While this approach seems less burdensome, it does come with some complications. Firstly, let us assume an entity has a 31 December year end, thus its first year of adoption would be for the year ending 31 December 2018. Under the modified retrospective approach, the disclosures for the 2017 financial period would remain as those determined in accordance with IAS 18 Revenue.
However, the disclosures for the 2018 financial period would be based on the requirements of IFRS 15 - thus quite clearly, the information is not going to be comparable. In addition, the rules of IFRS 15 may change the way in which revenue is recognised. Under IAS 18 the entity may have recognised revenue “at a point in time”, whereas IFRS 15 may require “over time” revenue recognition – this could give rise to revenue being recognised for the same contract in both the 2017 and 2018 Statement of profit or loss and other comprehensive income. One more thing to consider is that the modified retrospective approach requires additional disclosures in the notes to the financial statements. Thus, although it may appear to be the easier of the two transition approaches – it is not without its complications. In order to determine which of the two approaches is most appropriate for an entity, an entity would be required to perform an impact assessment in order to identify the differences between revenue recognition under IAS 18 and that required under IFRS 15, and whether there are any parties who would be concerned about the lack of comparability between the information presented in the year of adoption.
In addition to the business considerations above and irrespective of the transition approach elected, IFRS 15 requires significantly more disclosures than what was required under IAS 18. The revenue number will require disaggregation, information about what performance remains outstanding on open revenue contracts at the end of the reporting period will require disclosure, as will information about any judgements and assumptions applied by management in applying the new standard – just to list a few.
Consideration of the process of adoption should be given its due consideration as soon as possible. The standard may impose different information requirements to what is currently available and, as such, reporting entities would need to ensure that they are adequately prepared in order to ensure a smooth transition.
Allan MundellNolands SA, More than 10 offices throughout Africa
T: +27 21 658 6600
Nolands SA is an international auditing firm located in twelve offices in all major centres in Africa. Nolands employs almost 200 people and focuses on providing the best possible solutions for its clients. The company prides itself on being “not ordinary” and on its ability to integrate services and respond rapidly to clients’ needs.
Allan Mundell is the CEO of Nolands Incorporated and is based in Cape Town, South Africa. He holds an Honours degree in Accounting from the University of South Africa and qualified as a Chartered Accountant in 1999. Allan is currently the GGI Regional Chairperson of the Auditing, Reporting & Compliance Practice Group for Africa and Middle East.
Published: Auditing, Reporting & Compliance Newsletter, No. 01, Spring 2019 l Photo: Neissl - stock.adobe.com