New reporting standards under IFRS 15 are a significant and wide-ranging change which fundamentally alters how revenue is recognised.
The latest standard became mandatory for all companies with accounting periods beginning on or after January 1, 2018 and impacts the majority of companies reporting under IFRS or FRS 101.
IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts and is aimed at reducing ambiguity when it comes to how and when companies recognise revenue while increasing comparability among companies across sectors.
Previous reporting standards had left some scope for companies to manipulate the recognition of revenue for tax and earnings purposes such as, for instance, adding in revenue which came in at the end of a bad year even if the benefit wouldn’t arrive for some time after that date.
Similarly, other companies looking to avoid a higher tax bill has the opportunity under previous reporting standards to recognise revenue in a later period.
IFRS 15 seeks to end these practices by introducing a five-step model for determining when revenue should be recognised, based on the various phases of a company’s contracts with clients.
As part of the new model, companies will be required to:
- Identify the contract or contracts with a customer;
- Identify the performance obligations within the contract;
- Determine the transaction price;
- Allocate the transaction price to performance obligations; and
- Recognise revenue when or as performance obligations are satisfied.
Some companies have been following a similar path for many years already but IFRS 15 will standardise this process to be replicated across industries.
While the new standard does look to bring transparency to revenue reporting, it does also create some challenges for companies when it comes to staying compliant. As an example, IFRS 15 comes with rule changes to when contracts should be combined or modified as well as changes to royalty and licence payments, non-refundable upfront fees and customer incentives – among other things.
This means companies will need a much more detailed method for measuring the progress of performance obligations that make up each stage of a contract if they are to stay compliant with the new rules.
For companies looking to transition into the new standards there are two options to take:
- Retrospective approach
- Cumulative approach
Whichever method a company chooses it is going to involve a significant amount of effort to analyse contracts already in place and work out any adjustments that need to be made to comply with the new standard.
What is clear about these new standards is that any company determined to stick with manual data entry is going to struggle under the administrative burden and that automation of accounts should be front of mind for any company now investigating how to deal with IFRS 15 – or those working towards early adoption.
For information about how automation can help stay compliant with IFRS 15 – and for more information on the reporting standard changes, download our new eBook here