IFRS 15Revenue from Contracts

with Customers

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Bindi PalmerPARTNER

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Derek WaltonC F O

COMPLIANCE DEADLINE

2018

BackgroundoHarmonisation of IFRS and US GAAPo Revenue Recognition is one of the

biggest differenceso Removes the industry and transaction

specific requirements under US GAAPo It replaces all the old revenue standards

including IAS 18 (Revenue) and IAS11 (construction contracts)

o IFRS 15 is more prescriptive than the old standards – it provides much less room for your own accounting policy decisions & prescribes a 5 Step model

o For some industries IFRS 15 may be more complex

o FRS 102 similar to IAS 18/IAS 11

Steps to consider

INTERPRETING THE

STANDARDGATHER

DATAMANAGING

THE PROJECTASSESSING SYSTEMS

CHOOSING THE TEAM

o An entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer

o This may affect timing and amount of revenue recognisedo IFRS 15 introduces a 5 step model

Step 1Identify the

contract

Step 2Identify the performanc

e obligations

Step 3Establish

the transaction

price

Step 4Allocate

the transaction

price

Step 5Recognise revenue

5 Step Model

o The new standard has an implementation date for IFRS entities for accounting periods commencing on or after 1 January 2018

o Report by KPMG - the impact of the standard will vary by industry. Certain industries are summarised in the table below:

Industry Steps1 2 3 4 5

Aerospace and defence Asset managers Building and construction Contract manufacturers Health care (US) Licensors (media, life sciences, franchisors) * Real estate

Software

Telecommunications (mobile, networks, cable) Source: KPMG* In particular, life sciences

Implementation and Industries

o Judgement and legal position to determine legal enforceable rights exist.o As soon as performance begins?o Or when contract is signed by both parties if later. o E.g. software licence delivered before contract is signed by both parties. When does

contract exist? At point of delivery or at later date when contract signed?

o Assessment of collectabilityo Probable that the entity will collect the consideration o That the customer will and has the intention to pay.o May be different from the contractual price if there are implied price concessions.

o Contract Modificationso Part of original contract or create a separate contract. o e.g number of hours modified in customising an accounting package may create

adjustment to timing in recognising original revenue.

Step 1 : Identify the contract

o Promised goods and services represent separate performance obligations if they are:

• Distinct or • Part of a series of distinct goods and services that are substantially the same and have a similar pattern of transfer to the customer.

o Softwareo Software commonly involves the delivery of multiple goods and services, such as a software

licence, unspecified or specified future upgrades and enhancements, maintenance and other professional services.

Step 2 : Performance Obligations

o Licenceso Distincto Combined with other promised goods or services

o Post contract support serviceso Upgradeso Enhancementso Judgement required

Step 2 : Identify the performance obligations

o Transaction Price is the amount of consideration to which an entity expects to be entitled in exchange for promised goods or services.

o Includes variable amountso Could be different to contract price.o Transaction price determined at inception of contract.o Judgement and consistency required.

Step 3 : Determine the Transaction Price

oAllocate the transaction price to the performance obligations in proportion to their stand-alone selling prices

oExampleoSoftware entities will need to establish methods to estimate

their stand-alone selling prices

Step 4 : Allocate the transaction price

i. Contract to provide installation and 12 month supporto Price is £100,000o 2 performance obligationso Installation recognised over period of installationo Support over 12 monthso Stand-alone selling price £70,000 installation, £50,000 support, total £130,000.o £100,000 would be allocated

o £58,333 on completion of installation, o £41,667 support over 12 months

ii. Contract to provide licence and anti-virus support for 12 month periodo Price is £60,000o 1 performance obligationo Revenue recognised £60,000 over 12month period

Step 4 : Example

o An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to the customer…..

o Either o over timeo at a point in time

Step 5 : Recognise revenue

oReported revenueoKPI’SoRatiosoCompensationoTax oBank CovenantsoContracting processesoIT systems update

Commercial Impact

IFRS 15Revenue from Contracts

with Customers