director ifrs & accounting bdo - institute of public ... ifrs & accounting bdo ifrs 15 •...

David Holland

Director IFRS & Accounting BDO

IFRS 15

• Introduction

• Potential issues in practice

• Other issues

• Transition

Page 3 Title

• Contents

Introduction

INTRODUCTION

• Issued 28 May 2014

• Joint revenue project - IFRS and US GAAP

• Effective 1 January 2017

• Early application permitted

Page 5 Title

• IFRS 15 Revenue from Contracts with Customers

INTRODUCTION

• It is difficult!

• Needs attention now!!!!

• Changes pattern of revenue recognition

• Changes pattern of profit

Page 6 Title

IFRS 15 Revenue from Contracts with Customers

INTRODUCTION

• Bonus schemes

• Earn outs

• Deferred payments

• Bank covenants

• Dividends payments

Page 7 Title

Impact of change in pattern of revenue

INTRODUCTION

• Determine impact

• Educate staff

• Change processes

• Change systems

• Modify contracts

Is three years enough time?

Page 8 Title

Actions required before 2017

INTRODUCTION

• Software companies

• Construction companies

• Residential real estate

• Manufacturers

• Professional services

• Licensors

• Retailers and consumer industries

• Media companies

• Telecommunication companies

• Everyone else?

Page 9 Title

• Who will be impacted

INTRODUCTION

Supersedes previous IASs, SICs and IFRICs related to revenue

Page 10 Title

• Superseded standards

IAS 18 Revenue

IAS 11 Construction Contracts

IFRIC 13 Customer Loyalty Programmes

IFRIC 15 Agreements for the Construction of Real Estate

IFRIC 18 Transfers of Assets from Customers

IFRS 15

Revenue from Contracts with Customers

SIC-31 Revenue – Barter Transactions Involving Advertising Services

INTRODUCTION • Size of IFRS 15

IFRS 15 (pages)

IAS 18 (pages)

IAS 11 (pages)

Standard 39 10 11

Application guidance 17 n/a n/a

Transition guidance 2 n/a n/a

Amendments to other standards

26 n/a n/a

Illustrative Examples 82 8 4

Basis for conclusions 173 n/a n/a

Total pages 339 18 15

INTRODUCTION

• Does not apply to

• Lease income (IAS 17 Leases)

• Insurance income (IFRS 4 Insurance Contracts)

• Contractual rights & obligations under IFRS 9 Financial Instruments

• Non-monetary exchanges

• Income that is not derived from ‘contracts’ with customers (IFRS 15)

Page 12 Title

• Scope

INTRODUCTION

• Far more complex

• Far more disclosure

• Clear set of principles for recognition of all types of revenue

• Pattern of revenue recognition will change

• Will require systems changes

• Will impact earnings per share (EPS)

• Possibly bonuses, share-based payments and bank covenants

Page 13 Title

• Impacts of IFRS 15

KEY POINTS TO NOTE

• Based on the principle of transferring control of an asset (even for services)

• Not focused solely on risks and rewards (now one indicator of a transfer of control)

Page 14 Title

• Transfer of control

KEY POINTS TO NOTE

• Consideration recognised is the ‘expected’ consideration that the vendor is entitled to (not fair value)

• Revenue can only be recognised if it is highly probable that consideration will be collected

Page 15 Title

• Recognising consideration

KEY POINTS TO NOTE

• Centres on ‘promises made in the contract’

• Requires identification of ‘performance obligations’

• Requires key judgement as to whether performance obligations are ‘distinct’

• Do goods or services need to be ‘integrated’ in order to provide benefits to the customer ?

Page 16 Title

• Performance obligations

KEY POINTS TO NOTE

• Are the performance obligations dependent upon other ‘promises’ made to the customer ?

• Are performance obligations satisfied over time or, at a point in time?

• Stand-alone selling price will need to be determined for performance obligations that are never sold separately

Page 17 Title

• Performance obligations

KEY POINTS TO NOTE

• Much greater guidance on agent vs. principle

• Greater guidance on sale or return / refunds

• Assurance warranty vs. service warranty

• Contract assets

- Sets out guidance on what should not be capitalised

- Capitalise costs (incremental and those to fulfil the contract) that relate to contracts within the scope of IFRS 15

Page 18 Title

• Other

KEY POINTS TO NOTE

• Complexity on linking contracts and modifying contracts

• Significantly more disclosure

• Specific guidance on recognising revenue at a ‘point in time’ vs ‘over time’

• Significant guidance on accounting for variable consideration

Page 19 Title

• Other

VARIABLE CONSIDERATION

Page 20 Title

An entity shall include in the transaction price some, or all, of an amount of variable consideration, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.’

KEY POINTS TO NOTE

• Importance of having a customer

– IFRS 15 applies only to contracts with customers, therefore excludes collaboration agreements, farm in etc

• Customer must receive a benefit for revenue to be recognised

– Mobilisation activities, recruitment activities etc. do not benefit the customer (i.e. there is no transfer of goods or services) so no revenue can be recognised

Page 21 Title

• Other

KEY POINTS TO NOTE

• Financing arrangements

– Entities need to consider financing both in terms of deferred consideration and prepaid revenue ... prepaid revenue could mean you are borrowing from the customer

• Determining margin on contracts

– Where equipment delivered procured with low margin (e.g. elevators) adjust profile of profit recognition

Page 22 Title

• Other (cont)

CORE PRINCIPLE

Page 23 Title

Recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be

entitled in exchange for those goods or services

FIVE STEP MODEL

Page 24 Title

Potential issues in practice

POTENTIAL ISSUES IN PRACTICE

• IFRS 15: Specific guidance regarding ‘over time’ or ‘point in time’ (mutually exclusive)

• Currently: Lack of clear guidance, diversity in practice

• Impact

- Some current ‘point in time’ revenue recognition may switch to ‘over time’

- Some current ‘% of completion’ revenue recognition may switch to ‘point in time’

Page 26 Title

• Timing of revenue recognition – Point in time vs over time


• From ‘point in time’ to ‘over time’

• Most likely result in earlier revenue recognition

– Residential real estate

• Most likely result in delayed revenue

– Sign on/activation fees

– Design and build

– License fees

Page 27 Title

• Timing of revenue recognition - Point in time vs over time


• From ‘% of completion’ to ‘point in time’

• Most likely result in delayed revenue

– Constructing an asset e.g. ships or oil rigs at the constructor’s premises

– Audit fees

– Consulting fees

– Linked contracts

Page 28 Title

• Timing of revenue recognition - Point in time vs over time (cont)


• IFRS 15: Specific guidance on

– Bundling (linking) performance obligations

– Debundling (separating out) performance obligations


Page 29 Title

• Timing of revenue recognition – Bundling vs debundling


Bundling or linking performance obligation

• Changes revenue recognition from ‘point in time’ to ‘over time’

• Most likely result in delayed revenue recognition

– Software license fees

– Gym membership

Page 30 Title

• Timing of revenue recognition – Bundling vs debundling (cont)


Debundling or separating out performance obligations

• Most likely result in earlier revenue recognition

- Free watch with magazine subscription

- Mobile phone with a phone plan

• Most likely result in delayed revenue recognition

- Free repair maintenance services

- Extended warranties

Page 31 Title

• Timing of revenue recognition – Bundling vs debundling (cont)


• IFRS 15: Requires separate revenue recognition for each separate performance obligation

• Currently: Such items may not be separately accounted for

• Examples

- Subsequent maintenance services

- Discount vouchers

• Potential impact

– Could result in delayed revenue recognition

Page 32 Title

• Timing of revenue recognition - Incidental obligations and sales incentives


• IFRS 15: Specific guidance regarding the methods of measuring and constraining variable consideration (high probability of no future revenue reversal)


• Examples

- Contract penalties

- Volume rebates

- Performance bonuses

- Rental guarantees

- Contingent consideration

- Retentions

Page 33 Title

• Estimates of variable consideration


• IFRS 15: Specific requirement to consider significant financing components

• Currently: May not be being considered when customers pay in advance/arrears

• Examples

– Contracts with extended payment terms

– Contracts with advanced payment terms


– Increases revenue

– Increase interest charge

– Creates a loss in the earlier periods and more profit in later periods

Page 34 Title

• Significant financing components


• IFRS 15: More specific guidance on principal and agent relationships

• Currently: Diversity in practice


– Decreases revenue if now acting as agent

Page 35 Title

• Principal and agent


• Currently: Disclosures are inadequate and lack cohesion

• IFRS 15: Comprehensive disclosure and presentation requirements have been introduced

• Example

– Disclosure of unfulfilled obligations that has not yet been recognised revenue in time bands

Page 36 Title

• Disclosure

Other issues

TOPICS

• Licenses

• Principal and agent

• Contract costs

Page 38 Title

Page 39 Title

Licenses

LICENSES

• Technology - software and patents

• Entertainment and medial – films, music, copyrights

• Pharmaceutical – patents and trademarks

• Retail– trade name and franchises

Page 40 Title

• Industries affected

LICENSES

Page 41 Title

• Is the license distinct?

Is the promise to provide license separate from other promises?

One performance

obligation (bundle)

Yes

Separate performance

obligation

No

LICENSES

Page 42 Title

Customer has right to access the item throughout the license period as the conditions of that item changes over time

Customer has right to use

the item in its condition

at a point in time

Recognise revenue at a

point in time Recognise revenue

over time

Future sales or usage based royalties

Recognise revenue when

the sale or usage occurs

LICENSES

• Pharma Ltd Licenses patent for Drug X to XYZ Ltd

• Pharma Ltd will also manufacture Drug X for XYZ Ltd for next 10 years (manufacturing process is highly specialised)

• Pharma Ltd does not need to do anything else to support the drug (mature product)

Page 43 Title

• Example: Licenses – Distinct vs non distinct

LICENSES

• Questions: (a) Is the license distinct if no one else other than Pharma Ltd are able to manufacture

the product?

(b) Is the license distinct if other entities can manufacture the drug?

(c) How is revenue recognised if other entities can manufacture the drug and Pharma receives 5% royalty for sales?

Page 44 Title


LICENSES

Question (a): Is the license distinct if no one else other than Pharma Ltd are able to manufacture the product?

• Answer (a): • Not distinct

• XYZ cannot benefit from license on its own – has to take License and manufacturing

service

• One performance obligation – recognised the revenue over time (10 years)

Page 45 Title


LICENSES

Question (b): Is the license distinct if other entities can manufacture the drug?

• Answer (b): • Yes

• Can benefit from License on its own

• XYZ will benefit from date License granted as no further update work

• Recognise License revenue at ‘point in time’ – Day 1

Page 46 Title


LICENSES

Question (c): How is revenue recognised if other entities can manufacture the drug and Pharma receives 5% royalty for sales?

• Answer (c): • License revenue recognised over time as and when the future sales occur

Page 47 Title


Title

Principal vs agent

PRINCIPAL VS AGENT

• The party responsible for providing the goods or services promised

• Recognise revenue on a gross basis

Page 49 Title

• Principal

PRINCIPAL VS AGENT

• Another party is responsible for fulfilling the contract • No inventory risk • No discretion in setting prices • Consideration is in the form of commission • Not exposed to credit risk

Agents recognise revenue on a net basis

Page 50 Title

• Indicators of agent

PRINCIPAL VS AGENT

• Mr A purchased 5 shirts from ShirtCo an online retail store CU60 each, a total of CU300 (CU60x5)

• Standard delivery is free for any customers with orders above CU250 • For orders less than CU250, a standard delivery fee of CU20 is charged • The delivery fee is set by the delivery company • Customers can enquire on the status of their delivery by contacting the delivery

company • All online purchases are paid by credit card

Question: How much revenue should ShirtCo recognise?

Page 51 Title

• Example: Principal versus agent – Online retailer

PRINCIPAL AND AGENT

Question: How much revenue should ShirtCo recognise? Answer: • ShirtCo should only recognise revenue of CU280 (CU300 – CU20)

• ShirtCo is only an agent for the delivery company

- Does not control the shipping services - Delivery company is responsible for the shipping services - ShirtCo has no inventory risk during shipping - ShirtCo has no discretion in setting shipping prices - ShirtCo has no credit risk as the price is fully paid by credit card

Page 52 Title

• Example: Principal versus agent – Online retailer

PRINCIPAL VS AGENT

• E-buy is an online website that allows customers to buy different goods from a range of suppliers

• The goods are delivered directly to the customers • When a customer buys a good E-buy is entitled to 10% commission of the sales price • Prices are set by the suppliers • E-buy requires payments from customers before the orders are processed and all

orders are non-refundable • Customer A buys CU100 worth of goods Question: How much revenue should E-buy recognise?

Page 53 Title

• Example: Principal versus agent

PRINCIPAL VS AGENT

Question: How much revenue should E-buy recognise? Answer: • E-buy should only recognise revenue of CU10 (CU100X10%)

• E-buy is only an agent

– Supplier is responsible for fulfilling the contract i.e. shipping the goods to the customer

– E-buy has no inventory risk – goods are directly shipped to the customer – E-buy has no discretion in setting prices of the goods – E-buy has no credit risk as the price is fully paid in advance

Page 54 Title

• Example: Principal versus agent

Page 55 Title

Contract costs

CONTRACT COSTS

• Capitalise contract costs if they are incremental • Unless the contract <1 year then can expense

• Incremental costs • Costs that would not have incurred if the contract had not been signed e.g. sales

commissions - Sales commission for contracts less than a year can be expensed - Example: an agent is paid a 5% commission when a customer signs up for a 24

month magazine subscription. The commission paid is amortised over 24 months

Page 56 Title

• Capitalise incremental contract costs

CONTRACT COSTS

• Bid costs

• Proposal costs

• Selling costs

• Marketing costs

• Advertising costs

• Fixed salaries

Page 57 Title

• Examples of non incremental costs

CONTRACT COSTS

Fulfillment costs can be capitalised if all three criteria are met (if not addressed by other standards) • The costs relate directly to a specific contract

• The costs generate/enhance the resources the entity will use to complete the contract

• The costs are expected to be recovered

Page 58 Title

• Capitalise fulfillment costs

CONTRACT COSTS

• Telco sells mobile phones and provides mobile phone services • 100 customers signed up for two year service contract • Sales staff are paid a commission on top of their salaries • Telco incurs the following expenses for the month

• Question: • Can Telco capitalise any of the above costs?

Page 59 Title

• Example: Selling costs

Salaries CU10,000

Commissions CU2,500

Advertising CU5,000

Total CU17,500

CONTRACT COSTS

• Question: • Can Telco capitalise any of the above costs?

• Answer:

Page 60 Title

• Example: Selling costs

Costs Capitalise? Explanation

Salaries X Would have been incurred whether or not contracts are signed

Commissions √ Would not have been incurred if contracts were not signed

Advertising X Would have been incurred whether or not contracts are signed

Transition

TRANSITION

Choice of three methods

1. Full restatement of comparative figures (IAS 8)

2. Full restatement with any of the following practical expedients:

– Need to restate any completed contracts that begin and end within the same annual period

– For completed contract with variable consideration, may use the transaction price at the end of the contract rather than estimating the variable consideration in the comparative periods

– No need to disclose information on unfulfilled performance obligations for comparatives

3. Cumulative effect of initial application recognised as a single entry in opening retained earnings at date of initial application, with additional disclosures

Early application permitted

Page 62 Title

• Retrospective application

Questions

director ifrs & accounting bdo - institute of public ... ifrs & accounting bdo ifrs 15 •...

Documents