Revenue recognition is an integral element of accounting. The time of sales, the delivery of the product/ service to the customer and the kind of contract are few factors that determine when and how the revenue will be recognized. The process of recording the revenue is relatively simple in straightforward sales contract, however, in cases where the contract is bundled, long-term or complex in nature, revenue recognition becomes somewhat tricky.
IFRS 15 seems to address this issue. It replaces existing IFRS and US GAAP guidance is aimed at changing the existing accounting treatment for revenue recognition. Now companies are following IFRS 15 effective 1st January 2018. The existing accounting standard IAS 18 will no more to be followed.
The new standard establishes a single model for revenue recognition from contracts with customers. This single revenue recognition model will bring in greater consistency and standardization across industries.
The 5 step model under IFRS 15 requires businesses to identify distinct elements in the contract and recognize revenue for each of them on the basis of separate pricing. This level of detailing was not required previously and it will now demand lot of data from the system perspective.
Another feature is the Timing of revenue recognition. The change in timing of the revenue recognition impacts bonuses, targets, KPIs, corporate income tax, external relations, loan covenants, regulatory requirements and more.
Before we proceed to understand the 5 step revenue recognition model, let us get familiar with a few terms:
follow sitePerformance obligation:It is a promise between seller and customer to transfer distinct good or service.
followTransaction Price:Stand-alone selling price of each Performance obligation. This is ascertained by market standards or by estimating the total cost and adding an appropriate margin to the cost price.
easy payday loan atlantaVariable consideration:Proportion of Transaction price made to seller which depends on various factors such as credibility of the seller to deliver the contract, uncertainties in the long term contract and other contingent factors related to market.
The new accounting standard can have significant impact on businesses involving best personal loan balance transfer offersbundled products, milestone payments, non-refundable upfront fee, rights of return, bill and hold arrangements warranty etc. Some examples are Technology sector, Telecom sector, Software companies, Real estate, Manufacturing, Energy, Media and entertainment.
follow urlImplications for IFRS 15 on various areas:
Transfer of assets from customers:
Companies will need to assess whether they have obtained full control of the assets received, and then measure it at a reasonably estimated fair value. Then they would need to refer to the guidance under IFRS 15 to ascertain whether the revenue should be recognised immediately or deferred to a later date. Also, the contractual terms of such agreement need to be reviewed thoroughly.
Let us take the example of telecom sector. It is quite common to offer something free for new subscription. Assume a free handset is given for a new subscriber. As per the old standard (IAS 18), it was considered to be single performance obligation with recognition of revenue over time. But under IFRS 15, the provided sale is unbundled i.e. free handset and subscription fee. This could result in more revenue being recognised at the start of a contract. Another implication is that since it is unbundled even free handset given also will earn revenue.
Payments made to distributors and retailers:
In the Consumer durables sectors, many a times, companies make payments to distributors and retailers for promoting their products, giving preferential placement in store, or doing co-branded advertisement. The previous IFRS, such payments were recognised as revenue reducing factor or sometimes as expense. However, under IFRS 15, companies will need to review the circumstances of such payments. Whether such payments has been made in exchange of any goods/ service or as some form of incentive.
It is quite common for FMCG companies to offer cash discounts, rebates, free distribution of products or loyalty programmes. Under previous IFRS, these were treated as revenue reducing factor, an expense or sometimes as a separate deliverable, depending on their nature. However, under IFRS 15, this will be treated as a variable consideration. As we have read that variable consideration will be a part of transaction price. It must be noted that the agreements for such contracts need to be reviewed in details as well.
Global accounting is a dynamic arena; it is constantly evolving according to the requirements of industry and markets, and there are changes that are significantly different. So, act wisely and stay abreast about the latest developments.
http://www.proschoolonline.com/blog/wp-content/uploads/2018/01/IFRS15.jpg8001000Adminhttp://www.proschoolonline.com/blog/wp-content/uploads/2015/10/logo.pngAdmin2018-01-22 05:17:112018-01-22 05:17:11Gazing into the crystal ball-Part II- IFRS 15