The International Accounting Standards Board (IASB) has published final changes to an accounting rule for when and how companies account for revenue from customer contracts.
The international financial reporting standard, IFRS 15 'Revenue from Contracts with Customers', which is seen as one of the most important international standards, will apply to annual reporting periods beginning on or after 1 January 2018, although companies can start using it before then.
There are three changes ("identifying performance obligations", "principal versus agent considerations", and licensing), which the IASB said balanced "helping entities with implementing IFRS 15 and not disrupting the implementation process."
Identifying performance obligations
IFRS 15 requires an entity to identify performance obligations on the basis of distinct promised goods or services. To clarify the concept of 'distinct', the IASB has added the clarification that the objective of the assessment of a promise to transfer goods or services to a customer is to determine whether the nature of the promise, within the context of the contract, is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs.
Principal versus agent considerations
When another party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it is the principal in the transaction or the agent on the basis of whether it controls the goods or services before they are transferred to the customer. To clarify how to assess control, the IASB has amended and extended the application guidance on this issue.
When an entity grants a licence to a customer that is distinct from other promised goods or services, the entity has to determine whether the licence is transferred at a point in time or over time on the basis of whether the contract requires the entity to undertake activities that significantly affect the intellectual property to which the customer has rights. To clarify when an entity's activities significantly affect the intellectual property, the IASB has amended the application guidance and stresses that the activities significantly affect the intellectual property if:
- the activities are expected to significantly change the form or the functionality of the intellectual property; or
- the ability of the customer to obtain benefit from the intellectual property is substantially derived from, or dependent upon, those activities.
In 2014, when the revenue recognition standard was agreed, Steve Collings, AccountingWEB's expert on financial reporting, said it would have the greatest affect on businesses in the construction industry, telecommunications and software companies because they will probably recognise revenue earlier than they would do under the existing IAS 11 'Construction Contracts' and IAS 18 'Revenue' standards.