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Dealing with the changes faced by IFRS 15

23rd Jun 2020
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CaseWare
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Despite a large amount of time passing since the large scale changes to IFRS 15, it is still a popular topic for us.

The standard became mandatory for all companies whose accounting periods fell after January 2018, and it affected those companies who reported under FRS 101 and IFRS.

The standard replaced IAS 18 Revenue and IAS 11 Construction Contracts and it was aimed at how and when companies recognise revenue and reducing ambiguity around that whilst they increased comparability among companies across all sectors.

Previously, there was some scope for companies to manipulate of revenue for tax and earnings purposes under the old reporting standards. For example, even if a benefit wouldn’t arrive for some time in the new tax year, the revenue would have been attributed to the end of the previous year which was considered a bad one.

Companies who looked to avoid a higher tax bill would have previously used the old reporting standards to their advantage and revenue would be recognised at a later period.

Seeking to end these practices, IFRS 15 introduced a five-step model, determining when revenue should be recognised, looking at various phases of a firm’s clients and contracts.

Under the new model, companies were required to:

  • Identify any contracts with a customer;
  • Identify any performance obligations set within the contract;
  • Determine a transaction value;
  • Allocate a transaction value to any performance obligations; and
  • As performance obligations are satisfied, recognise any revenue attributed.

There were instances of companies following along these lines prior for many years, but with the introduction of IFRS 15, this has standardised the process and across all industries.

Although the standards have brought some transparency to the revenue reporting for companies, when it comes to staying compliant, it has posed some challenges to companies. For example, the standard came with changes to when contracts should be combined or modified, along with changes to royalty and license payments, non-refundable upfront fees and customer incentives – along with other things.

For companies, this meant that much more detail has been required for measuring the progress of performance obligations that make up each stage of a contract if they wish to stay complaint with the rules.

Companies who have transitioned to the new standards, they would have taken one of two options:

  • Retrospective approach
  • Cumulative approach

Either method a company chose to adopt, would have involved a significant amount of effort to analyse contracts that were already in situ as well adjustments which may have been required to ensure they complied with the new standards.

Something that has been learned since the changes is that any companies wishing to stick to manual data entry were going to struggle under the weight of the administrative burden places upon them. When dealing with IFRS 15, those companies should have accounts automation at the front of their minds to enable them to work more efficiently.

If you’d like to read more about how you can stay complaint with IFRS 15 using accounting automation – along with more information on how the reporting standards changed, download our eBook here