CPA Canada
Financial Reporting Alert
IFRS
OCTOBER 2014
IFRS 15 Revenue from Contracts with Customers
In May 2014, the International Accounting Standards Board (IASB) published a new standard
IFRS 15 Revenue from Contracts with Customers that sets out the principles for when revenue should be recognized and how it should be measured, together with related disclosures.
IFRS 15 has not yet been incorporated into the CPA Canada Handbook – Accounting, but
is expected to be incorporated shortly.1
The new standard applies to revenue transactions, with limited exceptions, 2 and replaces all
current revenue standards and interpretations in IFRS, including IAS 11 Construction Contracts,
IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue —
Barter Transaction involving Advertising Services.
This CPA Canada Financial Reporting Alert highlights the basic requirements of IFRS 15,
considers possible business implications and suggests an action plan to implement the
new standard.
1
The Accounting Standards Board (AcSB) determines the contents of the CPA Canada Handbook – Accounting. The AcSB updates
the standards set out in each Part of the Handbook only after due process.
2 IFRS 15 applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and
other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint
Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities
in the same line of business to facilitate sales to customers or potential customers.
1
Why does IFRS 15 matter to me?
For some entities, the new standard will have a significant impact on the entire organization,
resulting in changes in how and when revenue is recognized, and will require the adoption
of new systems and processes. For other entities, the transition may be more limited.
The extent of the impact on an individual entity will vary depending on the complexity of revenue
arrangements, contract-specific terms and conditions, systems already in place and other entityspecific facts and circumstances.
For example, entities with revenue transactions involving variable consideration, long-term contracts,
multiple elements and after-sale obligations are more likely to be significantly affected by one or
more of the new requirements. Examples of industries where these characteristics are prevalent
include telecommunications, manufacturing, retail, software, technology and construction.
All entities will be subject to new disclosure requirements.
IFRS 15 also has more guidance in many areas where current IFRSs are limited, such as:
3
• breakage (e.g., unexercised rights)
• consignment arrangements
• licensing intellectual property
• multiple-element arrangements
• non-cash and variable consideration
• non-refundable upfront fees
• rights of return and other customer options
• seller repurchase options and agreements
• warranties.
When is IFRS 15 effective?
IFRS 15 is effective for annual reporting periods beginning on or after January 1, 2017. Earlier application is permitted.
IFRS 15 applies to new contracts created on or after the effective date, and to existing contracts not
yet complete as of the effective date. For example, a company with a December 31 calendar year
end applies IFRS 15 to its March 31, 2017 interim financial statements and December 31, 2017 annual
financial statements.
3 In some circumstances customers may not exercise all of their contractual rights. Those unexercised rights are often referred to as breakage. Common examples include gift cards, non-refundable tickets and customer loyalty points.
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Illustrative Timeline:
Year end
Effective date
(early application
permitted)
First interim financial
statements applying
IFRS 15
First annual financial
statements applying
IFRS 15
December 31
January 1, 2017
March 31, 2017
December 31, 2017
What are the transitional requirements?
IFRS 15 must be applied retrospectively. With regard to comparative periods, entities have the option
of either applying IFRS 15 on a full retrospective basis or on a modified retrospective basis. For
example, a company with a December 31 calendar year end that adopts IFRS 15 using the modified
retrospective approach will adjust retained earnings as at January 1, 2017 for the cumulative effect
of applying IFRS 15 with comparative figures of December 31, 2016 unchanged.4
Retrospective Application
Full Retrospective Application
•
Apply the standard in full to prior periods.
•
Certain limited practical expedients are available (e.g., refer to IFRS 15.C5).
Modified Retrospective Application
•
Retain prior period comparative figures as
reported under the previous standards (i.e.,
unchanged).
•
Recognize the cumulative effect of applying IFRS 15 as an adjustment to the opening
balance of retained earnings as at the date of
initial application.
What are the basics of IFRS 15?
The core principle of IFRS 15 is that an entity recognizes revenue that represents the transfer of
promised 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. Transfer is complete
when the customer has control of the goods or services. Specifically, revenue is recognized as
control is passed, either over time or at a point in time. Application of this guidance depends on
the facts and circumstances present in a contract with a customer and requires the exercise of
professional judgment.
4 Under the modified retrospective approach, to determine the cumulative effect of adopting the new standard, at the date of initial application, entities electing this approach will have to calculate the revenues they would have recognized for any contracts not yet complete
as if they had always applied IFRS 15.
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The new revenue recognition model is implemented using a five-step approach.
What are the five steps in the new revenue model?
STEP 1
STEP 2
STEP 3
STEP 4
STEP 5
Identify the
contract(s)
with the
customer.
Identify the
separate
performance
obligations.
Determine
the
transaction
price.
Allocate the
transaction
price to the
performance
obligation.
Recognize
revenue
when
(or as) a
performance
obligation is
satisfied.
Each of these steps is explained in detail in the standard, along with additional criteria and guidance.
Entities will be required to apply these steps for each type of revenue transaction.
Each of these steps, as well as some additional considerations, is briefly summarized below.
Step 1: Identify the contract(s) with the customer.
•
A contract is an agreement between two or more parties that creates enforceable rights and
obligations.
•
The contract must meet all of the following:
—— be approved by the parties
—— have commercial substance
—— identify each party’s rights and obligations
—— outline payment terms, and
—— result in collection being probable.
Some considerations:
4
•
Consider that a contract can be written, oral or implied by an entity’s customary business practices. A contract can be as simple as providing a single off-the-shelf product (e.g., convenience
store), or as complex as an agreement to build specialized technology.
•
Evaluate whether combining contracts into a single contract is required (i.e., whether contracts
are negotiated as a package with a single commercial objective with the same customer or parties related to the customer).
CPA Canada Financial Reporting Alert
October 2014
•
Consider whether changes in price and/or scope should be treated as a new contract or as part
of the existing contract.
•
Assess collectability. It must be probable that the entity will collect the entitled consideration.
To assess this collectability threshold, the seller evaluates the customer’s ability and intent to
pay the amount of the consideration when it comes due.
Step 2: Identify the separate performance obligations.
•
Each performance obligation is a separate promise to transfer to the customer either a
distinct good(s), a distinct service(s), a bundle of distinct goods or services, or a series
of distinct goods or services.5
•
A good or service is distinct if both of the following criteria are met:
—— A customer can benefit from its use on its own or with readily available resources.
—— An entity’s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract (i.e., the goods or services are distinct in the
context of the contract).
Some considerations:
•
Identify distinct goods and services.
•
If the promised goods or services are not distinct, an entity can combine them with other
promised goods or services until they identify a bundle of goods or services that is distinct.
In some cases, this may result in all the goods and services being treated as a single performance obligation.
•
Factors to consider as to whether a promise to transfer the good or service to the customer is
separately identifiable (i.e., distinct in the context of the contract) include, but are not limited to:
—— The entity does not provide significant integration of the good or service with other goods
or services promised in the contract.
—— The good or service does not significantly modify or customize another good or service
promised in the contract.
—— The good or service is not highly dependent on, or highly interrelated with, other goods
or services promised in the contract.
•
There may be goods and services previously thought to be incidental that will now be recognized as distinct. For example, consider sales incentives or obligations such as installations,
free maintenance, or warranties.
5 The promise can be explicit, implicit, or implied by an entity’s customary business practice.
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•
If a contract includes an option for that customer to acquire additional goods or services, it is
important to determine whether it grants the customer a material right that it would not have
received without entering into the contract. If this is the case, the option to acquire the additional
goods or services is considered a performance obligation to which the reporting entity allocates
a portion of the transaction price.6
Illustration: Identifying distinct performance obligations:
Are multiple goods or services promised?
Yes
Can the customer benefit from the individual good or service on its own or
with readily available resources?
Yes
Is the entity’s promise to transfer the good or service to the customer separately identifiable from other promises in the contract (i.e., the good or
service is distinct within the context of the contract)?
No
Combine
Performance
Obligations until
Bundle is Distinct
Yes
Distinct Performance Obligation
Step 3: Determine the transaction price.
The transaction price is the amount of consideration the entity expects to receive in exchange
for the transfer of goods and/or services.
Some considerations:
•
Consider the implications for contracts that have variable amounts of consideration:
—— Review past customary business practices when determining the transaction price.
—— Variable consideration arises when there are, for example, discounts, rebates, refunds,
credits, price concessions, penalties, bonuses or contingencies.
6 Customer options to acquire additional goods or services (either free of charge or at a discount) come in many forms, including sales
incentives, customer award credits (such as loyalty points), contract renewal options, or other discounts on future goods or services.
Specifically, loyalty programmes previously accounted for under IFRIC 13 are now within the scope of IFRS 15 and considered within the
step of “identifying separate performance obligations”.
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—— When it is highly probable the amount of variable consideration will not be subsequently
revised and reversed, variable consideration is included in the transaction price.7
—— The amount is estimated using a probability-weighted value or the most likely amount.
•
Recognize the amount of any financing component separately from the total transaction consideration if the period between payment and the date of transfer of the goods or services is more
than a year.
•
Include in the transaction price the fair value of any non-cash consideration promised.
•
Reduce the transaction price by any consideration payable to a customer (i.e., cash,
credits, coupons, vouchers) unless it is in exchange for a distinct good or service.
Step 4: Allocate the transaction price to the performance obligation.
•
Generally, the allocation is based on the relative stand-alone selling price (observable or
estimated) for each distinct good or service.
•
Stand-alone selling price is the price at which the good or service would be sold separately
to a customer.
Some considerations:
•
Determine a suitable approach to estimate the stand-alone selling price if the stand-alone
selling price is not directly observable. For example, IFRS 15.79 outlines examples of possible
approaches, such as:
—— adjusted market assessment approach
—— expected cost plus a margin approach
—— residual approach (only permissible in limited circumstances).
•
Consider how to allocate discounts, if any, between the identified performance obligations
(see Step 2).
•
Consider how to allocate the variable consideration when it is attributable to one or more,
but not all, performance obligations or distinct goods or services.
•
Determine how subsequent changes in the contract price should be allocated to performance
obligations that have been completed and/or are still being completed.
7 Some factors that indicate a significant revenue reversal may result from including an estimate of variable consideration in the transaction
price are discussed in IFRS 15.57.
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CPA Canada Financial Reporting Alert7
Step 5: Recognize revenue when (or as) a performance obligation is satisfied.
A performance obligation is satisfied when control of the good or service is transferred to the
customer. This may be either at a single point in time or over time. If an entity does not satisfy
its performance obligation over time, it satisfies it at a point in time.
Illustration: Recognizing revenue when (or as) the entity satisfies a performance obligation:
Does the customer simultaneously receive and consume all the benefits
provided by the entity as the entity performs?
Yes
No
Does the entity’s performance create or enhance an asset the customer
controls as the asset is created?
Yes
Recognize
Revenue
over Time.
No
Does the entity’s performance create an asset with no alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date?
Yes
No
Recognize Revenue at a Point in Time
Where none of the three scenarios is applicable, revenue is recognized
at a single point in time (i.e., upon transfer of control).
To determine the point in time at which a customer obtains control of
a promised asset and the entity satisfies a performance obligation, it
is important to consider the guidance in paragraphs 31–34 of IFRS 15.
In addition, indicators of transfer of control include, but are not limited to:
• the seller’s right to payment
• with respect to the asset transferred to the customer, the customer’s:
— legal title
— physical possession
— assumption of the significant risks and rewards of ownership
— acceptance of the asset.
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How are the costs associated with obtaining and fulfilling a contract recognized?
There are two specific types of contract costs considered in the new standard: costs to obtain a
contract and costs to fulfill a contract. An asset recognized in respect of the costs to obtain or fulfil
a contract is amortized on a systematic basis that is consistent with the pattern of transfer of the
goods or services to which the asset relates.
•
Obtainment Costs — Costs incurred solely to obtain a customer contract are capitalized when
they are either incremental (e.g., sales commissions) or are explicitly chargeable to the customer
regardless of whether the contract is obtained. Costs are not considered incremental if they
would have been incurred regardless of whether the contract was obtained. A practical expedient is available, allowing the incremental costs of obtaining a contract to be expensed if the
associated amortization period is 12 months or less.
•
Fulfillment Costs — Costs of fulfilling a contract that are not within the scope of another standard
(e.g., IAS 2 Inventories, IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets) are
capitalized under IFRS 15 when those costs relate directly to a contract or a specific anticipated
contract, generate/enhance resources that will be used in satisfying performance obligations in
the future and are expected to be recovered. Examples of fulfillment costs include: direct labour,
direct materials and directly attributable allocated supervisory costs.
In some situations, previously expensed contract costs will now be capitalized; in other situations,
costs currently capitalized may not be eligible for capitalization under IFRS 15. Entities should
carefully consider the above guidance to determine whether a change in their capitalization policy
is required.
What new disclosures are required?
For some entities, IFRS 15 may require considerably more disclosure about revenue, including information about contract balances, remaining performance obligations and key judgments. No exemptions have been provided for commercially sensitive information.
The objective of the disclosure requirements is for an entity to disclose sufficient information to
enable users of financial statements to understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. To achieve that objective, an entity
should disclose qualitative and quantitative information about all of the following:
• contracts with customers
• significant judgments and changes in the judgments made in applying the guidance to those
contracts, and
• any assets recognized from the costs to obtain or fulfill a contract with a customer.
In order to achieve the disclosure objective stated above, IFRS 15 introduces a number of new
disclosure requirements. Specific disclosures are outlined in IFRS 15.113-.129.
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How do the proposed changes affect my business?
The extent of the impact on an individual entity will vary depending on the complexity of revenue
arrangements, contract-specific terms and conditions, systems already in place and other entityspecific facts and circumstances.
The proposed changes to the accounting for revenue may specifically affect key business areas,
such as:
Business Area
Questions
Considerations
•
•
Consider clarifying and/or modifying
pricing structures, contract terms,
conditions as well as contracting
policies and procedures.
•
Consider how changes in the
following may affect information
technology:
—— timing and amount of revenue
recognition
—— allocation among performance
obligations
—— capturing data used to make
estimates
—— capturing data required for
disclosures.
Consider whether changes to systems and processes are needed to
comply with the new requirements,
including producing the associated
disclosures.
Consider the effect of applying the
standard retrospectively and whether
the IT systems are capable of running
parallel data during the transition
period.
Sales
•
How will IFRS 15 affect existing
contract terms, pricing policies or
stand-alone prices?
Should any changes be made to
sales practices? If so, how will such
changes affect the sales force?
Information Technology
Systems,
software and
programs
•
•
Is the current IT system capable of
collecting the necessary data for the
new reporting requirements?
Is it necessary to develop new IT
systems and/or manual processes
for new data accumulation?
•
•
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CPA Canada Financial Reporting Alert
October 2014
Business Area
Questions
Considerations
Performance Measurement
Employee
compensation
•
•
Are employee commission arrangements affected?
Is there a need to change compensation packages affected by revenue?
•
•
•
Contractual
covenants
•
Are contractual covenants affected
(e.g., banking covenants)?
•
•
Acquisition
payouts
•
Are acquisition-related clauses such
as contingent consideration relating
to performance (also known as “payout targets”) affected?
•
Consider the effect on items such as:
—— revenue
—— gross profit
—— EBITDA
—— net income
—— profitability ratios, such as return
on assets, return on investment
or return on income.
Plan for potential changes to performance metrics, such as revenue
growth and gross profit.
Consider aligning performance metrics and related compensation plans
with the new revenue model, including revising commission structures
and bonus payment arrangements.
Consider the effect on items such as:
—— assets (both current and
non-current)
—— liabilities (both current and
non-current)
—— equity
—— solvency ratios such as debt to
equity or interest coverage
—— current ratio
Consider carefully monitoring the
potential effect on covenants during
IFRS 15 implementation.
If acquisition-related contingent consideration is dependent on financial
statement results (e.g., payout based
on a percentage of net income), such
consideration may be affected.
To manage the impact on performance measurement, consider:
• determining whether contractual calculations (e.g., bonuses or covenants) are based on “frozen GAAP”
(i.e., IFRSs at the time of contract negotiation) or would be affected directly by the adoption of new
accounting standards
• redefining and/or renegotiating performance metrics.
October 2014
CPA Canada Financial Reporting Alert11
Business Area
Questions
Considerations
Communication and Training
•
•
Is it necessary to develop a communication plan for affected stakeholders (e.g., internal staff, directors,
creditors and analysts)?
What type of training should be
offered to affected stakeholders?
•
•
•
•
Consider early education for all
affected stakeholders.
Consider developing a communication strategy (e.g., webinar presentations, roundtable meetings) to
help key stakeholders understand
the possible implications of adopting
IFRS 15.
If a modified retrospective transition
approach is selected, consider how
the possible lack of comparability
may result in requests for additional
information.
Plan and deliver training for sales,
IT, finance and other affected operational staff.
Finance
Budgeting
•
•
Processes and
internal
controls
•
•
•
Has a budget been allocated for
supporting the implementation of
IFRS 15, including IT changes, training
and education?
Have budgets and forecasts been
adjusted to reflect the effect of
IFRS 15?
•
When will accounting policies and
procedures be updated to comply
with IFRS 15?
Are processes and controls in place
to capture new information required
to support estimates and judgments?
Is there easy access to the information required to satisfy the new
disclosure requirements?
•
•
•
•
Consider updating key processes
and controls to reflect how revenue
transactions are accounted.
Consider if internal control certification procedures need to be updated.
Understand that IFRS 15 requires
new qualitative and quantitative
disclosures.
Dividends
•
Are dividend payouts affected?
•
Consider the effect on net income,
retained earnings and dividend payout ratios.
Income taxes
•
Will there be any changes in timing
differences related to revenue recognition that will impact the amount of
cash taxes to be paid?
Will transfer pricing strategies have
to be adjusted?
•
Consider the effect on taxable
income of:
—— timing and amount of revenue
recognized
—— capitalization of costs
—— expensing of costs.
Consider any impact on existing tax
strategies.
Consider new deferred tax items.
•
•
•
12
Consider developing a special IFRS 15
transition budget.
Consider updating budgets and forecasts to address the effect of IFRS 15.
CPA Canada Financial Reporting Alert
October 2014
What is my action plan?
All entities will need to understand IFRS 15, review its revenue transactions, controls and processes
and assess the implications of adopting the standard. Even in situations where the effect of adopting
IFRS 15 is concluded to be minimal, it is critical to document the process undertaken to determine
the effect of adopting the standard.
To prepare for the adoption of IFRS 15, consider a preliminary action plan, such as:
Action
Milestone (what)
Timeline (when)
Resources (who)
1
Understand
Understand IFRS 15:
• Read IFRS 15.
• Download and review IFRS 15related information from the
IASB website.
• Consider other externally prepared
information on this topic (e.g.,
refer to the CPA Canada website
for a variety of externally prepared
summary documents).
• Discuss the implications of IFRS
15 with industry peers or a trusted
business advisor.
• Consider education and training
available on this topic.
[Set specific due
date for achieving
milestones]
[Determine who
will implement the
milestones and
what resources
are required]
2
Review
Review processes (including systems,
data collection and internal controls):
• Develop a comprehensive project
management process (e.g., identify a project leader) and provide
appropriate resources and budgets.
• Identify required but unavailable
information and develop a plan for
obtaining such information.
• Review customer contracts to
identify whether contracts are
separate or should be combined.
• Review customer contracts to
identify separate performance
obligations.
• Consider any new data that should
be collected and retained and
compare that requirement to current system/process capabilities.
October 2014
CPA Canada Financial Reporting Alert13
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Action
Milestone (what)
Timeline (when)
Resources (who)
3
Assess
Assess the effect of IFRS 15:
• Compare the accounting guidance
in IFRS 15 to your entity’s current
accounting policy for each revenue
transaction.
• Determine when performance is
satisfied and whether the sale
of goods or services should be
recognized over time or at a single
point in time.
• Consider the required changes to
your entity’s current accounting
revenue recognition policies.
• Assess the adequacy of existing
controls and procedures and consider any new controls needed to
support any revised processes.
• Discuss any potential changes with
the entity’s auditor.
• Document the process undertaken
to analyze and quantify the effect
of adopting IFRS 15.
• Adopt and communicate required
changes to appropriate personnel.
• Consider drafting pro-forma financial statements.
• Assess the implications for
contractual arrangements. • Consider modifying agreements
(if necessary) for bonuses and
covenants.
• Consider tax implications (if any).
• Consider the effect on key financial ratios, performance metrics
and covenants.
• Assess the need for additional
training.
[Set specific due
date for achieving
milestones]
[Determine who
will implement the
milestones and
what resources
are required]
4
Implement
Implement IFRS 15:
• Update the entity’s accounting
policy and internal control documentation to reflect the adoption
of IFRS 15.
• Decide on which transition method
will be applied on transition (see
earlier discussion on transition).
• Review contracts to determine
which ones will be incomplete on
the transition date and determine
transition effect.
CPA Canada Financial Reporting Alert
October 2014
5
Action
Milestone (what)
Timeline (when)
Resources (who)
Communicate
Communicate the effects of IFRS 15:
• Communicate with the board of
directors and the audit committee.
• If applicable, develop a communication plan to inform all stakeholders (e.g., lenders and investors) of
the associated changes made to
your entity’s accounting policy as
a result of implementing IFRS 15.
[Set specific due
date for achieving
milestones]
[Determine who
will implement the
milestones and
what resources
are required]
What resources are available to help me?
IASB
Joint Transition Resource Group for Revenue Recognition
The IASB and the FASB have jointly formed a Joint Transition Resource Group for Revenue Recognition (TRG). The TRG will inform the IASB and the FASB about potential implementation issues that
could arise when entities implement IFRS 15.
Other Resources
The IASB has issued several resources to various stakeholders to help them understand and apply
IFRS 15. Examples of resources include:
• Project Summary Feedback Statement (May 2014)
• Webcast — INFOCUS: Revenue from Contracts with Customers (June 2014)
• Investor Perspective — Revenue Recognition (June 2014)
To access information on the TRG or to download some of the above-noted resources,
visit www.iasb.org.
CPA Canada
CPA Canada has compiled various IFRS technical summaries, practical application guides and
frequently-asked-question documents aimed at supporting the understanding and application
of IFRS 15.
To access our online library of IFRS resources, visit www.cpacanada.ca/ifrs
October 2014
CPA Canada Financial Reporting Alert15
Comments on this CPA Canada Financial Reporting Alert, or suggestions for future CPA Canada
Financial Reporting Alerts should be sent to:
Alex Fisher, CPA, CA
Principal, International Financial Reporting Standards
Research, Guidance and Support
Chartered Professional Accountants of Canada
277 Wellington Street West
Toronto, Ontario M5V 3H2
email: [email protected]
DISCLAIMER
This paper was prepared by the Chartered Professional Accountants of Canada (CPA Canada) as non-authoritative guidance. It has
not been approved by the Canadian Accounting Standards Board (AcSB).
CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a consequence of
the use, application or reliance on this material.
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Extracts from the International Financial Reporting Standards, International Accounting Standards and Exposure Drafts are reproduced with permission of the IFRS Foundation.
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