UNDERSTANDING THE IFRS RULES FOR REVENUE RECOGNITION

UNDERSTANDING THE IFRS RULES FOR REVENUE RECOGNITION

Although its actual implementation has been delayed to 2018, buying us all another year to study it in full, the new IFRS 15 revenue standard is something you should be making yourself aware of sooner rather than later.

The Revenue from Contracts with Customers standard specifies both how and when to recognise revenue, with a requirement for more informative, relevant disclosures in financial statements. The new standard is based on a five-step model framework that is intended to be applied to all customer contracts:

Identify the contract with the customer

This requires documented approvals and clear payment terms

Identify the performance obligation in the contract

Both goods and services qualify as obligations

Determine the transaction price

Includes new rules for variable consideration

Allocate the transaction price to each performance obligation

Requires adjustments for estimates and financing

Recognise revenue when each performance obligation is satisfied

Defines revenue based on when control is passed

While IFRS 15 may have little effect on some business, it will require significant changes for others, especially since it redefines revenue to include certain costs associated with fulfilling a sale. Understanding the standard is one thing, but the IASB and FASB have recognized that understanding how to implement it is another thing entirely – hence the delay from January 2017 to January 2018.

At a high level, business will be required to reassess whether they recognize revenue over time or at a fixed point in time. Depending on that acceleration/deceleration, everything from earn-outs, to tax payments, to employee incentives may be impacted.

Click here to know more about   Outsourced Finance