Clarifications to IFRS 15 regarding Revenue from Contracts with Customers

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers.

Following the discussions conducted at meetings of the Transition Resource Group (TRG), which was set up jointly by the IASB and the US FASB to support companies in implementing the new revenue Standard after it was issued in May 2014, further on 30 July 2015 the IASB published for public consultation some proposed clarifications to and transition reliefs for IFRS 15 Revenue from Contracts with Customers.

The Exposure Draft proposes to clarify :

• how to identify the performance obligations in a contract;
• how to determine whether a party involved in a transaction is the PRINCIPAL (responsible for providing the goods or services) or the AGENT (responsible for arranging for the goods or services to be provided to the customer); and
• how to determine whether a licence provides the customer with a right access or a right to use the entity’s intellectual property.

In Questions for Respondents part, concerning the Question 1 – Identifying performance obligations, it states that IFRS 15 requires an entity to assess the goods or services promised in a contract to identify the performance obligations in that contract. An entity is required to identify performance obligations on the basis of promised goods or services that are distinct. To clarify the application of the concept of ‘distinct’, the IASB is proposing to amend the Illustrative Examples accompanying IFRS 15. In order to achieve the same objective of clarifying when promised goods or services are distinct, the FASB has proposed to clarify the requirements of the new revenue Standard and add illustrations regarding the identification of performance obligations. The FASB’s proposals include amendments relating to promised goods or services that are immaterial in the context of a contract, and an accounting policy election relating to shipping and handling activities that the IASB is not proposing to address. The reasons for the IASB’s decisions are explained in paragraph BC7-BC25 of the ED.

Regarding the Principal versus Agent considerations as concerned in Question 2, the ED states further that 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. To do so, an entity assesses whether it controls the specified goods or services before they are transferred to the customer. To clarify the application of the CONTROL principle, the IASB is proposing to amend paragraphs B34-B38 of IFRS 15, amend Examples 45-48 accompanying IFRS 15 and add Examples 46A and 48A. The FASB has reached the same decisions as the IASB regarding the application of the control principle when assessing whether an entity is a principal or an agent, and is expected to propose amendments to Topic 606 that are the same as (or similar to) those included in this ED in this respect. The reasons for the Boards’ decisions are explained in paragraphs BC26-BC56.

In addition, the IASB also proposes two reliefs to aid the transition to the new revenue standard.

The IASB is seeking comments on this ED by 28 October 2015.

IFRS 15 regarding Revenue from Contracts with Customers, reasons for issuing the IFRS

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers.

Reasons for issuing the IFRS

Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in IFRS differed from those in US GAAP and both sets of requirements were in need of improvement. Previous revenue recognition requirements in IFRS provided limited guidance, and, consequently, the two main revenue recognition Standards, IAS 18 Revenue and IAS 11 Construction Contracts, could be difficult to apply to complex transactions. In addition, IAS 18 provided limited guidance on many important revenue topics such as accounting for multiple-element arrangements. In contrast, US GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions.

Accordingly, the IASB and the US national standard-setter, the FASB initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard for IFRS and US GAAP that would :

1. remove inconsistencies and weaknesses in previous revenue requirements;
2. provide a more robust framework for addressing revenue issues;
3. improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
4. provide more useful information to users of financial statements through improved disclosure requirements; and
5. simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

IFRS 15, together with Topic 606 that was introduced into the FASB Accounting Standards Codification by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606), completes the joint effort by the IASB and the FASB to meet those objectives and improve financial reporting by creating a common revenue recognition standard for IFRS and US GAAP.

IFRS 15 will be effective for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies this Standard earlier, it shall disclose the fact.

IFRS 15 supersedes the following Standards :

1. IAS 11 Construction Contracts;
2. IAS 18 Revenue;
3. IFRIC 13 Customer Loyalty Programmes;
4. IFRIC 15 Agreements for the Construction of Real Estate;
5. IFRIC 18 Transfer of Assets from Customers; and
6. SIC-31 Revenue-Barter Transactions Involving Advertising Services

Latest, on 22 July 2015 the IASB issued a press release letter which confirmed a one-year deferral of effective date of IFRS 15 to 1 January 2018.

The revenue Standard was issued jointly by the IASB and the US Financial Accounting Standards Board (FASB) in May 2014 with an effective date of 1 January 2017. Both Boards have now confirmed a one-year deferral of the effective date. Companies applying IFRS continue to have the option to apply the Standard earlier if they wish to do so.