IFRS 15, Revenue from Contracts with Customers, introduces some significant changes in accounting for revenue. The effect on entities will depend on the nature of their sales transactions. While some entities will see little, if any, changes to the recognition and measurement of revenue, others will see substantial changes (for example, entities with long-term service contracts and multiple-element arrangements). Many entities will have additional disclosure requirements.
IFRS 15 was incorporated into Part I of the CPA Canada Handbook – Accounting in February 2015.
IFRS 15 is effective for annual periods beginning on or after January 1, 2017. Comparatives will be required for 2016. Entities will need to assess the extent to which changes will be required to processes, IT systems and internal controls as a result of the new standard. This assessment phase is potentially a significant undertaking and, thus, it is important for all entities to consider how they are affected. — If you have not already started, you should begin the assessment now!
In a nutshell, IFRS 15:
- covers when and how much revenue to recognize (but excludes leases, insurance contracts and financial instruments);
- includes guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications);
- establishes core principles that will reduce the need for interpretive guidance; and
- provides more information for financial statement users.
When to Recognize Revenue
Revenue is recognized when the seller completes each separate performance obligation (i.e., when control of the good or service has transferred, rather than being based on risks and rewards). Some sales include two or more performance obligations. For example, when a cell phone is sold together with a service contract, the seller recognizes revenue on the sale of the phone at the time the phone is provided to the customer and revenue on the service contract over the term of the contract.
How Much Revenue to Recognize
The revenue to be recognized for each performance obligation is an allocation of the total amount expected to be received under the contract, based on the stand-alone selling price of the goods or services. For example, the total revenue recognized for a cell phone contract would be allocated between the cell phone and the provision of service.
This allocation may result in recognizing more revenue for the sale of the cell phone than the cash received at that time and less revenue being recognized over the service contract than the cash received during the contract period.
You will need to consider other issues, such as the following:
- Are there:
- incremental costs of obtaining a contract (for example, sales commissions)?; or
- costs to fulfil a contract (for example, salaries and wages of employees who provide promised services directly to the customer and supplies used in providing services to a customer)?
These costs are typically expensed today but may be able to be capitalized under the new standard.
- Is there:
- a warranty provided to customers in connection with the sale of a good or service and, if so, should this be accounted for as a separate performance obligation?;
- a license that is sold with other goods and services and, if so, is the license a separate performance obligation?
- Is the company acting as a principal or an agent if a third party provides certain goods or services? This can affect the amount and timing of revenue recognition.
The new revenue standard is the result of a joint project between the IASB and the FASB. While the result is a converged standard issued by each Board, there are some minor differences in certain areas.
The two Boards subsequently formed the Revenue Recognition Transition Resource Group (TRG) to identify and discuss implementation issues arising from the new standard. Ms. Karyn Brooks, retired Senior Vice-President and Controller of BCE Inc., is a member of the TRG. Stakeholders are encouraged to submit potential implementation issues to the TRG as soon as possible. TRG meetings are video-webcast and archived.
For additional information on this project, please refer to the IASB project page, which includes the Project Summary and Feedback Statement, an archived webcast discussing the final standard, and other relevant information. The AcSB project page provides information on the AcSB’s participation in this project.
Nancy A. Estey, CPA, CA
Principal, Accounting Standards Board
Phone: +1 (416) 204-3271