The IFRS 15 revenue recognition regulations came into effect for annual reporting periods on or after the 1st January 2018. Under the new standard, you are required to follow a five step process to recognise revenue.
The five step model for revenue recognition
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service promised in the contract
5. Recognise revenue when a performance obligation is satisfied by transferring a promised good or service to a customer.
6 Key considerations for CFOs
The challenge for CFOs and finance professionals is to accurately determine how much revenue can be recognised at different points over the contract lifecycle. In order to be successful, there are 6 key questions CFOs need to answer in conjunction with the IFRS 15 five step process.
1. Is the revenue recognised over time (spread between the periods during contract duration) or at the point of time (upon completion)?
2. If the revenue is to be recognised over time, how is progress towards completion measured (previously “stage of completion”)?
3. How is revenue from bundled offers (with multiple deliverables) measured? Should the contract be split into several components?
4. How are contract modifications handled?
5. How are contract costs, including the cost of obtaining the contract recognised? Should the costs be expensed immediately or capitalised in order to defer the impact?
6. What disclosures need to be made? Can you obtain appropriate and relevant information?
Each of these questions will need to be answered in conjunction with the 5 steps model outlined above. For example, if revenue is recognised over time, you will need to determine when certain performance obligations are satisfied, this determination will also need to be supported for reporting purposes.
From a technology perspective, financial information systems must operate in accordance with rules set out in standards like IFRS 15. Changes to these rules may have an impact on these systems; this becomes especially important when existing rules have been embedded within automated system processes.
Is your financial management system ready to comply with IFRS 15?
If you haven’t already, obtain assurances from your financial systems vendor that your system has the ability to handle the new standard. In cases where the system can’t handle the new standard, large manual work-arounds and external data manipulation may be required; this leaves you open to errors which regulators will be cracking down on.