Report

Disclosing the expected impact of IFRS 15

It has been a long time coming, but IFRS 15 Revenue from Contracts with Customers is finally effective for annual periods beginning on or after 1 January 2018.

This new international financial reporting standard establishes a five-step model for recognising revenue arising from contracts with customers. It supersedes all current revenue recognition requirements under IFRS and it is expected to have a significant impact on companies’ financial reporting.

There is a requirement under IAS 8 for companies to explain the impact of new financial standards that are yet to be applied to the financial statements. The FRC has signalled that it will be scrutinising disclosures made by companies in their financial statements prior to implementing the Standard, and in November 2017 it stated that it expects all entities to both discuss and quantify the impact that IFRS 15 is anticipated to have in their last financial statements before the transition date.

Key trends and common themes

We have conducted a review of the public disclosures made by 91 companies across a number of industries including telecoms, utilities, construction, retail and recruitment to identify key trends and common themes arising as entities transition to, or begin to assess the impacts of, IFRS 15. We have primarily focused on the disclosures these companies have made in accordance with the requirements of IAS 8 in their latest Annual Reports. However this review also includes other sources such as press releases where these cover points of interest.

We noted that very few entities had decided to early-adopt the new Standard, with the majority choosing to implement it from their first reporting period commencing on or after the effective date of 1 January 2018. Just under half of the entities reviewed have not yet stated which method of transition they plan to apply. Of those that have disclosed their intended transition method, more than half have opted for the modified retrospective approach (cumulative adjustment to opening reserves of the current year).

In addition, the majority of entities have not yet quantified the expected impact that IFRS 15 will have in their disclosures. For those that have provided quantitative information of the impact of the new Standard, there is a fairly even split between those anticipating a material impact and those that do not.

Strongest disclosures

In our report, we have highlighted six companies that we consider have presented the strongest disclosures. These entities have provided analysis specific to each of their revenue streams, detailing the treatment under the previous revenue standards and how this has changed under IFRS 15, as well as quantifying these changes. The report also includes excerpts from all of the annual reports reviewed, and illustrates the wide range of approaches that companies have been taking to explain the expected impact of this new Standard.

It remains to be seen what level of challenge the FRC will raise in respect of those companies which it considers fall short of these expectations.

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