Audit and assurance

IFRS 15: revenue from contracts with customers

As a headline measure of performance, it is important for businesses to understand any future changes to the way in which they will recognise revenues. The resultant impact on profits could also have dividend and tax planning implications.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) published their new converged standard on revenue recognition in May 2014.

The standard is expected to receive EU endorsement later this year and will be effective for periods beginning on or after 1 January 2017.  However, it will be available for early adoption, and applies retrospectively (with some transitional expedients).

Although it may seem some way off, the chances are that many businesses are entering into contractual arrangements today that will fall to be accounted for differently under the new standard.

Understanding the key requirements of the standard and making an early evaluation of the potential impact will reduce the risk of surprises and may give businesses the opportunity to revise standard contract terms where these might have undesired consequences in terms of timing or measurement of revenue.

For businesses with a large number of customer contracts, in particular those with a high degree of variability and / or non-standard terms, this evaluation could prove to be a time-consuming exercise.

Further, the enhanced disclosure requirements in the standard will mean that entities need to capture a lot more information in respect of their contracts with their customers, and this may in turn require system enhancements to produce the data required.

What's different about the new standard?

The standard sets out a five-step process to the recognition and measurement of revenues:

  •     Identify the performance obligations
  •     Determine the transaction price
  •     Identify the contract(s) with the customer
  •     Allocate the transaction price to the performance obligations
  •     Recognise revenue when or as an entity satisfies performance obligations

On the face of it this all looks pretty straightforward, however the devil is in the detail.  While there may be many businesses where revenue recognition is unchanged, they will all need to assess whether the requirements underpinning each of these steps could result in changes to their existing practice.

Areas where differences may arise include:

  •  IFRS 15 is a control-based model – revenue is recognised when control of an asset (goods or services) passes.  The series of criteria for determining whether control is transferred over time are new, and may well result in different patterns of revenue recognition than those previously seen under IAS 18 and IAS 11 for services and construction contracts
  •  contract modifications – where previously there was no guidance there are now specific requirements which may result in different accounting treatments from those adopted in the past
  • multiple element contracts will need to be analysed to identify the separate performance obligations which are 'distinct' – this may result in some differences from the previous approach to unbundling such contracts and result in deferral or acceleration of revenue recognition
  •  variable consideration will be recognised at the 'expected amount', although this will be subject to a constraint, in that it will only be recognised to the extent that it is not highly probable (very high threshold) that a significant reversal will subsequently occur.

The extent to which businesses will see a change in their revenue recognition will in part depend on current practice in their particular sector.  We have produced a series of bulletins which give some initial insights into the practical implications for particular sectors:

Your next steps

If you would like to discuss your contractual arrangements, and how these changes could impact the way in which your business will recognise revenues in the future, please contact your usual Grant Thornton contact or Jake Green, Director of Financial Reporting, at who will be happy to support.