IFRS 15 – Revenue from Contracts with Customers

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April 25, 2018
Employee Motivation
April 25, 2018

IFRS 15 recently became effective for financial periods beginning on or after 1 January 2018. IFRS 15 is only applicable to entities that have implemented International Financial Reporting Standards as their financial reporting framework. The new standard does not currently affect entities utilising the International Financial Reporting Standards for Small and Medium-Sized Entities as financial reporting framework.

The change from the previous standards regulating the recognition of revenue was initiated as it was found that the previous main revenue recognition standards namely, IAS 18 Revenue and IAS 11 Construction Contracts, were difficult to understand and apply. Furthermore, IAS 18 provided limited guidance on important topics such as revenue recognition for multiple-element arrangements.

The IASB and FASB initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard that would:

  • Remove inconsistencies and weaknesses in existing revenue requirements;
  • Provide a more robust framework for addressing revenue issues;
  • Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
  • Provide more useful information to users of financial statements through improved disclosure requirements; and
  • Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

IFRS 15 utilises a five-step model framework to ensure that an entity will recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The five-step model consist out of the following individual steps:

  • Identifying the contract;
  • Identifying performance obligations;
  • Determination of the transaction price;
  • Allocation of the transaction price to performance obligations; and
  • Recognition of revenue when or as the entity satisfies a performance obligation.

We believe that the vast majority of entities utilising International Financial Reporting Standards as their financial reporting framework would have successfully planned for the adoption of the new standard as it is already effective. Management should currently be monitoring new systems implemented to facilitate the change from the previous standard. This will ensure proper implementation of controls and compliance to the new standard. We further recommend that management continuously monitor the impact on the revenue figure and compare the expected effect on KPI’s and ratios to the actual current results.

We firmly believe that proper planning prevents poor performance. We thus encourage management considering a switch to International Financial Reporting Standards from International Financial Reporting Standards for Small and Medium-Sized Entities to investigate the effect that IFRS 15 will have on the revenue figure.

We will gladly assist in any IFRS 15 implementation queries you might have.

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