How Did IFRS 15 Affect the Revenue Recognition Practices and Financial Statements of Firms? Evidence From Australia and New Zealand (2024)

FAQs

How did IFRS 15 affect the revenue recognition practices and financial statements of firms? ›

The standard did not affect the accounting for standard retail sales transactions. However, it resulted in the deferral of revenue recognition for the majority of firms whose revenue recognition was impacted by the standard.

The main one-off effects of implementing IFRS 15 were found to be on performance indicators and the changes in IT systems that were needed in order to provide detailed information in the notes to the financial statements.

IFRS influences the ways in which the components of a balance sheet are reported. Statement of Comprehensive Income: This can take the form of one statement or be separated into a profit and loss statement and a statement of other income, including property and equipment.

The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised 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.

Applying IFRS 15, an entity recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Disadvantages of IFRS include a lack of detail, significant adoption costs, and the perception that IFRS is a less stringent standard than what is already in place in some countries.

IFRS 15 introduces enhanced disclosure requirements to provide users of financial statements with more information about revenue recognition. Companies will need to disclose qualitative and quantitative information about revenue streams, significant judgments, and changes in contract balances.

IFRS 15 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for revenue from contracts with customers. It was adopted in 2014 and became effective in January 2018.

IFRS 18 represents the most significant change to companies' presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago. It will give investors better information about companies' financial performance and consistent anchor points for their analysis.

How can the differences between IFRS and US GAAP affect the overall financial statements? ›

GAAP is a framework based on legal authority while IFRS is based on a principles-based approach. GAAP is more detailed and prescriptive while IFRS is more high-level and flexible. GAAP requires more disclosures while IFRS requires fewer disclosures.

An especially troublesome weakness of IFRS is that it does not necessarily utilize possible built-in crosschecks. Thus, for example, a reported IFRS “income” number may easily be in conflict with other figures in the same financial period.

IFRS 15 introduces guidance on how to identify and allocate revenue between the various goods and services of a contract (i.e., identification of performance obligations). This could affect when revenue from a contract is recognised and whether revenue should be recognised at a point in time or over a period.

Adjustments for the effects of the time value of money (a 'financing component'): if a financing component is significant, IFRS 15 requires an adjustment to be made for the effect of implicit financing. cash received in advance from buyer – vendor to recognise finance cost and increase in deferred revenue.

An entity may receive a non-refundable prepayment from a customer that gives the customer the right to receive goods or services in the future. Common examples include gift cards, vouchers and non-refundable tickets. Typically, some customers do not exercise their right – this is referred to as 'breakage'.

The revenue recognition principle, a key feature of accrual-basis accounting, dictates that companies recognize revenue as it is earned, not when they receive payment. Accurate revenue recognition is essential because it directly affects the integrity and consistency of a company's financial reporting.

Revenue recognition principles ensure that revenue is reported in the correct accounting period, matching it with the expenses incurred to generate it. This way, financial statements reflect the true income and cash flow of a business, and provide a basis for measuring its performance and value.

Essentially, IFRS is based on the guiding principle that revenue is recognized when value is delivered. GAAP has much more specific rules regarding how revenue is recognized in different industries, but essentially, income isn't recognized until goods have been delivered or a service has been rendered.