Achieving IFRS 15 Compliance
IFRS 15 is a revenue recognition standard that impacts all businesses entering into contracts with customers to transfer goods or services, including public, private, and non-profit entities. Both publicly and privately held companies should now be IFRS 15 compliant based on the 2017 and 2018 deadlines. Is yours?
The purpose of the IFRS 15 standard is to eliminate variations in the way businesses across industries handle accounting for similar transactions. This lack of standardization in financial reporting has made it challenging for investors and other consumers of financial statements to compare results across industries and even companies within the same industry.
Don’t rely on time-consuming, error-prone spreadsheets.
The right cloud application empowers your teams to make informed business decisions based on actionable data.
IFRS 15: A Five-Step Model to Compliance
In developing the IFRS standard, governing bodies aimed to provide a framework to drive consistency in financial reporting, improve comparative analysis and reporting, and simplify the preparation of financial statements through a Five-Step Model for Revenue Recognition.
We’ll break down the IFRS 15 compliance recommendations based on the contract process into the following 5 steps:
- Identify the contract with a customer: This step outlines the criteria for establishing a contract with a customer to supply goods or services.
- Identify the performance obligations in the contract: This step describes how distinct performance obligations in the contract must be handled.
- Determine the transaction price: This step outlines considerations when establishing the transaction price, the amount the business expects to receive for transferring goods and services to the customer.
- Allocate the transaction price: This step provides guidelines for allocating the transaction price across the contract’s separate performance obligations, representing what the customer agrees to pay for the goods and services.
- Recognize revenue when or as the entity satisfies a performance obligation: Revenue can be recognized as the business meets each performance obligation. This step specifies how that should happen.
What is the Impact of IFRS 15?
The “Revenue from Contracts with Customers” standardizes and simplifies how companies record revenue in customer contracts. The impact might not be as significant for companies, such as retailers, that sell products and receive revenue at one time. However, for companies selling recurring services like subscriptions or licenses, the rule may improve results.
Under the previous law, if a company, for example, sold a 12-month software product license, it could apply only six months of revenue to its books. It would not be able to count the next six months of revenue until 2017. But under IFRS 15 (also ASC 606), it can count all the revenue at once.
Implementing IFRS 15 also has broad ramifications. Meeting the standard will impact not just your accounting and financial departments but also your IT systems, HR policies, and more. It’s these broader implications and unknowns that have many companies concerned.
Assessing the Impact on Your Business
If you aren’t armed with the proper information, making the best business decision can be difficult.
At some point in the transition process, you’ll need to assess how the new standards will affect your company. This includes an evaluation of primary revenue streams and key contracts to identify the required revenue recognition changes and the business units where these changes may have the greatest impact.
The questions that come up during this phase are weighty. When you apply the new five-step compliance model to a sampling of mission-critical contracts, what happens to your revenue recognition profile? Will you need to change the design of your customer contracts? Can your sales process stay the same, or does it need tweaking? If you aren’t armed with the proper information, making the best business decision becomes difficult.
Evaluating Effort
Know the scope of work required so you can assemble the right plan, team, and budget. Several factors will impact your resource allocation and cost calculations:
Contract evaluation requirements: Develop a new rules-based framework for your accounting policies based on an assessment of your contracts. If your contracts are highly variable, will it be burdensome for the transition team to thoroughly evaluate each one and draft new policies accordingly?
Choice of transition method: The full retrospective and modified retrospective methods each have pros and cons, but both require significant implementation efforts. The full retrospective method requires restatement of the prior two comparative years (possibly three), while the modified retrospective method requires dual recordkeeping during the adoption year. Do you have the necessary systems and people in place?
Handling comprehensive disclosures: The new standards’ requirements for quantitative and qualitative disclosures are significantly more expansive than those under the current guidelines. How will you create a method for systematically gathering, reviewing, and disclosing information about remaining performance obligations, including resources consumed, labor hours expended, costs incurred, or machine hours used?
Post-transition revenue recognition plans: How will you track performance obligations and apply your new revenue calculation rules? How much manpower will be required to handle complex revenue scenarios, multiple revenue streams, and contract modification? How will you institute controls along the way?
Achieving IFRS 15 Compliance
Deliver the right reports to internal and external stakeholders.
About 50% of spreadsheet models used operationally in large businesses have material defects. You’ll need to deliver the right reports internally and externally to pass an audit—the crux of this entire endeavor. If your process is based on spreadsheets, this will be painful. Inefficient and error-prone, spreadsheets are notoriously difficult to audit. Furthermore, multiple user access easily leads to version-control problems, degrading data quality. It’s not just anecdotal: the European Spreadsheet Risks Interest Group cites research stating that 50% of spreadsheet models used operationally in large businesses have material defects.
Finding the Right Technology to Help
A robust technology solution, e.g., a revenue recognition cloud application, can offer two key ways of reducing the amount of required manual effort: automation and flexibility across your revenue recognition processes. First and foremost, the right solution helps you track various revenue streams, automate allocations and calculations, and configure different rules and templates for different calculations—all while eliminating your reliance on overly complex spreadsheets.
Additionally, a strong technology solution also eases the pain of implementing a transition method. Your choice of method should be driven by what’s best for investors, auditors, and financial statement readers, not by the capabilities of your IT systems (or lack thereof). With a strong technology solution, you can recognize revenue under the current standards up to the transition date, then seamlessly deploy retrospective or parallel recognition processes. Let your systems empower you to make the best choice for your stakeholders.
With the right system in place, you can produce clear audit trails and attach supporting documents and evidence directly to transactions. A robust tool also provides user-friendly reporting options, allowing you to slice, dice, and customize your data on a summary level or on an item-by-item basis. With better reports, your business teams will make better decisions.
What to Look for in a Revenue Recognition Cloud Application
- Powerful, flexible data models: Revenue models continue to multiply, from product-based to SaaS to bundled and usage-based contracts. The right tool recognizes revenue from multiple sources, including directly from opportunities, orders, contracts, projects, and invoices. The data model should also handle complex use cases, including multi-element arrangements.
- Seamless integration with other applications: The best cloud applications harness the power of your existing platforms (e.g., Salesforce) and integrate directly with your other applications, including customer relationship management (CRM) and professional services automation (PSA).
- Configurable templates and rules: The right tool enables you to adapt to whatever comes next. Create different rules based on your needs and how you want to recognize revenue. Find a tool that adapts to what’s best for your business—not the other way around.
Connect people, projects, and customers together and deliver profitable growth.
See how Certinia solutions transform and optimize operations.
)
