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IFRS 15 goes under microscope in four-month consultation

Author: ICAEW Insights

Published: 25 Jul 2023

IASB review seeks stakeholders’ views on whether revenue recognition standard is working as it should – with costs and benefits of implementation a central concern.

Accountants have until late October to take part in a review of a fundamental, global standard for revenue recognition.

Launched on 29 June by the International Accounting Standards Board (IASB), the review is seeking professionals’ thoughts on the effectiveness of IFRS 15, which sets terms for how accountants must recognise, measure and disclose revenue stemming from businesses’ contracts with their clients.

Implemented in 2018 following joint work between IASB and the US Financial Accounting Standards Board, IFRS 15 replaced a patchwork of previous standards and set out to simplify this area of accountancy under two innovations.

Firstly, it established the core principle that recognition must depict the transfer of promised goods or services to the customer in a quantity that reflects the payment to which the supplier expects to be entitled.

Secondly, it introduced a five-step model to support that principle, requiring accountants to:

  1. identify the contract(s) with the customer in question;
  2. identify the performance obligations in the contract(s);
  3. determine the transaction price;
  4. allocate the transaction price to the contract’s performance obligations; and
  5. recognise revenue when (or as) the entity satisfies a performance obligation.

Finer detail

In its consultation paper, the IASB notes that the previous standards had limited revenue recognition requirements – in particular, on key topics such as accounting for multiple-element arrangements and allocating payment accordingly.

By providing a comprehensive, robust framework, the IASB expected to drive consistency in companies’ revenue accounting, with the aim of improving financial reporting as a whole. It also expected the standard’s benefits to be ongoing, to justify the implementation costs that companies would incur while transitioning from the old measures.

In the years since IFRS 15 took effect, the paper explains, the IASB has already picked up initial feedback from stakeholders. Overall, the majority agree that the benefits of IFRS 15 outweigh the costs of implementing and applying it, and their general view of the five-step model is that it is particularly helpful as a robust basis for analysing complex transactions.

Stakeholders also credit the standard for improving comparability of revenue data among companies in the same sectors – as well as among sectors, and between companies in various capital markets.

Some stakeholders mentioned that implementing IFRS 15 has provided them with better knowledge of their client contracts, improved internal controls and enhanced cooperation between corporate accounting and business functions. While many observed that applying IFRS 15 was initially challenging, their companies have now developed accounting policies around the standard – so some have cautioned the IASB against making any fundamental changes to it that would lead to further disruption.

However, the paper says, some stakeholders reported that their companies must exercise significant judgement in applying the standard’s requirements to complex fact patterns – an issue that could lead to inconsistent outcomes.

Others observed that implementing IFRS 15 involved a considerable learning process. For those stakeholders, the standard’s finer detail is complex, and has required companies to put a great deal of time into grasping the underlying concepts and terminology – often enlisting accounting firms for advice on developing relevant policies.

As such, a few stakeholders suggested that IFRS 15 may be too complex for smaller companies – and those in emerging economies – to apply.

Objective fulfilled?

With those caveats in mind, the review aims to formally gauge stakeholders’ views on IFRS 15 in the round. In parallel, it is seeking evidence to assess whether the costs and benefits around preparing, auditing, enforcing and using revenue-related data are those that the IASB intended when it developed the standard.

Among the questions listed in the consultation, the IASB is asking stakeholders whether IFRS 15 provides a clear and sufficient basis for:

  • identifying performance obligations in a contract;
  • determining when to recognise revenue; and
  • accounting for contracts involving licences.

The paper is also asking whether IFRS 15’s disclosure requirements result in companies providing useful information to end users of financial statements.

In a statement, IASB Chair Andreas Barckow said: “We encourage stakeholders to share evidence they have with us on whether IFRS 15 is achieving its objective, around the understandability of the standard and on the costs and benefits of applying it.”

ICAEW Technical Manager, Corporate Reporting, Laura Woods says: “We believe IFRS 15 has generally brought about positive improvements to reporting on revenue matters since its implementation in 2018. Over this time, we have heard that the standard has not necessarily resulted in major changes to how entities recognise revenue. 

“But in fact, the process – while involving a significant learning curve – has helped entities to form a better grasp of the ways in which their contracts are structured and the relationship between those structural factors and what is reported externally. We will be forming our views in response to this request for information over the next few months,” Woods adds.

Comments on the consultation are open until 27 October.

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