The revenue standard is finally out
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have jointly issued a long-awaited standard earlier this year.IFRS 15 – Revenue from contracts with customers, which will supersede virtually all of the revenue recognition guidance of both IFRS and US GAAP, including industry-specific guidance for films, broadcasting, cable television and music.
Subject to EU endorsement, the new standard will be effective for annual periods beginning on or after 01 January 2017, with early application being permitted. Now the real work of implementing it begins.
The core principle of the new standard (embodied in the standard’s five-step model) is that a company will recognise revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.
In applying this model, media and entertainment companies will have to make significantly more estimates and use more judgment than they do for US GAAP reporting purposes, but will conversely find more detailed and more prescriptive guidance compared to what’s currently available under current IFRS
- identifying each separate performance obligation in film, broadcasting, book, music, publishing and advertising contracts. Estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation;
- determining whether a license of intellectual property (IP) is a promise to provide a right to access the IP (recognised over time) or a right to use the IP (recognised at a point in time), although the new standard is clear that sales and usage-based royalties from licenses of IP are recognised when the subsequent sales or usage occurs.
Media and entertainment companies
Media and entertainment companies can choose to apply the new standard using either the full retrospective approach or a modified retrospective approach. Under the modified approach, financial statements will be prepared for the year of adoption using the new standard, but prior periods won’t be adjusted. Instead, companies will recognise a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under today’s revenue guidance.
One way or the other, media and entertainment companies should begin assessing the possible changes to the timing of revenue and earnings recognition, and planning for the range of impacts the new revenue standard will have on their business. Including but not limited to, underlying pricing models, contracting and licensing arrangements, KPI and staff incentive schemes, and the core information systems and accounting processes enabling collection of the required data, and compliance with the new standard.
While some companies will be able to implement the standard with limited effort others may find implementation to be a significant undertaking, that’s why making an early assessment of the standard’s impact on your company is so important.
Frédéric Larquetoux, Director, Ernst & Young
Entertainment and Media Group, November 2014
The views expressed are the author’s and not ICAEW’s.