This blog is written Mr. Zahid Mehmood Malik, FCCA, ACA Director. Please read this blog and provide your valued comments.
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
REASON TO DEVELOP NEW STANDARD
- Remove inconsistencies and weaknesses in the current revenue recognition literature
- Provide a more robust framework for addressing revenue recognition issues
- Improve comparability of revenue recognition practices across industries, entities within those industries, jurisdictions and capital markets
- Reduce the complexity of applying revenue recognition requirements by reducing the volume of the relevant standards and interpretations
- Provide more useful information to users through expanded disclosure requirements
For annual reporting periods beginning on or after 1 January 2018.
TRANSITION TO IFRS 15
Transition retrospectively to each prior period presented or retrospectively, with the cumulative effect of initial application recognised in the current period.
WHAT HAS CHANGED AS COMPARED TO PREVIOUS STANDARDS?
- IFRS 15 superseded IAS 11 (Construction contracts), IAS 18 (Revenue), IFRIC 13 (Customer royalty programmes, IFRIC 15 (Real Estate Sales), IFRIC 18 (transfer of assets from customers), and SIC 31 (Advertising barter transactions).
- Revenue recognition is based on transfer of control of goods or services to the customer whereas it was based on risk and rewards under previous standard.
- A standardized 5 steps revenue recognition model to recognize all types of revenues whereas there was different recognition criteria for different types of incomes under previous standards.
- There is significant guidance on identification of contract whereas concept was not addressed specifically.
- Significant explanatory and application guidance on identification of separate performance obligation.
- Contract modification covered for all revenue contracts whereas previously covered only in IAS 11 relating to construction contract only.
- There is specific guidance relating to warranties, significant financing component, broader explanation of contract cost applicable to all contracts and detailed guidance covering types of variable consideration arrangements, estimation methods etc.
- Detailed guidance covering various scenarios on consideration payable to customers.
- Detailed guidance on determination, allocation and changes in transaction price etc., supplemented with illustrative examples.
- There is detailed guidance on licencing arrangement which may lead to different revenue recognition under licensing
- Require new and extensive disclosures in the financial statements.
MOST IMPACTED INDUSTRIES
- Real Estate
Zahid Mehmood Malik, FCCA, ACA