Transition to IFRS 15 are you ready?

Transcription

1 Transition to IFRS 15 are you ready? 01 May 2018 DOWNLOAD THE SLIDES TO ACCOMPANY THE WEBINAR FROM THE RESOURCES PANEL ON THE LEFT OF YOUR SCREEN THE WEBINAR WILL BEGIN SHORTLY

2 Transition to IFRS 15 are you ready? 01 May 2018

3 Introduction Henning Diederichs Technical Manager ICAEW

4 Today s presenters Phil Barden Partner Deloitte Jake Green Technical partner Grant Thornton

5 Ask a question Audio problems? Ensure your volume is turned on If you experience poor sound quality try refreshing your page. VAT Changes in 2015 Ask a question Type your question into the question box then click submit. Download resources here OR: FRF members: icaew.com/f-faculty : resources

6 Poll - At what stage of implementation are you?

7 Contents Introduction The five step approach Costs and licensing Transition and disclosures Q&A

8 STEP STEP STEP STEP STEP The five steps 5 steps of revenue recognition Identify the contract Identify the separate performance obligations Determine the transaction price Allocate transaction price to each performance obligation Recognise revenue when or as an entity satisfies performance obligations

9 Step 1: Identify the contract

10 Step 1 Is there a contract? Combining contracts Were contracts negotiated as a package with a single commercial objective? No Yes Does consideration in one contract depend on the price or performance of another contract? No Yes Treat as a separate contract Are contracts for a single performance obligation? No Yes Treat as separate contracts

11 Step 1 - modifications Start here How do we track modifications? Are all the newly added goods or services distinct? Y N At least some of the remaining goods and services distinct? N Treat as part of existing contract [IFRS 15.21(b)] Y What information is required? System solution? Practical simplifications? Does the additional price/unit = SSP? N Are all remaining goods and services distinct? N Impact on audit timing and fee? Y Treat as separate contract [IFRS 15.20] Y Treat as termination of old and creation of new contract [IFRS 15.21(a)] Combination judgement needed [IFRS 15.21(c)] Education of those involved, eg, project managers

12 Step 2: Identify the performance obligations

13 Step 2: identify performance obligations Performance obligation = distinct good or service (or a series of similar items for which control transfers over time) Two stage test to assess whether distinct: Is good / service capable of being distinct? Is it useful either (1) by itself or (2) with other items that are readily available (items only available from same supplier can still qualify)? Is good / service distinct in context of contract? Think about whether: Seller provides significant service of integrating with other deliverables Good or service significantly modifies or customises another deliverable Two or more deliverables are highly interdependent or highly interrelated

14 Step 2: identify performance obligations Can require a lot of judgement Useful to read examples and relevant paragraphs in Basis for Conclusions Highly inter-related / highly interdependent Functional interdependency not usually enough Focus on risk

15 Step 2: identify performance obligations Tricky areas Initial activities set up, planning, mobilisation Options for additional items / variable consideration Cancellable contracts

16 Step 3: Determine the transaction price

17 Step 3 determine the transaction price Estimate variable consideration and include in transaction price Apply constraint Expected value Or Most likely amount Limited to the extent that it is highly probable that there will not be a significant revenue reversal What does highly probable mean? Factors that could increase the likelihood or the magnitude of a revenue reversal include, but are not limited to, any of the following: the amount of consideration is highly susceptible to factors outside the entity s influence. Those factors may include volatility in a market, the judgement or actions of third parties, weather conditions and a high risk of obsolescence of the promised good or service. the uncertainty about the amount of consideration is not expected to be resolved for a long period of time. the entity s experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value. the entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances. the contract has a large number and broad range of possible consideration amounts.

18 Step 3 determine the transaction price Practical issues: Do our systems track payments to customers? Can we identify the distinct goods and services? How can we estimate the fair value of the goods or services? Is consideration payable to the customer for a distinct good or service? No Reduce the transaction price by the amount owed to the customer at later of: Related revenue is recognised Consideration is paid or promised to customer Yes Account for the purchase of distinct good or service similarly to purchases from suppliers: If consideration owed to the customer > fair value of goods/services: reduce transaction price by that excess If entity cannot estimate fair value of goods/services received from customer: reduce transaction price by total consideration owed to the customer

19 Step 4: Allocate the transaction price

20 Step 4: allocate transaction price Allocate transaction price between performance obligations Based on standalone selling price Usually pro rata residual method only allowed in limited circumstances Estimate standalone selling price if not observable Use of residual method only allowed if amount allocated makes sense and either: Item sold to different customers at / near same time for broad range of amounts, or Price not yet established and item not previously sold on standalone basis Specific guidance on allocating discounts to some items and not others limited circumstances, very rule-driven

21 Step 4: allocate transaction price Specific guidance on allocating variable consideration Allocate to a single performance obligation if: variability is directly related to that performance obligation (eg, entity s efforts, outcome from transfer), and consistent with overall allocation objective (i.e. reflects stand-alone selling price) Otherwise, allocate to all performance obligations

22 Step 4: allocate transaction price SSP reflects class of customer and circumstances of transaction Practical challenges Estimating stand-alone selling price Keeping SSP estimates up-to-date Multiple allocation calculations?

23 Step 5: Recognise revenue when or as a performance obligation is satisfied

24 Step 5 Point in time or over time? Does the customer control the asset as it is created or enhanced? No Does the customer receive and consume the benefits as the entity performs? No Does the asset have an alternative use to the entity Yes Yes Yes No Control is transferred over time Yes Does the entity have the enforceable right to receive payment for work to date? No Control is transferred at a point in time Alternative use consider the asset that will constructed Enforceable right to payment: consider both contractual and legal framework What have you actually promised to deliver (think back to step 2)

25 Step 5 estimating stage of completion Output or input method The objective: to depict an entity s performance in transferring control The lift example

26 Costs and licensing

27 Costs guidance Separate (and different) guidance for: Costs to obtain a contract Costs to fulfil a performance obligation Important to identify the right category Pre-contract costs could include both On transition, costs guidance must be applied retrospectively for open contracts Think about contract cancellation provisions

28 Costs of obtaining a contract Most costs of obtaining a contract have to be expensed when incurred Capitalise costs of obtaining a contract if and only if: Incremental; and expected to be recovered Incremental = costs would not have been incurred if contract was not obtained typically limited to success fees eg, sales commissions Practical expedient: may expense all costs if amortisation < 12 months

29 Costs to fulfil a performance obligation Many fulfilment costs in scope of other Standards IAS 2, IAS 16, IAS 38 Otherwise, capitalise if costs: relate to contract or anticipated contract that can be specifically identified; and generate or enhance resources to be used in satisfying performance obligations; and are expected to be recovered. Costs of satisfied or partially satisfied performance obligations must be expensed

30 Licensing two different types of licence Need to determine whether customer is being provided with: right to use IP as it exists at a point in time (control transfers at start), or right to access IP as it exists throughout the licence period (control transfers over time) Only accounted for as latter if three criteria met: entity required / expected to undertake activities that significantly affect IP licence directly exposes customer to positive / negative effects of activities, and activities do not result in transfer of good / service to customer as they occur

31 Licensing royalty exception Exception applies to sales-based or usage-based royalty promised in exchange for a licence of intellectual property Don t apply usual variable consideration rules (ie, estimate, constrain) Instead, recognise at later of when: - subsequent sale or usage occurs, and - when performance obligation is satisfied (i.e. if right to access) Exception is very rules-based does not apply to other transactions that are economically similar ICAEW 2017

32 Transition and disclosures

33 Transition and disclosures Choices to be made which will affect complexity of adoption but also the numbers! Which transition option: Retrospective or modified retrospective Which practical expedients for: Completed contracts Modifications Disclosure of transaction price allocated to remaining performance obligations

34 Transition and disclosures Don t forget disclosures; do your systems capture this information (lots more than this!): Disaggregation of revenue (how will you disaggregate yours?) Reconciliation of contracts assets and liabilities Aggregate transaction price allocated to remaining performance obligations and explanation of when this will be recognised (quantitative or qualitative) An explanation of why the measure of progress faithfully depicts performances Judgement needed to determine which are material (Practice Statement 2)

35 Questions Phil Barden Partner Deloitte Jake Green Technical partner Grant Thornton

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37 Future webinars and events Webinars 31 May Financial instruments under FRS 102 what s changed? 19 Jun IFRS update 26 Jul Supplier payment regulations icaew.com/frfwebinars for details of our upcoming webinars Events 2018 For full details of our events programme for 2018 please see our website. icaew.com/frfevents for details of upcoming events

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