The IFRS 15 (International Financial Reporting Standard) governs how turnover is to be identified and revenue recognised. The editorial staff of ECOVIS international interviewed Tommaso Fabi, auditor and Technical Director at Organismo Italiano di Contabilità (OIC – Italian standard setter) on the significance of the new standard and its affects.
Mr Fabi, what is new about the IFRS15?
The IFRS 15 replaces the current standards on revenue recognition, notably IAS 18 and IAS 11 (International Accounting Standards), by incorporating all the rules for revenue recognition in one standard. Revenue recognition in the new standard is based on the concept of control so that an entity recognises revenues only when the control over the asset has been transferred to the customer; this is consistent with the definition of assets within the IFRS’s conceptual framework. Previously, IAS 18 was based on the transfer of risk and rewards while IAS 11 was based on the rule of percentage of completion. The major innovation of the IFRS 15 is that the IASB has tried to incorporate all the revenue recognition for the transfer of assets to customers into one concept.
What companies have to apply the new standard?
This question really depends on local legislation and whether IFRSs are mandatory or optional. In Europe, for example, IFRSs are required for listed companies in their consolidated financial statements. Listed entities have therefore to apply the IFRS 15 to their consolidated accounts. There are some countries where IFRSs are also applicable to the individual accounts, so in this case these companies also have to apply it.
What are the consequences of the new standard?
The new standard is pretty much based on the process leading to revenue recognition; this is why the standard is structured as a five-step approach. The standard illustrates these five steps that have to be followed up to revenue recognition. Revenue recognition is currently the fifth step, so, to arrive at the fifth step, a preparer has to start from the beginning:
- The first step is to identify the contract.
- The second step is to identify all the performance obligations towards the customer within the contract.
- The third one is to determine the transaction price of the contract itself.
- The fourth step is the allocation of the transaction price to the performance obligation, and
- the fifth step relates to the recognition of revenue when the company satisfies the performance obligation, so when it transfers control over the asset to the client.
To implement this process for revenue recognition, companies will probably have to revise their revenue cycle process.
When do companies have to start applying the new standard?
This question depends, again, on local legislation. However, if an entity applies full IFRSs, they should apply this standard starting with their annual report dated 1st January, 2018, but there could be some cases where it depends whether local legislation wants to agree to a delay or not. In Europe listed companies will apply the IFRS to their consolidated accounts from 2018 onwards.
At the ECOVIS International Partner Meeting (IPM) in November, 2017, we had the pleasure of attending your workshop on the IFRS15. Sometimes it seemed a bit philosophical. What do you personally like about the IFRS?
One of the aims of the IFRS is to be a set of standards based on principles. Starting from the concepts set out in the framework, each standard translates into accounting requirements. This implies a very long and structured standard setting thought process, to ensure that the standards work and fit with the concepts of the framework. Trying to translate the concept of substance over form, for example, into standard requirements requires a very detailed assessment. To this end the contribution of academics is very important. On some occasions, it does indeed become a sort of philosophical assessment. For this reason due process and field testing also help with understanding the practical implications of the new standards.
What other projects are relevant under IFRS?
There are a number of projects in the IASB’s agenda, classed as either completed or active items. On the completed agenda there are many projects: IFRS 9 on financial instruments, IFRS 16 on leases, IFRS 17 on insurance contracts. Among these projects, IFRS 16 is closely linked to IFRS 15. IFRS 16 is an attempt to incorporate all the accounting principles for leases of all types in one standard. Previously, IAS 17 required operating leases to be separate from finance leases. Now, with IFRS 16, all these contracts should be accounted for in the same way. IFRS 16 is mandatory as of 2019. On the active agenda, the IASB is working hard to complete the conceptual framework project, which is the framework for all the standards. Other active projects are, for example, on rate regulation and the disclosure initiative. There are also several research projects on business combination under common control, and on goodwill and impairment.
CPA and tax advisor at Ecovis in Munich, Germany
You can watch the whole interview at: www.ecovis.com/en/video-ifrs-15/