How IFRS 15 will increase disclosure requirements related to revenue
As we summarized here, the IASB has issued IFRS 15, Revenue from Contracts with Customers, effective for annual reporting periods beginning on or after January 1, 2017 (NB this was subsequently amended to January 1, 2018). Not so surprisingly, even although the IASB has acknowledged concerns elsewhere about disclosure overload, some entities might find the new standard increases the volume of their notes quite significantly; it takes some four pages to set out all the disclosures that might be required. Certainly, the standard acknowledges at the outset that an entity “consider(s) the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements,” and goes on: “An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.” Still, at least initially, entities for whom IFRS 15 causes significant changes in their recognition or measurement practices may be surprised by the potential volume of additional explanation.
This partly reflects the fact that disclosure requirements under the main existing standard, IAS 18, are very minimal (specifying little more than that an entity discloses its accounting policies and the amount of each significant category of revenues), entailing that financial statements often provide far less transparency about revenue than about other items less significant to users by any possible measure. First of all, IFRS 15 requires disaggregating the overall revenue numbers into “categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.” Depending on the entity’s business, this might be done (for instance) by type of good or service, by geographical area, by market or type of customer, by duration, or – for some entities – by a combination of approaches. The standard also requires explaining “the significant changes in the contract asset and the contract liability balances during the reporting period,” distinguishing for instance between changes due to business combinations or to adjustments arising from changes in the measure of progress, or in the estimate of the transaction price. Currently, financial statements often provide little insight into the changes in “deferred revenue” or similar balances.
As explored in more detail in previous articles, IFRS 15 is built around a five-step framework, and in broad terms, the bulk of the standard’s disclosure requirements focus on key issues attaching to each of these five steps. Therefore, among other things, it requires disclosing information about performance obligations (including for instance when an entity typically satisfies these obligations; for example, upon shipment, upon delivery, as services are rendered or upon completion of service), and about the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period and an explanation of when it expects to recognize these amounts as revenue. The standard also requires disclosing the judgments (and changes in the judgments) made in applying the Standard that significantly affect the amount and timing of revenue from contracts with customers. This includes disclosing the methods used to recognize revenue from performance obligations satisfied over time (for example, a description of the output methods or input methods used and how those methods are applied); and also explaining why the methods used provide a faithful depiction of the transfer of goods or services.
An entity also discloses the methods, inputs and assumptions used for such matters as determining the transaction price (including estimating variable consideration, adjusting the consideration for the effects of the time value of money and measuring non-cash consideration) and allocating the transaction price, including estimating stand-alone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract.
The final major category of IFRS 15 disclosures (and congratulations if you made it this far) focuses on assets recognized for the costs of obtaining or fulfilling a contract with a customer, including the judgments made in determining the amount of those costs, the method used to determine the amortization for each reporting period, and the closing balances of assets recognized from such costs by main category of asset.
For entities with straightforward revenue streams, such as retail operations that essentially function by handing over the item and collecting the cash, all of this won’t amount to much more than a fresh coat of paint on existing disclosures, perhaps primarily by providing a bit more detail in the accounting policy note about that very straightforwardness (Canadian securities regulators have commented for years about the excessive brevity of policy disclosures in this area). For others though, at least at first glance, the new disclosures may seem daunting. However, the information required to satisfy the requirements should flow naturally out of the numbers in the statements and, as noted, it’s not necessary to regard the items as a checklist that must be implemented regardless of all considerations of materiality or significance. Even so, any planning exercise for the new standard should clearly consider the impact on the notes as well as the accounting mechanics themselves.
The opinions expressed are solely those of the author