Proposed changes to IFRS 15, or rather, proposed non-changes

As we discussed here, the IASB has issued its exposure draft of clarifications to IFRS 15, with comments to be received by October 28, 2015.

We’ve looked at the proposed changes in four previous posts. However, the FASB is proposing changes to its corresponding revenue standard in other areas as well. Here they are, along with the IASB’s reasons for leaving things as they are:

Collectibility As part of the first step of the standard’s five-step framework, an entity assesses whether it’s probable that it’ll collect the consideration to which it’ll be entitled in exchange for the goods or services to be transferred to the customer. Some stakeholders apparently interpret this guidance to mean that an entity should assess the probability of collecting all of the consideration promised in the contract. Under this way of looking at it, some contracts with customers with poor credit quality wouldn’t meet the test, even though they’re otherwise valid and genuine: in that case, the entity would only recognize revenue when no obligations remain to transfer goods or services to the customer and all or substantially all of the consideration has been received and is non-refundable; or else when the contract has been terminated, and what’s been received is non-refundable. The IASB decided to leave it alone, noting among other things that an entity won’t generally enter into a contract with a customer if it doesn’t consider it probable it’ll collect the consideration to which it’ll be entitled, and so the population of contracts to which any clarification might apply is small.

Contract termination Some diversity of opinion also exists about when a contract is terminated, as cited above. Some think it’s when an entity stops transferring promised goods or services to the customer; others that it’s only when the entity stops pursuing collection from the customer, which could be at a different point in time. The IASB concluded it’s not necessary to expand any more on what’s already there: it’s usually clear that an entity has the right to terminate a contract in the event of non-payment, and the rights and obligations under the contract with respect to the consideration owed by the customer aren’t usually affected by whether or not the entity is actively pursuing collection.

Non-cash consideration To determine the transaction price for contracts in which a customer promises non-cash consideration, IFRS 15.66 requires measuring that consideration at fair value, but doesn’t specify the date when this is done: it could be interpreted as being at contract inception; when the non-cash consideration is received; or at the earlier of when the non-cash consideration is received and when the related performance obligation is satisfied. The IASB doesn’t dispute this lack of clarity, but observes that the issue interacts with other standards (IFRS 2, IAS 21) and that any change might create a risk of potential unintended consequences. It observes that “any practical effect of different measurement dates would arise in only limited circumstances” and that “if significant, an entity would be required to disclose the accounting policy applied.” It holds out the vague prospect of looking at the issue more comprehensively in the future, if needed.

Sales taxes IFRS 15.47 says the transaction price excludes amounts collected on behalf of third parties, and adds in parenthesis, “for example, some sales taxes.” Apparently, “some US stakeholders have expressed concerns about the cost and complexity of assessing tax laws in each jurisdiction because many entities operate in numerous jurisdictions, and the laws in some jurisdictions are unclear about which party to the transaction is primarily obligated for payment of the taxes.” The FASB is therefore proposing a practical expedient to allow an entity to exclude from its measurement of the transaction price “all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from customers (for example, sales, use, value added and some excise taxes).” The IASB isn’t taking a similar step, in part because IFRS preparers should already have had their heads around this issue for purposes of complying with IAS 18.

All of that sounds fine to me – even if it means some diversity arises in practice, this diversity doesn’t seem likely to be a material barrier to comparability between entities. As for any other issues that might arise, the IASB says this: “Although it is possible that further implementation issues could arise, the IASB expects that any further issues are unlikely to lead to standard setting before it undertakes the post-implementation review of IFRS 15. This is because entities, auditors and others have had fourteen months since the issuance of the new revenue Standard to identify implementation issues—the IASB expects any substantive implementation issues to have been identified in that time period. In addition, recognizing that any further changes to IFRS 15 could disrupt, rather than help, the implementation process, the IASB is reluctant to propose any further amendments until after the post implementation review.” In other words, it’s full steam ahead from here, or at least, full steam ahead, with an extra year to get there.

The opinions expressed are solely those of the author

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