Changes to IFRS 15, part one

The IASB has issued Clarifications to IFRS 15 Revenue from Contracts with Customers.

These clarifications, as the accompanying news release sums it up, “do not change the underlying principles of the Standard but clarify how those principles should be applied. They arise as a result of discussions of the Transition Resource Group (TRG). The TRG was set up jointly by the Board and the (FASB) to assist companies with implementing the new Standard.” They have the same effective date as IFRS 15 as a whole, January 1, 2018.

We covered the main items in a series of articles at the time the IASB issued the exposure draft, and the substance of them hasn’t changed too much in the final version. Here’s a brief summary, with links to the earlier posts:

Principal vs. agent

In some cases, it will be important for an entity to determine whether the nature of its promise to a customer is a performance obligation to provide goods or services that it controls itself (i.e. the entity is a principal) or rather to provide goods or services controlled by others (i.e. the entity is an agent). Of course, this distinction exists under current standards as well, but it’s more central to the structure of IFRS 15. As in current IAS 18, the standard doesn’t provide a “bright line” for distinguishing between the two situations, but provides a list of indicators that an entity is acting as an agent. The IASB has tried to address various points of confusion, by making the following changes (among others):

  • reframing the indicators as indicators of when an entity controls a specified good or service before transfer, rather than as indicators that an entity does not control the specified good or service before transfer.
  • adding guidance to explain how each indicator supports the assessment of control.
  • removing the indicators relating to the form of the consideration and to exposure to credit risk.
  • clarifying that the indicators are not an exhaustive list and merely support the assessment of control—they do not replace or override that assessment. One or more of the indicators might provide more persuasive evidence to support the assessment of control in different scenarios.

Identifying the performance obligations

A good or service that’s promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to it (i.e. the good or service is capable of being distinct); and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the good or service is distinct within the context of the contract). This assessment will often be key to determining whether a particular aspect of a contract can be regarded as a separate performance obligation. IFRS 15.29(c) sets out some factors indicating that an entity’s promise to transfer a good or service to a customer is separately identifiable, including that the good or service isn’t highly dependent on, or highly interrelated with, other goods or services promised in the contract.

The IASB identified a risk of this concept being applied more broadly than intended, resulting in items being inappropriately combined as a single performance obligation. Questions arose about scenarios in which one of the promised goods or services depends on the transfer of another, such as a contract for equipment and also for related consumables required for the equipment to function. The board intends its amendments to clarify its intentions, without changing the underlying principle. To illustrate, it notes among other things that “in a contract to build a wall, the promise to provide bricks and the promise to provide labour are not separately identifiable from each other within the context of the contract because those promises together comprise the promise to the customer to build the wall.”

Recognizing the revenue from a licence

Where an entity’s promise to grant a licence to a customer is distinct from the other promised goods or services in the contract and so constitutes a separate performance obligation, the entity determines whether the licence transfers to the customer at a point in time or rather over a period of time. This requires considering whether the nature of the entity’s promise in granting the licence to a customer is to provide the customer with:

  • (a) a right to access the entity’s intellectual property as it exists throughout the licence period; or
  • (b) a right to use the entity’s intellectual property as it exists at the point in time at which the licence is granted.

The distinction depends on whether the intellectual property to which the customer has rights will change during the licence period. An entity’s activities significantly affect the intellectual property when they’re expected to significantly change its form (for example, the design or content) or its functionality (for example, the ability to perform a function or task); or when the customer’s ability to obtain benefit from the intellectual property is substantially derived from, or depends upon, those activities. For example, the benefit from a brand is often derived from or depends on the entity’s ongoing activities to support or maintain its value. The board’s amendments attempt to clarify this aspect of the standard.

More to come on this…

The opinions expressed are solely those of the author

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