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 looked at some of the main items last time.
The changes also affect the mechanics of making the transition to IFRS 15, which we discussed here. You’ll recall that any entity for which the new standard causes a change in its existing accounting practices will have to make a choice about how to make the transition from its old to its new IFRS 15-compliant policies, between the two following methods:
- (a) apply IFRS 15 retrospectively to each prior reporting period presented in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, subject to various practical expedients…; or
- (b) apply IFRS 15 retrospectively, recognizing the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application. An entity choosing this method applies the Standard retrospectively only to contracts that aren’t completed contracts at the date of initial application.
One of the existing practical expedients attaching to full retrospective adoption allows that for completed contracts, an entity needn’t restate contracts that begin and end within the same annual reporting period. In the basis for conclusions document, the Board notes: “A consequence of this relief is that revenue reported in interim periods before and after the effective date would not necessarily be accounted for on a comparable basis. The boards expect that an entity would not elect to use this relief if it operates in an industry in which comparability across interim reporting periods is particularly important to users of financial statements.” The Board has now extended this, to allow that an entity also needn’t restate contracts that are completed contracts at the beginning of the earliest period presented. Most of the theoretical differences arising from allowing this concession would presumably just wash out within opening retained earnings. For an example of how differences would arise though: take an entity that concludes under old IAS 18 that it completed all its obligations to a particular customer during 2016 and therefore doesn’t look at the contract again; however, if it had re-examined the contract in accordance with IFRS 15, it would have identified obligations to that customer extending into 2017 or beyond, with resulting differences to the allocation of revenue.
The IASB has also now added the following additional practical expedient:
- for contracts that were modified before the beginning of the earliest period presented, an entity need not retrospectively restate the contract for those contract modifications in accordance with paragraphs 20–21. Instead, an entity shall reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented when:
- (i) identifying the satisfied and unsatisfied performance obligations;
- (ii) determining the transaction price; and
- (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.
The thinking here is simply that for an entity that (say) has numerous long-term contracts that are frequently modified, this concession should allow some cost relief without usually impeding comparability too much. An entity will have the choice of applying this approach either to all contract modifications that occur before the date of initial application (January 1, 2018, for a calendar-year issuer not adopting the standard early) or else to all those occurring before the beginning of the earliest period presented (such as January 1, 2017).
The IASB and FASB also considered allowing an entity to account for the unsatisfied performance obligations in a modified contract at transition as if the original contract were terminated and a new contract created as of the transition date. This would be computationally simpler, but the boards thought it could result in financial information that differed too much from what would otherwise be obtained.
The new amendments to IFRS 15 are all applied retrospectively in accordance with IAS 8, with the following explanation: “In reaching its decision to require retrospective application, the IASB observed that the amendments were intended to clarify the IASB’s intentions when developing the requirements in IFRS 15 rather than to change the underlying principles of IFRS 15. The IASB decided not to allow prospective application of the amendments because that would reduce comparability in the limited cases that the amendments may have resulted in significant changes to an entity’s application of IFRS 15.” One member of the IASB voted against the amendments on this basis, because he “thinks that requiring an entity that has applied IFRS 15 before applying these amendments to restate the effects of initially applying IFRS 15 for the effects, if any, of initially applying the amendments is inconsistent with allowing early application of IFRS 15. That entity might be required to restate some contracts twice, first on initially applying IFRS 15 and again on initial application of these amendments.” He thinks this could be perceived as “penalizing those entities that begin their implementation process early and rewarding those that delay. Such perceptions could discourage entities from starting the implementation of any new Standard on a timely basis.” We should be so lucky though as to live in a world where significant numbers of entities are so far along in their IFRS 15 implementation process that this is a major concern…
The opinions expressed are solely those of the author