IFRS 15 – Value behind compliance

IFRS 15 ”Revenue from Contracts with Customers” has an effective date for periods beginning on or after 1 January 2018. Six months into the implementation period you should be confident of your approach, have your accounting policies up to date and the comparatives restated. Is that the case? If you are feeling less that compliant and are in the early stages of implementation here are some things to consider.

The new revenue recognition standard is one of the most significant accounting changes in the last decade and depending upon the complexity of your business  may require substantial investment of time and resource from some of your most senior people. If you are to achieve compliance, it is not just about a change to your accounting policy but will require an in-depth review and likely change to your existing processes and systems.

1. Don’t limit your approach to technical accounting guidance

   The requirements of the standard are broad and impact technology, data requirements, business-wide processes and your control environment.  If you have been looking at your revenue recognition policy in isolation, it will give you too narrow a focus. This is the perfect time to evaluate your business, streamline processes and re-evaluate your accounting software.

2. Realise that your business may be more complex than it first appears

   IFRS 15 requires us to evaluate our existing contracts in a new way. This may reveal complexities that are historic and have previously not had an impact. If there are, several obligations included in a contract there can be difficulty in determining which are “distinct” and which form part of a “bundled service”. This is an integral part of the process as it influences the determination of transaction price, how the transaction price is allocated and the timing of revenue recognition. The standard can make a significant EBITDA impact if revenue which would have been previously recognised now has to be deferred to a future period.

3. Price is easy, right?

   Determining the transaction price under IFRS 15 can be relatively complex. Variable consideration receivable and payable needs to be evaluated for each performance obligation. Many accounting systems do not have the ability to do this calculation automatically and there could therefore require a lot of manual intervention. Given considerable receivable and payable can require forward looking estimates this is the perfect time to refine revenue and cost budgets and forecasts.

Regardless of what stage you are at in the implementation process there is still time to not just comply with IFRS 15 but to review your systems, processes, budgets and accounting software. The project can achieve value beyond mere compliance through the development of a more robust finance function. To find out more on how we can support you through this process, please don’t hesitate to contact us.

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