Katie McGarry, KPMG
Rob Brouwer, KPMG
The story so far...
In May 2014, the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) published their new joint Revenue Standard (IFRS 15/ASC Topic 606). In response to concerns expressed by users, the standard setters formed a transition group (the TRG) to consider implementation issues, and the group did indeed identify some potential for unintended diversity in practice.
The Boards addressed these issues and agreed to proposed amendments to clarify the guidance for licenses of intellectual property and identifying performance obligations. It is noteworthy that the FASB is proposing more extensive changes than the IASB, as the FASB will now also propose amendments on non-cash consideration, collectability and practical expedient on sales tax presentation. The Boards also agreed to provide additional practical expedients for transition.
The Boards do not expect that incremental FASB amendments will create differences in outcomes when applying the new Revenue Standard. However, it is disappointing that the guidance is not being fully aligned between the IASB and the FASB, and this will certainly create potential for divergence in practice.
The story continues...
In response to significant implementation concerns expressed, the FASB and IASB voted in April 2015 to propose a one-year deferral of the Revenue Standard from the original effective dates of December 16, 2016, and January 1, 2017, respectively. The FASB approved the deferral on July 9, 2015. Early adoption of the standard will still be permitted under IFRS 15. Under U.S. GAAP, early application will be permitted, but not before the original effective date of December 16, 2016.Reasons for the deferral are articulated in the Boards’ respective Exposure Drafts and include:
- the proposed amendments to each Board’s Revenue Standard, while largely clarifications, may impact implementation decisions;
- for the FASB, delivery delays for technology-based implementation solutions by software companies; and
- for the IASB, maintaining convergence with the FASB.
What does this mean for Canada?
As one of the only IFRS countries with quarterly filing requirements, Canadian companies will be among the first to apply IFRS 15. Experience has shown that being the first country to adopt a new standard can be challenging and Canadian companies should closely monitor developments surrounding IFRS 15.
Companies facing implementation issues may also find it helpful to follow the documented discussion by the Boards and the TRG for possible interpretation and implementation guidance.
It is hoped that the extra year allowed by the Boards does not lead companies to postpone their implementation efforts. The Boards proposed the deferral because some industries need more time to complete the implementation. Most larger companies have started to analyze the impact of this new standard on their business; however, some have yet to begin. It is important not to underestimate the time that may be required to implement the Revenue Standard, and ensure adequate time to develop and implement the necessary changes to accounting systems, processes and internal control.
What are the issues?
For some, the new standard will have a significant impact on how and when they recognize revenue, whereas for others the transition may be easier. For example, if your company has operations in telecommunications, software, aerospace and defense, or contract manufacturing, you are more likely to be significantly affected by one or more of the new requirements.
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If you have…
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The potential impact is…
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… multiple goods or services in a contract.
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- Revenue may be recognized earlier or later, and the split of revenue between different goods and service lines may change, affecting key performance indicators.
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… contracts that span a period of longer than one year.
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- The finance element of payments received in advance or in arrears may need to be accounted for separately, changing the amount of revenue recognized.
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… contracts for which a portion of the consideration is not fixed.
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- Variable consideration – including discounts, rebates, refunds, credits, incentives, bonuses, penalties and contingencies – will be estimated using a specific methodology that may differ from current practices.
- Variable consideration will be included in revenue only when it is ‘highly probable’ that there will not be a significant revenue reversal in the future.
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… licenses or royalty arrangements.
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- New guidance will determine if revenue from a license is recognized up-front or over the licence period, which may alter the revenue profile.
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… costs to obtain or fulfill a contract.
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- Accounting for some costs related to a contract with a customer may also change, with new criteria on when some costs can be deferred in the balance sheet.
- Amortization periods may differ from current practice.
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… contracts that are regularly changed throughout the term.
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- Changes to a contract will be recognized only when the change is approved, which may be later than at present.
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… significant compensation or debt arrangements linked to revenue.
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- Changes to revenue and cost recognition may mean that staff incentive or compensation plans are no longer aligned with corporate goals.
- Changes in earnings may affect compliance with debt covenants or financial assurance tests.
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The implications of the new revenue recognition standard are causing some companies to undertake a fundamental reassessment of their business practices and the contract terms offered to customers, in order to achieve or maintain a particular revenue profile. Investor relations professionals are well advised to keep connected with their finance teams to understand how the adoption of the new standard will impact revenue metrics, and the implications for both the business and reported results.
Katie McGarry, CPA, CA is a Senior Manager, and Rob Brouwer, FCA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.