New Revenue Recognition Rules

Background

The joint revenue project commenced in 2002 and the key objectives of the project were to:

• Remove inconsistencies and weaknesses in existing revenue requirements.
• Provide a more robust framework for addressing revenue issues.
• Improve comparability of revenue recognition practices across entities, jurisdictions, and capital markets.
• Provide more useful information to users of financial statements through improved disclosure requirements.
• Simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer.

The first discussion paper was published in December 2008, and the first exposure draft was issued in June 2010. After the comment period, the boards decided to reexpose the updated proposals. A second exposure draft was published in November 2011. The boards received many comments from respondents and engaged in extensive outreach on their proposals, all of which was taken into account in their redeliberations and led to some important changes in the final standards.

Scope

The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of the ASU’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (e.g., sales of property, plant, and equipment; real estate; or intangible assets). Such provisions include guidance on recognition (including determining the existence of a contract and control principles) and measurement (existing accounting guidance applicable to these transfers (e.g., ASC 360-20) has been amended or superseded).

IFRS 15, Revenue from Contracts with Customers, applies to all contracts with customers except for: (1) leases within the scope of IAS 17, Leases; (2) financial instruments and other contractual rights or obligations within the scope of IFRS 9, Financial Instruments, IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures; (3) insurance contracts within the scope of IFRS 4, Insurance Contracts; and (4) nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers

Overview

The new standard provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are:

• Identify the contract(s) with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations in the contract.
• Recognize revenue when (or as) the entity satisfies a performance obligation.
• There is new guidance on whether revenue should be recognized at a point in time or over time, which replaces the previous distinction between goods and services.
• Where revenue is variable, a new recognition threshold has been introduced by the standard. This threshold requires that variable amounts are only included in revenue if, and to the extent that, it is highly probable that a significant revenue reversal will not occur in the future as a result of reestimation. However, a different approach is applied for sales- and usage-based royalties from licenses of intellectual property; for such royalties, revenue is recognized only when the underlying sale or usage occurs.
• The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications, and accounting for the time value of money.
• Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, principal versus agent considerations, licensing, and bill-and-hold arrangements.
• The standard also introduces new guidance on costs of fulfilling and obtaining a contract and specifying the circumstances in which such costs should be capitalized. Costs that do not meet the criteria must be expensed when incurred.
• The standard introduces new, increased requirements for disclosure of revenue in a reporter’s financial statements.

Effective date

The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016, for public entities. Early application is not permitted; however, early adoption is optional for entities reporting under IFRSs.

The 2017 effective date has been chosen, in part, to allow time for entities to make changes to systems and processes that may be needed in order to comply with the new Standard.

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Background

The joint revenue project commenced in 2002 and the key objectives of the project were to:

• Remove inconsistencies and weaknesses in existing revenue requirements.
• Provide a more robust framework for addressing revenue issues.
• Improve comparability of revenue recognition practices across entities, jurisdictions, and capital markets.
• Provide more useful information to users of financial statements through improved disclosure requirements.
• Simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer.

The first discussion paper was published in December 2008, and the first exposure draft was issued in June 2010. After the comment period, the boards decided to reexpose the updated proposals. A second exposure draft was published in November 2011. The boards received many comments from respondents and engaged in extensive outreach on their proposals, all of which was taken into account in their redeliberations and led to some important changes in the final standards.

Scope

The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of the ASU’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (e.g., sales of property, plant, and equipment; real estate; or intangible assets). Such provisions include guidance on recognition (including determining the existence of a contract and control principles) and measurement (existing accounting guidance applicable to these transfers (e.g., ASC 360-20) has been amended or superseded).

IFRS 15, Revenue from Contracts with Customers, applies to all contracts with customers except for: (1) leases within the scope of IAS 17, Leases; (2) financial instruments and other contractual rights or obligations within the scope of IFRS 9, Financial Instruments, IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures; (3) insurance contracts within the scope of IFRS 4, Insurance Contracts; and (4) nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

Overview

• The new standard provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are:
• Identify the contract(s) with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations in the contract.
• Recognize revenue when (or as) the entity satisfies a performance obligation.
• There is new guidance on whether revenue should be recognized at a point in time or over time, which replaces the previous distinction between goods and services.
• Where revenue is variable, a new recognition threshold has been introduced by the standard. This threshold requires that variable amounts are only included in revenue if, and to the extent that, it is highly probable that a significant revenue reversal will not occur in the future as a result of reestimation. However, a different approach is applied for sales- and usage-based royalties from licenses of intellectual property; for such royalties, revenue is recognized only when the underlying sale or usage occurs.
• The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications, and accounting for the time value of money.
• Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, principal versus agent considerations, licensing, and bill-and-hold arrangements.
• The standard also introduces new guidance on costs of fulfilling and obtaining a contract and specifying the circumstances in which such costs should be capitalized. Costs that do not meet the criteria must be expensed when incurred.
• The standard introduces new, increased requirements for disclosure of revenue in a reporter’s financial statements.

Effective date

The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016, for public entities. Early application is not permitted; however, early adoption is optional for entities reporting under IFRSs.

The 2017 effective date has been chosen, in part, to allow time for entities to make changes to systems and processes that may be needed in order to comply with the new Standard.