How To Achieve IFRS 15 Compliance: A Front-Line Report

Christian Brandl and Stefan Paetzold

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have issued new requirements to recognize revenue under IFRS and U.S. GAAP, respectively. The requirements for recognizing revenue are going to change drastically.

Historic development

Over the last decade, an enormous amount of effort was spent developing this new set of accounting rules. The objective of the new IFRS regulations is to improve financial reporting by clarifying the principles for recognizing revenue and creating a single, joint revenue-recognition standard for IFRS and U.S. GAAP that companies can apply consistently across various industries and capital markets. The main concept of IFRS 15 is to recognize revenue in a way that shows the transfer of goods and/or services promised to customers in an amount that reflects the expected consideration in return for those goods or services.

Scope of IFRS 15

The new standard IFRS 15 will establish a five-step process (independent of any specific industry or type of revenue transaction) that will apply to revenue earned from a contract with a customer. The process will determine when to recognize revenue and at what amount.

Although almost all companies are affected by IFRS 15, some industries, such as telecom, engineering, construction, and software, are likely to experience the most significant changes.

Revenue will be recognized as companies transfer the control of goods or services to a customer at the amount that the company expects to be entitled. When certain defined criteria are met, revenue is recognized either over time (e.g., monthly) in a manner that best reflects the company’s performance, or at a certain point in time (e.g., when control of the good or service is transferred to the customer).

The new requirements also apply to the recognition and measurement of gains and losses on the sale of certain non-financial assets (which are not an output of the entity’s regular activities: sales of plants, properties, or intangibles, for example).

The requirement for financial disclosures will be significantly increased and include a disaggregation of the total revenue, detailed information on performance obligations, and changes in contract asset and liability account balances.

Transition approach to IFRS 15

The new revenue standard will provide companies with an option to apply either a full retrospective transition method or a modified retrospective transition method. The options will allow companies to exercise optional practical requirements at their own discretion. One result will be that companies must review and analyze contracts that date back several years, even before IFRS 15 became effective. Most companies will have to keep two books to track the corresponding revenue balances during the retrospective period (especially when the retroactive recalculating of revenue balances will not be feasible).

Impact on current accounting processes

Companies will be required to make significant judgment calls when applying IFRS 15 for the first time. A first judgment is in the identification of the individual performance obligations and the corresponding allocation of revenue to those performance obligations. This will also include providing new or additional documentation to comply with IFRS 15 on these new and/or different judgments, and gathering and tracking relevant information that most customers will not have previously monitored.

Most legacy systems are unable to support the capture of additional data elements and will need to be modified significantly. In order to ensure the effectiveness of both external and internal controls for the required financial reporting, management will be required to assess and upgrade current control systems.

Effective date of IFRS 15

IFRS 15 Revenue from Contracts with Customers was issued by the IASB on May 28, 2014, and applies to an entity’s first annual IFRS financial statements for a period beginning on or after January 1, 2018.

Based on our experience, some companies are surprised by the required length and the complexity of the implementation phase of IFRS 15. Because both regulator and stakeholder expectations are high, companies must be proactive in their activities to implement the new accounting standard in 2017.

Big data is morphing into vast data. Learn more about how to take advantage of the opportunities in analytics in Data Lakes: Deep Insights.

Follow SAP Finance online: @SAPFinance (Twitter) | LinkedIn | FacebookYouTube

Christian Brandl

About Christian Brandl

Christian Brandl is a business enterprise principal consultant and has worked for SAP Consulting for more than 5 years. He has been supporting companies as a solution architect and functional consultant in the areas of financial planning, controlling, and consolidation. Christian received his M.B.A. (Master of Business Administration) with a focus on corporate finance and controlling from Purdue University (USA).

Stefan Paetzold

About Stefan Paetzold

Stefan Pätzold is a global business transformation manager, PMP, and has worked for SAP Business Transformation Services for more than 6 years. He has been supporting companies as a program manager and trusted advisor in the areas of finance, controlling, and consolidation. Stefan received his diploma in business administration and engineering with a focus on finance and controlling from the University of Applied Sciences, Giessen.