The recognition criteria of revenue in accounting standards is about to change—and your entity might be significantly affected, maybe even more than you expect!
Revenue is one of, if not the most, critical component of an entity’s financial statements. It is among the key performance indicators of a business, monitored closely by different stakeholders including market analysts, and often used in benchmarking different players within the same industry. It also has a direct impact on the calculation of income taxes. Accordingly, it is critical that the accounting policy appropriately captures the nature of the business, the terms of agreements with customers, and is in accordance with the applicable accounting standards.
What is the “Big Change?”
In May 2014, IFRS 15 (International Financial Reporting Standards) Revenue from Contracts with Customers was issued. It established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 supersedes the current revenue recognition standards including IAS 18 Revenue, IAS 11 Construction Contracts and their related interpretations. It will become effective on 1 January 2018, with retrospective application, and early adoption is permitted.
What triggered the change?
IFRS 15 was a result of the convergence work between the International Accounting Standards Board (IASB), the body that promulgates IFRS, and the Federal Accounting Standards Board (FASB), the standard setting body for US GAAP (Generally Accepted Accounting Principles.) It was created to fill the gap between IFRS and US GAAP, provide a robust revenue framework, and improve comparability among reporting entities through consistent and extensive disclosure requirements. It also provides guidance on a few of the grey areas on revenue recognition such as contracts involving multiple elements, treatment of costs to obtain and fulfil a contract and accounting for contract modifications.
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