Malta: IASB And FASB Release New Revenue Standard – A Change In Mindset?

Last Updated: 12 June 2014
Article by Fabio Axisa

The FASB and IASB have issued their long-awaited standard on revenue recognition, IFRS 15 Revenue from Contracts with Customers. The standard will affect most entities but how much will it actually change current practice?

The release of IFRS 15 is the culmination of a long running joint project between the IASB and the FASB to create a single revenue standard. The standard moves away from a revenue recognition model based on an 'earnings process' to an 'asset-liability' approach based on transfer of control. Some argue that many of the changes from the original proposals mean that the outcome of applying IFRS 15 will not be that different from today. But one thing is for certain - application of IFRS 15 will require a change in mindset.

Why? Simply put – there is just more to think about. IFRS currently says very little about complex revenue transactions. There is limited or no guidance on, for example, multiple element arrangements, variable consideration and licences. Practice has developed and the IASB did not necessarily set out to change that practice. That said, preparers will now need to do more than simply think about 'commercial effect', 'fair value' and 'risk and rewards'.

IFRS 15 is effective from 1 January 2017 and early adoption is permitted. It seems far off but there is a lot to learn.

Key provisions

Let's look at the key provisions.

Performance obligations

Performance obligations are the building blocks in the new revenue recognition model. The amount and timing of revenue recognition are determined at the performance obligation level.

So what is a performance obligation? It is a promise to transfer either a good or a service (or a bundle of goods or services) that is distinct. IFRS 15 provides the criteria to determine when a good or service is distinct by focusing on how a customer might benefit from that good or service.

Transfer of control

The new standard is based on the principle that revenue is recognised when control of a good or service transfers to the customer. It replaces the separate models for goods, services and construction contracts under current IFRS. IFRS 15 is a single model that distinguishes between performance obligations satisfied at a point in time and those that are satisfied over time.

The criteria are provided to determine when a good or service transfers over time. For example, revenue from a traditional service would be recognised over time because the customer consumes the benefit (that is, the asset) as it is performed. But not all the criteria are intuitive and might change practice in some industries such as real estate and construction. If the criteria are not met, indicators of control are used to determine when revenue is recognised.

Variable consideration

An estimate of variable consideration is included in the transaction price only if it is highly probable that there will not be a significant revenue reversal. This principle is intended to provide useful information– that is, the IASB does not believe it is useful to recognise revenue that might be reversed in the future.

Indicators are provided to help management make this assessment. These include whether the variability is subject to factors outside the entity's influence, how long until the variability will be resolved, whether the entity has experience with similar types of contracts and whether there is a broad range of possible outcomes.

The 'minimum' amount that is not subject to significant reversal is recognised and updated each period. This means that some entities that previously deferred revenue until all contingencies were resolved might need to make an estimate and record revenue earlier. Others might find that the 'highly probable' threshold is not met and recognise revenue later than they do today.

There is one exception to this principle. Revenue for licences of intellectual property with a sales or usage based royalty is recognised only when sales or usage occurs. One thing that might be surprising is how often entity's will have to look to the guidance on variable consideration. It captures everything that might change the transaction price including discounts, refunds, penalties and royalties. It does not, however, capture uncertainty about whether the customer will pay. Once a contract exists and revenue is recognised, any subsequent impairment of receivables is recognised in accordance with financial instruments guidance.

Licenses

IFRS 15 distinguishes between two types of licenses. The first is a 'right to use' IP (Intellectual Property) as it exists at the point in time the licence is granted, for example, rights to a film in its current form. A right to use is a performance obligation satisfied at a point in time. The second is a 'right to access' IP as it exists throughout the licence period, for example, access to a film library that is updated during the licence period. In this case, the performance obligation is satisfied over time. In either case, revenue is subject to the constraint for variable consideration.

Contract costs

Costs to obtain a contract (such as sales commissions) must be capitalised and amortised as revenue is recognised. This will be a change in practice for many who today expense these costs as incurred. As a practical expedient, costs may be expensed if the contract is less than one year. One challenge is that costs previously expensed might need to be capitalised at transition and then expensed in future periods. For more information on these and other key provisions, see linked In Brief.

Convergence – will it last?

One of the IASB's primary objectives was to achieve consensus with the FASB and for the most part, it has been successful. That said, US GAAP preparers will likely have a different experience with implementation. Many will have to move away from industry guidance to a single principle based model for all transactions. Preparers may long for more guidance. So who will they ask?

The IASB and FASB have formed the Revenue Transition Resource Group to address these questions, at least in the short term. The Group includes representatives from both the US and international accounting worlds and including regulators, preparers and the audit firms. It will not issue authoritative guidance but watch this space – it is unlikely to get away without a written record of its discussions. The Group will have a limited life. After that, issue resolution will likely revert back to the IFRS Interpretations Committee (IC) and Emerging issues Task Force in the US (EITF). This could get interesting. The EITF has historically been active in issuing guidance while the IC seems to be less inclined to address industry issues or specific transactions. So will convergence last? We will have to wait and see.

What is next?

The final standard is effective from 1 January 2017. For some, this new guidance will require change to systems, processes and controls. Management will need to assess implications as early as this year to ensure ample time to embrace the change and capture information needed for transition, especially those that elect the full retrospective adoption method.

Also get yourself prepared for the change in mind-set. Even if you do not expect a significant change, it is worth another look. At a minimum, the disclosures requirements will give you something to think about.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions