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.


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.

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