As IFRS (International Financial Reporting Standards) are evolving fast, we are continuing our focus on the latest IASB’s (International Accounting Standards Board) updates.
Since our last blog published in January 2014, the following publications have been issued by the IASB:
IFRS 15: a long-awaited standard for revenue recognition
Started in 2002, this convergence project led with the US Financial Accounting Standards Board (FASB) has finally come to an end in May 2014 with the publication of IFRS15 and its US equivalent Topic 606 (introduced into the FASB Accounting Standards Codification ® by Accounting Standards Update 2014-09). Both texts are very similar even though some minor differences remain.
IFRS 15 replaces the previous revenue standards IAS 18 Revenue and IAS 11 Construction Contracts and the related interpretations (IFRIC 13, IFRIC 15, IFRIC 18, SIC 31). Effective from 1 January 2017, earlier application is permitted.
IFRS15 sets out the requirements for recognizing revenue that apply to all contracts with customers, except for contracts that are within the scope of the standards on leases, insurance contracts and financial instruments.
The main questions are when to recognize revenue and how much revenue to recognize. The core principle of IFRS 15 is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”.
IFRS 15 establishes a comprehensive framework, based on a five-step approach:
In addition, IFRS 5 provided extended guidance (the new standard together with the application guidance, illustrative examples and basis for conclusions have more than 300 pages) to assist companies in applying the revenue framework to certain areas (e.g. warranties, licensing, repurchase agreements …).
Lastly IFRS 5 significantly expands the disclosure requirements about revenue recognition.
What will change from existing practice?
According to the IASB, for many contracts such as straightforward retail transactions, IFRS 15 will have little, if any, effect on the amount and the timing of revenue recognition. On the other hand, for some contracts such as long-term service contracts or multiple-element arrangements (e.g. telecom operators), IFRS 15 may result in substantial changes to the timing of revenue recognition.
Even if the effective date is still distant, companies should carefully assess the impact of IFRS 15 as soon as possible. In some cases, changes may be required to processes and IT systems to comply with new model and / or new disclosure requirements.
Other H1 publications (final standards)
IFRS14 Regulatory Deferral Accounts
This new standard deals with rate-regulated activities where an authorized body (usually depending from a government) regulates the supply and pricing of particular types of activity by private entities, including utilities, telecommunications or transport. These regulations are often designed to allow the suppliers to recover specified costs and other amounts through the prices they charge to customers. However, rate regulation is also designed to protect the interests of customers. Consequently, the rate regulation may defer the recovery of these amounts in order to reduce price volatility. The suppliers usually keep track of these deferred amounts in separate regulatory deferral accounts until they are recovered through future sales of the regulated goods or services.
IFRS 14 is an interim standard that allows first-time adopters to maintain these deferral accounts until the comprehensive rate-regulated activities project (started by the IASB in 2012) is completed.
The impact of IFRS 14 will be limited, firstly because it only covers those specific activities. Furthermore, this standard only applies to first-time adopters (i.e. entities that will publish their first IFRS financial statements from now).
Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations
The acquisition of interests in a joint operation (as defined by IFRS 11) was not explicitly addressed by IFRS resulting in different approaches in practice. These amendments clarify that all the principles required in IFRS 3 as regards business combinations should apply, including goodwill recognition. IFRS 11 now also specifies that this applies to the acquisition of both the initial interest and additional interests in a joint operation. However, when an additional interest is acquired, previously held interests in the joint operation are not remeasured if the joint operator retains control.
Amendments to IAS 16 and IAS 38
These amendments clarify acceptable methods of depreciation and amortization. For property, plant and equipment (IAS 16), revenue-based methods of depreciation are clearly no more acceptable.
For intangible assets (IAS 38), there is a rebuttable presumption that a revenue-based method is not appropriate. But this presumption can be overcome in the following circumstances:
- The intangible asset is expressed as a measure of revenue
Example given (IAS38.98C): an entity acquires a concession to explore and extract gold from a gold mine. The expiry of the contract may be based on a fixed amount of total revenue to be generated from the extraction (and not be based on time or on the amount of gold extracted).
- It can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated.
Amendments to IAS 16 and IAS 41
These amendments entitled Agriculture: Bearer Plants change the financial reporting for bearer plants such as grape vines, rubber trees and oil palms.
Until then, bearer plants were regarded as biological assets and thus measured at fair value less costs to sell according to IAS 41 principles. The IASB decided that bearer plants should now be accounted for in the same way as property, plant and equipment (IAS 16) because their operation is similar to that of manufacturing. Bearer plants will then be measurement using either cost model or revaluation model as permitted by IAS 16, whereas the produce growing on bearer plants remain measured at fair value according to IAS 41 requirements.
Update of IASB Work Plan
Compared with the previous version published in our last blog, one of the major projects (revenue) is now ended and does not appear any more on the Board agenda.
The remaining major projects are:
- Financial Instruments (IFRS9): final standard including impairment principles and latest amendments on classification and measurement was initially expected in H1 2014; it has been postponed to Q3
- Leases and Insurance contracts: no change, still no deadline for the final standards
In addition to these major projects, the IASB works on many other topics. Some publications are planned for H2, 2014:
- Annual improvements 2012-2014;
- Equity method in separate financial statements (amendments to IAS 27);
- Sale or contribution of assets between an investor and its associate or joint venture (amendments to IAS 28 and IFRS 10).
We will get back to these projects in our next blog. Stay tuned!