If your company or your customers report under U.S. GAAP or International Financial Reporting Standards (IFRS), there is a new revenue recognition standard effective in January 2017 that could have time-consuming and costly compliance ramifications.
The IFRS 15 standard, which governs contractual relationships, is one of many developed by the International Accounting Standardization Board (IASB) and has been created due to misinterpretations of previous guidelines. While it will not take effect until 2017, companies must start preparing now, as it will dramatically change the process of revenue recognition. Essentially, companies must shift from a model that is focused on vendor-specific objective evidence (VSOE) to a single model for revenue recognition using a standalone selling price.
To comply most likely will require better data availability and extensive integration, which in turn may necessitate new systems and associated internal controls. In addition, employee incentive plans are often linked to financial performance, so changes to revenue recognition may require a redesign of remuneration plans. And these are only a few of the changes that will be required because of all that will be affected – the list goes on and on.
How will it affect your industry – and your company?
IFRS 15 compliance poses a challenge to many industries, but there are a few that bundle goods and services – such as telecommunications and high tech – that will be impacted to a greater extent.
Let’s look at the telecommunications industry as an example. Telcos typically bundle services and handsets or equipment. And, due to mergers and acquisitions, these companies have a variety of systems that hold information about a customer contract, making it difficult to obtain a holistic view of the customer. In addition, data may be ‘over aggregated’ to get a converged invoice, with no visibility or traceability back to the originating source for the invoice.
To comply with IFRS 15, this must change. Telcos will need to change revenue recognition when accounting for multiple performance obligations, or when there is an uncertain or variable consideration in determining transaction prices. There will also be changes related to collectability; allocation of the transaction price and establishing stand-alone selling prices; equipment installation revenues; and contract and customer acquisition costs.
For instance, under IFRS 15, telcos will need to allocate revenue based on the relative standalone selling price of a handset and the monthly service plan. In many cases, this would result in the company allocating some of the revenue that is currently associated with the service to the handset. In addition, IFRS 15 compliance could result in different revenue amounts being allocated to the same or similar monthly service plans.
To achieve this will require the integration of enormous amounts of data from diverse sources that most likely are not aligned or integrated today.
The new compliance process is complex – and time consuming
Although it doesn’t go into effect for another year and a half, any company affected by IFRS 15 should start preparing for it now to avoid incorrect reporting and non-compliance. Most existing billing solutions will not meet the new complex regulations and calculation schemes, so it’s best to address these issues now rather than later.
For many telcos, for instance, traditional billing data will not suffice, as there will be a need for additional integration points to retrieve data for revenue recognition, such as contract management, commissions, and accounts receivable. Data quality might also be a concern for these companies, as poor quality would impede the adoption of the IFRS 15 standard. And with additional integration points, there will also be a need to increase auditing and reconciliation activities.
The compliance to IFRS 15 may require a lot of manual work, especially in companies that have a large volume of contracts, unless an automated process is implemented. Therefore, for many companies, complying with IFRS 15 standards may require significant investments into new systems. The good news is that this compliance presents an ideal opportunity to improve systems and processes that were already outdated. The effort put into enhancing the data quality opens great possibilities to better analyzing fraud and churn, to easily implement offer recommendations, or build segmentation models based on usage and launch campaigns for these target groups.
Start soon – and start smart
The requirements for IFRS 15 are complex and often difficult to understand, leaving many companies wondering where they should even begin. Here at SAP, we are already working hard to help our customers. Our chief accounting officer is on the IFRS/IASB Advisory Board. In addition, we have met with the IASB, the Big 4 auditing firms, and over 100 customers on this topic to date. And we have developed the SAP Revenue Accounting and Reporting application that helps companies manage revenue recognition in compliance with IFRS 15. We also have a Telco Executive Advisory Council IFRS work group to support customers as well.
And finally, SAP consultants are already working with many companies on this topic and we offer an advisory service for IFRS 15 compliance. This service helps companies understand how this new standard specifically affects them and their industries, including the business challenges and full impact on their existing revenue recognition processes. The advisory service also helps companies identify what data sources and systems are involved – and how they must be revamped.
To learn more about IFRS 15 compliance and how this advisory service can help your company, please contact me at firstname.lastname@example.org.