IFRS 15 for professional services
The new IFRS 15, Revenue from Contracts with Customers, contains comprehensive guidance for accounting for revenue and replaces existing requirements which are currently set out in IAS 18 Revenue, IAS 11 Construction Contracts and number of related Interpretations.
IFRS 15 contains significantly more prescriptive and precise requirements in comparison with existing IFRS. This means that for many entities, the timing and profile of revenue recognition will change. In some areas, the changes will be very significant and will require careful planning, including for commercial effects.
For entities in the professional services sector, BDO’s initial analysis of IFRS 15 indicates that the following areas may be of particular significance:
- Is revenue recognised at a single point in time, or over a period of time?
- If revenue is recognised over time, how should progress towards completion be measured and recognised?
- Will a contract need to be ‘unbundled’ into two or more components? Alternatively, will two or more contracts need to be ‘bundled’ into a single overall obligation?
- How should contracts which include variable amounts of consideration be dealt with?
- How should modifications to contracts be dealt with?
- Should costs associated with obtaining a contract be capitalised, or expensed immediately?
- What adjustments are required for the effects of the time value of money (a ‘financing component’)?
IFRS 15 also introduces significantly more disclosures about revenue recognition. It is possible that new and/or modified internal processes will be needed in order to obtain the necessary information.
The commercial effects
The adoption of IFRS 15 may lead to significant changes in the pattern of revenue and profit recognition. Careful consideration and planning will be needed for a wide range of issues, including the effect on:
- Compliance with bank covenants
- Performance based compensation (including share-based payments)
- Internal budgeting processes
- Corporate tax obligations
- Market and investor communications, including compliance with regulatory requirements (which might arise from significant expected future changes to an entity’s reported financial position or performance).
A review of the terms and conditions of existing contracts will be needed (in particular long term contracts which extend into periods covered by financial statements affected by the adoption of IFRS 15) as well as those which are to be entered into in future. In some cases, entities may wish to consider whether changes should be made to contracts.
What changes will be required to internal controls and processes?
The changes introduced by IFRS 15 are significant and should not be underestimated. It is likely that changes to internal controls and processes will be needed, in order to analyse sales contracts in accordance with the new guidance and to ensure that the accounting is appropriate.
Annual periods beginning on or after 1 January 2018. Earlier application permitted.