New Revenue Recognition Standards – IFRS 15 – should you be concerned?

The new accounting standards for revenue recognition that has been agreed by both IASB (International Accounting Standards) and the US FASB (Financial Accounting Standards Board) comes into effect 1st January 2018 applying to accounts that commence in 2018.

You may think that revenue recognition only applies to organisations delivering projects with complex contractual and payment terms. But that is no longer the case with IFRS 15. It now applies to any circumstance where the invoicing does not coincide with the delivery of goods or services, with certain pre-defined exclusions.

The exceptions are:

  • lease contracts under IAS 17;
  • insurance contracts under IFRS 4;
  • financial instruments under IFRS9, IFRS 10, IFRS 11, IAS 27 and IAS 28
  • non-monetary exchange between entities in the same line of business to facilitate sales

You may think that your organisation only provides goods rather than services, so how could is apply to you? One example is that if a product e.g. a washing machine is sold with a three-year maintenance under IFRS 15 part of the price paid should be considered as applying to the maintenance and should therefore be recognised in the accounts as and when the maintenance is delivered.

Another example could be if you sell a product which requires a deposit. At what stage are you entitled, under IFRS 15, to take that deposit to revenue? How does IFRS 15 apply to distributors with ‘sale or return’ arrangements with their customers?

For many service organisations its implications are clear (even if implementation details require a lot of consideration). Project organisations of any size are probably familiar with accounting with revenue recognition but will have to adapt their accounting from earlier ones (which will depend on a number of factors). But now many organisations that charges an annual fee for a service – software licence, maintenance, internet hosting for example – will have to take account of IFRS 15.

Is your organisation affected?

Definitely yes if your organisation currently handles revenue recognition under existing non-excluded IFRS rules you will need to change to the new standards.

Currently no if your organisation only ever supplies goods and/or services that are invoiced (or paid for) in line with the supply of the goods and/or services (and intends to restrict business to such) or only supplies the financial products excepted from IFRS 15.

All other organisations should consider their situation and discuss with their auditor and/or accountant.

When should you consider IFRS 15?

There is less than eighteen months before the standard comes into effect. Of course if your accounts run from September, October, November or December you have at least two years before you are required to implement it. Note that IASB are happy for organisations to implement IFRS 15 immediately so there is no need to wait until the last minute.

I suggest you do two things right away:

  • discuss with your accountant/auditor whether you will be affected
  • find out whether your existing accounting system effectively handles IFRS 15 (Note that NetSuite with Advanced Revenue Manager has a fully integrated module that fully supports IFRS 15)

I further suggest that anyone considering a change to the accounting system adds full integrated support for IFRS 15 to their requirements. After all, do you really want your future business plans impacted by a lack of such support?