“IFRS 15 establishes a core principle that revenue should reflect the transfer of goods or services to the customer in exchange for the expected consideration.”

Introduction

The IASB has initiated a Post-Implementation Review (PIR) of IFRS 15, few years after its issuance. The purpose of this PIR is to evaluate whether the standard is functioning as intended. PIRs do not automatically trigger standard-setting but can identify areas for improvement in requirements, the standard-setting process, or Accounting Standards’ structure.

Based on the feedback received during the PIR, the IASB will determine its subsequent actions, which may involve developing educational materials or considering possible standard-setting.

In this view, in June 2023, the IASB issued Request for Information (RFI) on PIR of IFRS 15 to gather the stakeholders’ perspectives on extent and challenges faced in application of requirements of IFRS 15. The last date of submission of comments on the RFI to the IASB is 27th October, 2023.

In India, the Indian Accounting Standards (Ind AS) are converged with the globally recognized IFRS Standards. Ind AS 115, Revenue from Contracts with Customers, applicable in India is converged with IFRS 15. Therefore, inputs of Indian stakeholders on challenges faced in application of the Standard are very much relevant and needs to be communicated to the IASB appropriately. Therefore, the afore mentioned RFI, has been hosted on the ICAI’s and ASB’s websites also inviting public comments to be submitted by August 31, 2023. The inputs received by the Accounting Standards Board (ASB) from Indian Stakeholders will be considered and submitted to the IASB.

The link for accessing the RFI and submitting the comments on ICAI website is: https://www.icai.org/post/request-asb-pir-ifrs15-180723

The questions asked in the above-mentioned RFI issued by the IASB on various areas of IFRS 15 are summarized below. IASB had also received initial feedback on the application of IFRS 15 which is also summarized below along with the relevant topic.

Overall assessment of IFRS 15

Background

IFRS 15 establishes a core principle that revenue should reflect the transfer of goods or services to the customer in exchange for the expected consideration. To support this principle, a five-step model is introduced: contract identification, identification of performance obligations, determination of transaction price, allocation of transaction price, and recognition of revenue upon satisfying a performance obligation. The IASB expects improved consistency in revenue accounting among entities, leading to enhanced financial reporting. While implementation of the new requirements may involve costs, the ongoing benefits are anticipated to outweigh them, with the main costs incurred during the transition from previous revenue recognition requirements.

Initial Feedback

Feedback suggests that IFRS 15 has been successful in achieving its objective and is generally effective, although certain challenges remain for stakeholders. The five-step revenue recognition model has been viewed as valuable, particularly for complex transactions.

Stakeholders found that implementing IFRS 15 required a significant learning process, with entities seeking guidance from accounting firms to develop accounting policies. Concerns were raised about the complexity of the standard, particularly for smaller entities and those in emerging economies. However, IFRS 15 has improved comparability of revenue information, although the need for significant judgment in its application may lead to inconsistent outcomes.

Implementation costs decreased over time; stakeholders find that benefits of implementing IFRS 15 outweigh costs.

RFI

IASB seeks to gather stakeholders’ perspectives on IFRS 15 in its entirety. IASB aims to collect evidence to evaluate whether the costs and benefits associated with preparing, auditing, enforcing, and utilizing revenue-related information align with the intention with which the standard was developed.

Identifying performance obligations in a contract

Background

A performance obligation is defined as a promise in a contract with a customer to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Distinctness is evaluated based on the customer’s ability to benefit from the good/service alone or with available resources and the promise’s separability within the contract.

Initial Feedback

In certain cases, it is straightforward to identify distinct goods or services promised in a contract. However, there are situations where a more detailed analysis and judgment are necessary to make the assessment, particularly in the following scenarios:

1. arrangements involving internally developed products or digital products;
2. contract modifications;
3. licensing arrangements; and
4. arrangements in which an entity uses its judgement to determine whether it is acting as an agent or a principal.

RFI

IASB seeks stakeholder insights on the extent and challenges faced in identifying performance obligations and the underlying reasons for difficulty.

Determining the transaction price

Background

Determining the transaction price is a crucial step in the IFRS 15 revenue recognition model as it represents the amount that an entity assigns to the performance obligations in a contract, which is then recognized as revenue. The transaction price, defined as the consideration expected by the entity for transferring goods or services to a customer, excludes third-party amounts. IFRS 15 also outlines requirements for determining the transaction price in cases involving variable consideration, significant financing components, or consideration payable to the customer.

Initial Feedback

Marketing incentives to end customers: Feedback from stakeholders raises concerns about the accounting treatment of incentives in three-way arrangements, such as digital platforms offering incentives to end customers. Diverse practices, classifying incentives as customer payments or marketing expenses, may reduce the relevance of revenue information for financial statement users.

Negative revenue: Feedback highlights stakeholder uncertainty regarding the accounting treatment of consideration payable to customers exceeding expected receipts, with some presenting it as negative revenue and others as an expense.

RFI

IASB is gathering information on marketing incentives to end customers and negative revenue cases including accounting treatments and their impact on financial statement information.

Determining when to recognise revenue

Background

At least one of the following conditions must be met for recognition of revenue over time:

1. the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs;
2. the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
3. the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

Initial Feedback

It appears that most entities have successfully addressed initial difficulties regarding the recognition of revenue over time or at a point in time. However, challenges persist in certain industries like software development, gaming, and construction. Stakeholders have noted that assessments based on the criterion outlined in point (c) above can be particularly challenging, especially when it comes to determining the enforceability of an entity’s right to payment.

RFI

IASB seeks to understand from stakeholders in what circumstances they find determining when to recognise revenue difficult and why, and how pervasive these circumstances are.

Principal versus agent considerations

Background

An entity determines whether it is a principal or an agent by identifying the specified goods or services to be provided to the customer and then assessing whether it controls each specified good or service before it is transferred to the customer.

Initial Feedback

It has been indicated that entities often encounter difficulties when applying the concept of control and its associated indicators. Stakeholders have expressed concerns regarding a lack of understanding, particularly when it comes to the concept of control in relation to services. The IASB has also been informed that some entities solely rely on the indicators to determine whether they are a principal or an agent, disregarding the concept of control. Additionally, stakeholders have noted that entities face challenges when applying the indicators in cases where they lead to conflicting conclusions or when multiple parties are involved in an arrangement.

RFI

IASB aims to gather insights from stakeholders regarding the challenges they face when applying the concept of control and its associated indicators. IASB is seeking to understand the specific circumstances in which these difficulties arise and their extent of prevalence.

Licensing

Background

IFRS 15 mandates assessment of Intellectual Property (IP) license contracts for distinctness and transfer of license over time or at a point in time. Standard determines license nature: (a) right to access to IP throughout license period—satisfied over time, or (b) right to use of IP at license grant—satisfied at a point in time.

Standard specifies guidelines for recognizing revenue from sales-based and usage-based royalties associated with IP licenses, limiting the recognition to when the subsequent sale or usage takes place, or when the related performance obligation is fulfilled (partially or fully). This applies when the royalties exclusively pertain to an IP license or when the license is the primary component linked to the royalties.

Initial Feedback

Stakeholders have raised concerns about unclear and inconsistent accounting requirements for licensing arrangements. They have requested clarification:

1. to determine whether an arrangement is a licensing arrangement if the contract refers to licensing but is in substance similar to a sale of IP or service provision.
2. to identify performance obligations in arrangements that include an obligation to provide goods or services as well as a licence.
3. to account for licence renewals. Stakeholders commented that some entities recognise revenue when the renewal period starts and others recognise it when the renewal is agreed.

RFI

IASB seeks stakeholders’ insights on the extent, challenges, and reasons for difficulty in applying licensing requirements.

Disclosure requirements

Background

IFRS 15 includes improved disclosure requirements to provide more useful information about revenue. Entities are mandated to disclose revenue from customer contracts, impairment losses on receivables or contract assets, contract balances, reasons for significant changes in contract asset and contract liability balances, performance obligations including when the entity typically satisfies its performance obligations and how much of the transaction price it allocates to the remaining performance obligations in a contract, significant judgments made, assets recognized from costs to obtain or fulfil a contract with a customer, and the use of practical expedients. These disclosures offer stakeholders a better understanding of an entity’s revenue nature, timing, amounts, and uncertainties, enhancing transparency and decision-making.

Initial Feedback

Feedback on the disclosure requirements of Standard has been mostly positive. However, stakeholders have expressed concerns regarding the potential costs of meeting certain disclosure requirements, which may outweigh the benefits for financial statement users. For example, there were concerns about the expenses associated with disclosing contract assets, contract liabilities, and remaining performance obligations. Additionally, stakeholders have noted instances where entities omit the information mandated by IFRS 15, attributing this issue to a lack of specificity in the disclosure requirements.

RFI

The IASB is soliciting feedback on the effectiveness of disclosure requirements in IFRS 15, seeking opinions on whether they provide useful information to financial statement users. Respondents are encouraged to identify disclosures that are particularly valuable and those that lack usefulness. Additionally, the IASB is interested in understanding if any disclosure requirements result in significant ongoing costs and the reasons behind variations in the quality of disclosed revenue information, along with potential steps for improvement.

Applying IFRS 15 with other IFRSs

Background

IFRS 15 applies to all contracts with customers, except for lease contracts under IFRS 16, Leases; contracts within the scope of IFRS 17, Insurance Contracts (unless they primarily provide services for a fixed fee); financial instruments and other contractual rights or obligations within the scope of IFRS 9, Financial Instruments, IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IAS 27, Separate Financial Statements, and IAS 28, Investments in Associates and Joint Ventures; and non-monetary exchanges between entities in the same line of business for facilitating sales.

For contracts that partially fall under IFRS 15 and partially under other specified IFRS standards, an entity should follow the separation and measurement requirements of those other standards if they are specified. If those standards do not specify, IFRS 15 should be applied to separate and/or initially measure the part (or parts) of the contract.

Initial Feedback

• IFRS 3, Business Combinations: Feedback indicates that the difference between the measurement principles in IFRS 3 and IFRS 15 poses challenges for entities when measuring contract assets and liabilities acquired in a business combination.
• IFRS 9, Financial Instruments:
  • Price concession versus impairment losses: Stakeholders have raised concerns about the accounting treatment when an entity accepts lower consideration from a customer due to their deteriorated financial position. They are uncertain whether this reduction should be accounted for as a contract modification under IFRS 15, treating it as a price concession that reduces revenue, or as an impairment of receivables or contract assets under IFRS 9.
  • Liabilities arising from IFRS 15: Stakeholders are concerned regarding uncertainties in accounting for other liabilities arising from IFRS 15, particularly if these liabilities could meet the definition of a financial liability in IAS 32, Financial Instruments: Presentation.
• IFRS 16, Leases: Feedback indicates that entities may encounter challenges in accounting for contracts that involve both a service component and a lease component, as there are differences between the requirements in IFRS 15 and IFRS 16.
• IFRS 10, Consolidated Financial Statements: Stakeholders have raised inquiries about how to account for transactions involving the sale of an asset through a subsidiary entity (corporate wrapper) as part of ordinary business activities.

RFI

The IASB is requesting information and evidence regarding scenarios where the application of IFRS 15 along with other IFRS Accounting Standards poses uncertainty.

Transition requirements

IASB seeks feedback on effectiveness of transition requirements in IFRS 15. Stakeholders are encouraged to provide insights on two key aspects: (i) entities applied the modified retrospective method or the practical expedients and the reasons behind their decisions, and (ii) whether the transition requirements achieved an appropriate balance between reducing costs for preparers of financial statements and providing useful information to users of financial statements.

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¹ IASB is an independent standard-setting body of IFRS Foundation, responsible for developing IFRS. This article contains material from publicly available documents of the IASB.

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Authors may be reached at: asb@icai.in and eboard@icai.in