The upcoming changes to revenue recognition standards are more than just a headache for your finance department. Other dates (e.g. 606 is primarily principal-based, so how the rules apply to each business is not absolutely clear. In this article, we shall consider the implications of IFRS 15 and its US Generally Accepted Accounting Principles (GAAP) counterpart, ASC 606 Revenue from Contracts with Customers (“ASC 606”). Early adoption is permitted, although the level of update from early adopters has not been extensive. a US subsidiary of a foreign multinational company that uses IFRS for group reporting with local reporting under US GAAP, or vice versa. Revenue is a core element of the financial function and it is the prime identifier of your business' performance. Except for the amendment to the principal vs. In addition, ESMA ‘expects that entity-specific quantitative and qualitative disclosures about the application of the new standards will be provided’ and that since ‘the 2017 annual financial statements will be published after the requirements in IFRS 9 and IFRS 15 (and IFRS 16, if early adopted) will have become effective, ESMA expects that issuers will have substantially completed their implementation analyses (1). Written by: JJ Xia - Zuora. Sales of nonfinancial assets and in-substance nonfinancial assets scoped in ASC 610-20 are accounted for using the contract existence, separation, measurement and derecognition guidance in ASC 606. The US standard setter (the Financial Accounting Standards Board; FASB) issued ASC 606 at the same time IFRS 15 was issued by the IASB. In making the assessment of whether a significant financing component exists, ASC 606-10-32-16 provides the following factors that must be considered: 1. The IASB is issuing IFRS 15, which is essentially the same rule as ASC 606, giving this change global implications. In practice, this right to be paid, evidenced by the contractual terms and/or the applicable legal framework, must cover the costs incurred up to the termination date, plus a reasonable margin. In an effort to simplify the transition, both GAAPs permit not applying the new requirements to completed contracts. Find out what KPMG can do for your business. Both ASC 605 and 606 have to do with revenue recognition from customer contracts, so first off it’s important to realize that the accounting standards change affects accrual accounting on the income statement and shifts some assets and liabilities on the balance sheet, while operating cash flow on the cash flow statement will … Contract Revenue Management, a solution for ASC 606 and IFRS 15. The rules have changed, and if your business relies on complex revenue models – such as subscriptions and leases – Sage Intacct helps you get and remain compliant by enabling … Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. ASC 606 prescribes the method to recognize revenue from these ongoing relationships with customers: how to identify the obligations, determine the transaction price and allocate the transaction value to the performance obligations. Identification of performance obligations. This model covers the following: The transition between the old and new rules will create several M&A challenges, explain experts from Berkeley Research Group, Effective data governance is reliant on data integrity and uniformity and with a raft of new regulation on data governance, organisations need to understand what is expected of them, IASB clarifies how to apply IFRS 15 revenue recognition standard. For example, if a subsidiary that has only a building and does not represent a business is sold for a fixed price plus a contingent fee: Onerous contracts:  Determination of provisions for loss-making and onerous contracts, Transition:  Effective date for nonpublic companies, Transition:  Definition of 'completed contract', Disclosures:  Remaining performance obligations. Entities determine the significance of a financing component at an individual contract level rather than at a portfolio level. Recognizing Revenue Under ASC 606 / IFRS 15 Guidelines . A provision is recognized when the unavoidable costs of meeting the obligations under a contract exceed the economic benefits to be received. Â. Therefore, those team members, such as procurement or sales teams should be aware that contractual terms that they negotiate and agree could have a direct impact on the recognition of revenue. Topic 606 includes implementation guidance on when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. “By establishing comprehensive principles, the boards hope that preparers around the globe will find revenue guidance easier to understand and apply.” 2014 joint standard statement from the FASB and IASB In order to implement the output method, an entity first estimates the amount of outputs needed to satisfy the contract. Determine the obligating event for recognition of revenue for each performance obligation separately. All revenue and costs are then recognized upon transferring control of the goods to the customer. Overall, transition options are slightly different between the two GAAPs, so that opening numbers may not be similar under IFRS and US GAAP. • This This means the delivery of the committed … The complex revenue-recognition requirements of ASC 606 and IFRS 15 mean finance teams face some of the most sweeping changes since Sarbanes-Oxley. What do IFRS 15 and ASC 606 mean for your business? An entity should not split a sales-based or usage-based royalty into a ... IFRS. In some cases revenue will be recognised over time and in others at completion, depending on the way control of the underlying good or service is transferred to the customer, or possibly, the nuances in the wording of the contract. This selection is based on the potential impact on earnings that these differences may have (excluding certain industry-specific implications), as well as the complexity they may create to comply with both GAAPs. This means the delivery of the committed product or service must be fully complete for its revenue to be included in the respective accounting period. Completed contract for the purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP. Revenue Recognition (ASC 606 and IFRS 15) The Revenue Recognition Standard, effective 2018, was a joint project between the FASB and IASB with near-complete convergence. 13th February 2018 IFRS 15 & ASC 606 | revenue recognition The first issue our Project Manager faced at this growing company was around their manual high touch environment. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. There’s a corresponding tweak to international accounting standards called IFRS 15. However, businesses should also consider engaging with their shareholders through other means if they are aware of a significant impact on transition to the new Standard. For example, maintenance services which do not represent significant improvements to an asset; or, The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. Revenue from Contracts with Customers — A guide to IFRS 15 21 Mar 2018 This detailed guide is intended to assist preparers and users of financial statements to understand the impact of IFRS 15 and includes a high-level executive summary of the new requirements, followed by a specific focus on the important issues and choices available for entities on transition to the new Standard. Â. Noncash consideration, such as shares or advertising, is measured at fair value for inclusion in the transaction price. IFRS 15 establishes a restrictive definition of the costs that shall be recognised as an asset when obtaining a contract. Only the costs that would not have been incurred if the contract had not been obtained (typically, a sales commission) shall be recognised as an asset, provided it is probable that they will be recovered. The main aim of IFRS 15/ASC 606 is to recognize revenue for transfer of goods/services promised to customers in an amount reflecting the expected consideration in return for those goods or services. However, in 2016 the IASB and the FASB issued separate amendments to clarify their respective guidance and, in the case of the FASB, to provide some practical expedients to the requirements. not a performance obligation). Sales of a subsidiary that only has nonfinancial assets and/or in-substance nonfinancial assets and is not a business are scoped into ASC 610-20. Each performance obligation is considered and accounted for separately. Annual periods beginning after December,2017 (public business entities and certain not-for-profis) or after December, 2018 (other entities). Annual periods beginning on or after January, 2018. ... Company that is comparing US GAAP to IFRS; Effective dates. For the first time in several decades, the organizations that establish accounting and reporting standards for public and private companies – the Financial Accounting Standards Board (FASB) in the USA and the International Accounting Standards … IFRS 15 (as with current IFRS) does not specify a measurement date for noncash consideration to be received in a revenue contract. Fresh standards changes are approaching fast in the form of ASC 606 (and the jointly-developed IFRS 15), and now’s the perfect time to get compliant. The impact of the implementation of ASC 606. Foreign Private Issuers that file IFRS financial statements will face a more subtle issue. This criterion will be relevant if a contract transfers ownership to the customer as the asset is constructed. The US GAAP policy election simplifies the accounting and may accelerate recognition of the revenue and costs relating to the shipping and handling activities in comparison to IFRS, which is silent on the issue. If so, some revenue is allocated to the shipping activity and deferred until shipping and handling occurs. KPMG’s insights on the latest of everything you need to know about ASC 606. The amendments in this Update clarify the scope and applicability of this guidance as follows: 1. Under IFRS 15, the entity needs to estimate certain variable consideration for disclosure purposes only, even when those estimates are not needed for the recognition of revenue. Disclosure relief in two situations. 4. While the implementation of all new accounting standards requires CFOs to think through its implications — because revenue is at the heart of all profit orientated business — the impact of IFRS 15 could fundamentally change the profit, forecasts and thus the business model of some companies.  Other challenges to CFOs include the training of finance teams and communication to investors and other stakeholders. (1) ESMA public statement: “European common enforcement priorities for 2017 IFRS financial statements”, issued 27 October 2017, (2) ESMA public statement: “Issues for consideration in implementing IFRS Contracts with Customers”, issued 20 July 2016, Ben Levy is a senior manager in Mazars’ Financial Reporting Advisory team. This release reflects guidance effective in 2019 and guidance finalized by the FASB and the IASB generally as of … IP is considered functional if it has significant standalone functionality Nonpublic entities in the United States may therefore decide not to take advantage of the one year deferral offered by ASC 842 if they are also IFRS preparers. We have identified a few areas which could have a significant impact on the current accounting for revenue for companies. For companies involved in delivering complex and long-term projects, the impact of IFRS 15 or its US counterpart will be significant. The IASB has made it clear that IFRS preparers are not required to consider the decisions of the FASB and the US Transition Resource Group for Revenue Recognition for guidance in applying IFRS 15. Mandatory effective dates and early adoption provisions: Annual periods: For public business entities and certain not-for-profit entities* the effective date for annual periods is the fiscal years beginning after Dec. 15, 2017. Automate calculations, reduce your period-end close and gain a complete picture of your organization’s revenue - both recognized and deferred. Many offer CPE credit. The expected length of time between when the entity trans… No policy election. This may result in some taxes being presented on a net basis and others on a gross basis under IFRS, with a different presentation under US GAAP when the policy is elected. when the consideration is received) are acceptable under IFRS 15, but are not permitted under US GAAP. How Apttus Intelligent Quote-to-Cash solves compliance and automates … In fact, that makes it even … IFRS 15 is the new standard on revenue to replace all existing revenue standards, including: The new Standard sets out a five-step model and is generally considered to be more detailed and prescriptive than existing guidance. Sales of nonfinancial assets, such as property, plant and equipment (IAS 16), intangible assets (IAS 38) and investment property (IAS 40), are accounted for using the measurement and derecognition guidance of IFRS 15. 3 (formerly SOP 81-1. IFRS and US GAAP are likely to remain unaligned for the foreseeable future. The issues here are significant because the identification of more than one performance obligation in a contract means entities must: The timing of the recognition of revenue depends on the timing of the transfer of the promised good or service to a customer. New guidance Current US GAAP Current IFRS US GAAP Under ASC 606, IP that is licensed to a customer is classified as either “functional IP” (e.g., music, film, software or completed media content) or “symbolic IP” (e.g., brand names or logos). However, other dates (e.g. Despite the many differences, there are meaningful similarities as evidenced in recent accounting rule changes by both US GAAP and IFRS. 2. by the IASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes ASC 605-35. Any reversal of the impairment loss is limited to the carrying amount, net of amortization, that would have been determined if no impairment loss had been recognized. a principal vs. agent evaluation). However, it is expected that all companies should be determining the impacts through an internal transition project, so that this can be communicated externally, if required. They can potentially impact the growth engines at the heart of any business—and subscription-based companies are particularly vulnerable … Fair value can be measured at contract inception under both IFRS and US GAAP. Time is running out! 18 Ease of reporting revenue may also … The US GAAP practical expedient simplifies the presentation of sales taxes, in line with current US GAAP. For all other entites the effective date for … The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Join us for upcoming webcast events. or. Since the new revenue standard was released, companies have been hard at work to achieve compliance. Corporate strategy insights for your industry, Explore Corporate strategy insights for your industry, Financial Services Regulatory Insights Center, Explore Financial Services Regulatory Insights Center, Explore Risk, Regulatory and Compliance Insights, Explore Corporate Strategy and Mergers & Acquisitions, Customer service transformation & technology. Under IFRS, an entity recognizes a reversal of an impairment loss that has previously been recognized when the impairment conditions cease to exist. Our US GAAP/IFRS accounting differences identifier tool, which helps entities identify some of the more common accounting differences between US GAAP and IFRS that may affect an entity’s financial statements when converting from US GAAP to IFRS (or vice versa), has been updated. IFRS 15 & ASC 606 (5 Steps Approach) Objectives. This population of relevant SEC comment letters was determined and the filings were retrieved via searches within CompanyIQ™¹ Outputs are the result of inputs and processes in a business and are goods or services finished and transferred to the customer. The IFRS 15/ASC 606 standard’s detailed disclosure requirements arose in part because regulators and the board members believed that existing financial statements inadequately disclosed revenue information and because of the nature of the new revenue recognition standard which requires more judgments and estimation. The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs. Improving business performance, turning risk and compliance into opportunities, developing strategies and enhancing value are at the core of what we do for leading organizations. The ASC 606 5 Step Model. The US GAAP policy election simplifies the accounting and accelerates recognition of the revenue and costs relating to the shipping and handling activities in comparison to IFRS. The company evaluates whether sales and similar taxes are collected on behalf of a third party (e.g. Outside a lack of technology, part of the challenge is also interpreting the rules. We have identified the 10 key differences between IFRS 15 and ASC 606 that we believe are the most significant. Here are the differences explained in more detail. Except for the amendment to the principal vs. agent guidance (revenue being presented on a gross or net basis), these amendments may create differences in certain areas. The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services. Global recovery hinges on vaccine, says Western Union strategist, Finance teams Brexit preparedness ‘alarming’, Improved forecasting capabilities “crucial” to finance leaders in 2021, Finance teams still in early stages of digital transformation, Orange CFO capturing value of telco's ecosystem, IFRS 15 Revenue from Contracts with Customers, The regulations having the biggest impact on data governance, IASB updates IFRS 15 revenue recognition standard, Late payments: damage assessment and how to avoid unnecessary credit risks, Most businesses ill-prepared to handle IR35 tax changes, Cable pursues Government over Big Four audit domination, Woodhouse stays at Agent Provocateur as accounting probe continues, FRC proposes changes to reduced disclosure framework FRS 101, The Rules: FRS 102 presents an opportunity to rethink the way information is presented in financial statements, Allocating the transaction price to performance obligations, Allocate the revenue to each of the performance obligations identified (based on a prescribed approach) – a separate margin for each separately recognised performance obligation will need to be applied. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. KPMG does not provide legal advice. IFRS 15 has fewer disclosure requirements for interim financial reporting than ASC 606. US GAAP has no general guidance for recognizing a provision for onerous contracts, but instead focuses either on types of contracts or on industry-specific arrangements. The impact on Sales, Finance, and Legal teams. Close Start adding items to your reading lists: Sign in. Where companies expect to be significantly impacted by IFRS 15, it is important that all relevant areas of the business are trained on the impact of the transition to IFRS 15.  For example, as seen above, the timing of the recognition of revenue could be impacted by the contractual terms, such as the right to be paid. Although most of these new developments brought US GAAP and IFRS closer together, some other … Under IFRS, an entity recognises a reversal of an impairment loss that has previously been recognised when the impairment conditions cease to exist. IFRS 15 is effective for periods commencing on or after 1 January 2018. Completed contract for the purposes of transition is a contract for which the company has transferred all of the goods or services identified under legacy IFRS, regardless of whether all of the revenue has been recognized. Legacy IFRS revenue guidance continues to apply to revenue or adjustments to revenue arising from completed contracts after the transition date. ... What’s changing with ASC 606/IFRS 15 and why. Reversal of previously impaired contract acquisition and contract fulfilment costs. The company determines if shipping and handling activities are distinct from the shipped goods (i.e. Measurement date for non-cash consideration. As explained above, ESMA has provided guidance on the disclosures required in the 2017 financial statements. The International Accounting Standards Board (IASB) has issued two major accounting standards, which will be effective in 2018: IFRS 15 Revenue from Contracts with Customers (IFRS 15, or the “Standard”) and IFRS 9 Financial Instruments. The new accounting standards under ASC 606/IFRS 15 support convergence between the International Standards Board (IASB) and Financial Accounting Standards Board (FASB) to create compliance with an international system. ESMA highlights the fact that while they have ‘identified a number of informative qualitative disclosures on the implementation of the new standards, practice has varied concerning the specificity of the information provided’, they ‘expected a higher level of disclosure of the quantitative impact of the new standards’. Each transaction is bifurcated into separate POB and in some cases multiple transactions are also clubbed into a single POB depending on the nature of the service or the nature of contract. For example, this criterion is likely to be relevant to many contracts for the construction of highly customised assets. We share how private companies can review revenue contracts and give examples of contract terms to watch out for. ... Corporate turnarounds and impairments Derivatives and hedge accounting Fair value measurement Financial instruments IFRS in the US Income tax and tax reform … Explore challenges and top-of-mind concerns of business leaders today. Archived recordings can be accessed anytime. The US standard setter (the Financial Accounting Standards Board; FASB) issued ASC 606 at the same time IFRS 15 was issued by the IASB.  Although substantially converged when originally published, subsequent amendments have resulted in a few areas of divergence between the two standards, which are important to identify for US GAAP preparers and UK subsidiaries of US groups. With more international understanding and a closer alignment of global accounting standards when doing business, the possibility for increased capital flow and international investments could increase. Policy election to treat shipping and handling activities undertaken by the company after the customer has obtained control of the related goods as a fulfillment activity (i.e. Under IFRS 15, revenue will be recognised over time if it can be shown that either: Capitalisation of costs of obtaining a contract. Current IFRS (IAS 18) already requires a principal vs. agent evaluation for sales tax presentation. 2. Comparing the New Revenue Recognition Standards: IFRS 15 and ASC 606 (August 30, 2016) As originally issued, IFRS 15 and ASC 606 were very similar with very little difference between the two standards. Policy election to present all sales and similar taxes on a net basis. 2018 is expected to be a year where changes to the financial reporting environment are so extensive, the implications will seep into the financial management of the company, Ben Levy, senior manager in Mazars’ Financial Reporting Advisory team, explains the impact of new financial reporting standards. US GAAP vs IFRS: Key Similarities. However, companies recognized revenue i… Nonpublic business entities that have an IFRS parent may need to adopt the revenue standard one year earlier compared to what would be required for US stand-alone financial statements. These differences may be challenging for companies that report under both US GAAP and IFRS – e.g. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Peush Patel - Zuora. The entity then tracks the progress toward completion of the contract by measuring outputs to date relative to total estimate… Revenue is a core element of the financial function and it is the prime identifier of your business' performance. This includes partial sale transactions.Â, Sales of a subsidiary or group of assets that constitutes a business or not-for-profit activity continue to be accounted for under the deconsolidation guidance (ASC 810). Â, Onerous revenue contracts are accounted for under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Financial statements are required to disclose the impact of forthcoming accounting standards; therefore we should be able to have first sight of how market leaders in their sectors have been affected. Connect with us via webcast, podcast, or in person at industry events. Most companies who are therefore about to start their 2018 financial year will be in the same position and will need to account for their revenue under IFRS 15 for the first time. For example, building improvements carried out on the customer’s land and buildings; or. The convergence of ASC 606 and IFRS 15 is predicted to promote clarity, transparency, and comparability of financial reporting between different countries. Partner, Dept. Contract and Revenue Management is an Intacct module that provides an automated solution for the effects of ASC 606 and IFRS 15. Although the first year of adoption is 2018, the judgements required in the transition approach and the disclosures required mean that finance teams who have not started contemplating the implications of the new Standard may find themselves under pressure in the forthcoming year. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. ESMA guidance on the disclosure objective includes their expectation for issuers to ‘provide information about the accounting policy choices that are to be taken upon first application of IFRS 15’, ‘disaggregate the expected impact depending on its nature (i.e. A Converged Standard? disaggregated revenue, contract balances and remaining performance obligations. However, in 2016 the IASB and the FASB issued separate amendments to clarify their respective guidance and, in the case of the FASB, to provide some practical expedients to the requirements. APPLICABILITY OF ASC 606/IFRS 15. We will continue to update this publication periodically for new developments. Under US GAAP (ASC 610-20), the company estimates the transaction price following the variable consideration guidance that is subject to constraint. Current guidance is unchanged except for losses on long-term construction- and production-type contracts, where an entity is allowed to determine the provision for losses at either the contract level or the performance obligation level. Similar to annual disclosures -- e.g. The impact of the transition to IFRS 15 and ASC 606 depends on companies’ current accounting and the nature of their contracts. Its requirements have driven organizations to track revenue at more detailed levels than they have previously. 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