It took 15 years to plan and three years to implement, but as of Jan. 1, 2018, IFRS 15 became law. This international accounting standard deals with revenue recognition. More specifically, it outlines when and how you can book revenue from customer contracts. You can expect it to impact all your clients to some degree. With your help, though, they can make a smooth transition.
IFRS 15, Revenue Recognition, and What It Means
IFRS 15 attempts to streamline the revenue recognition process across industries by matching revenues to the actual time when customers obtain control of the goods or services. It went into effect Jan. 1, 2018, for public companies. Private businesses have until Jan. 1, 2019, to comply.
Prior to this change, companies had much more leeway in recognizing revenue. But this leeway led to huge discrepancies in standard practices across industries and even between businesses in a single industry.
The problem was the myriad of ways revenue could potentially be recognized, which made it difficult for investors, lenders, and regulators to compare companies, apples-to-apples. IFRS 15 sought to change that by implementing an across-the-board recognition process.
This law establishes a five-step process for recognizing revenue:
- Identify a contract with the customer that spells out each party’s rights and payment obligations.
- In the contract, identify the goods or services the business promises to transfer to the customer.
- Determine the transaction price for the goods and services mentioned.
- Match each transaction price to the goods sold or services rendered.
- Recognize revenue only when the customer obtains control of the good or service.
Customer control is the linchpin of IFRS 15. No longer can a business book revenue with the anticipation of delivering a good or service at a later date. You can help your clients understand these important changes, while being mindful of them yourself by staying up to date on changes as they occur.
In an ideal situation, you’ve been working with each client in preparation for these changes. But what about new clients who might be unprepared or existing clients who are now realizing the gravity of the changes? For these customers, it’s time to help instill a sense of urgency regarding adaptation to the new regulations.
Is Every Industry Affected by IFRS 15?
Some industries can expect to feel the pressure of the new law more than others. Automotive companies, which often employ convoluted contract provisions such as cash rebates, warranties, and lease financing, should prepare for major changes. Financial service companies, by contrast, might not feel as big an effect. IFRS 15 largely excludes contracts involving financial instruments from the new requirements.
The bottom line is that any company using contract language that enables it to book revenue before a customer takes control of a product or service cannot do so any longer. This means it’s time to comb through your clients’ sales contracts, seeking out language that might indicate changes to revenue accounting are needed.
Do Your Clients Need to Update Their Systems and Processes?
Your clients’ accounting information systems might have worked great under the old rules. But what’s going to happen when they change their processes to follow the new law? Can their current systems handle the new flow of data and produce accurate reporting?
Consult with your clients on issues such as these. Many don’t know any more about their information systems than they do about their accounting processes. Consider offering your clients audits of their accounting information systems. In doing so, you can spot potential problems before they occur.
Even Non-Revenue Arrangements Might Be Affected
The reach of IFRS 15 is broad. In many cases, it can affect parts of a business that have little to do with the actual booking of revenue. For example, say your client employs outside sales representatives who call on businesses in the area. When a rep books a sale, the new customer signs a contract stipulating payment up front, with the promised product or service delivered at a later date.
Before IFRS 15, your client recognized the revenue when it received payment from a new customer. Your client also paid the sales rep a commission on the sale as soon as revenue was recognized. Now, revenue cannot be recognized until the customer receives the product or service. It might take some time for your client to get accustomed to these revamped revenue standards. This affects not only the accounting processes and sales contracts with customers, but also employment contracts with sales reps.
IFRS 15 is certainly a hefty law, but walking your clients through the updates and making sure they’re complying with the first steps. Ready for success? Accelerate your year-end adjustment process and start saving time on corporate returns with QuickBooks Online Accountant. Sign up for free.