It took 15 years to plan and three years to implement, but as of Jan. 1, 2018, IFRS 15 is the law of the land. This international accounting standard deals with revenue recognition, specifically, when and how to book revenue from customer contracts. You can expect it to impact all your clients to some degree. With your help, though, they can transition smoothly.
IFRS 15, Revenue Recognition, and What It Means
IFRS 15 attempts to streamline the revenue recognition process across industries by matching revenues to when customers obtain control of a good or service. It went into effect Jan. 1, 2018, for public companies. Private businesses have until Jan. 1, 2019, to comply.
Before, companies had much more leeway in recognizing revenue, leading to huge discrepancies in standard practices across industries and even between businesses in a single industry.
The problem was, the hodgepodge of revenue recognition models made it hard for investors, lenders, and regulators to compare companies apples-to-apples. IFRS 15 sought to change all that.
The law establishes a five-step process for recognizing revenue:
- Identify a contract with the customer. The contract must spell 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.
Get Ready for Complexity
Make no mistake: the laws governing revenue accounting just got a lot more complex. While IFRS had devoted 77 pages to revenue recognition, already the length of a novella, as of Jan. 1, 2018, the page count jumped to a head-spinning 341.
Luckily, your clients have you to help them wade their way through it, but it still won’t be easy. Don’t let your clients underestimate the sweeping changes they’re about to experience. Even more important, don’t underestimate them yourself.
In an ideal situation, you’ve been working with each client for months or longer getting it ready. But what about new clients who might be utterly unprepared or existing clients who’re just now realizing the gravity of the changes? For these customers, it’s time to instill a sense of urgency. Your job only gets harder the longer they go without adapting to the law.
Every Industry Is Different, But All Are Affected
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, though, 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 any 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?
As a modern accountant, part of your job involves consulting with clients on issues such as these. Many of them don’t know any more about their information systems than they do their accounting processes. Consider offering your clients audits of their accounting information systems. In doing so, you can spot potential problems before they create major headaches with your clients’ financial reporting.
Even Nonrevenue 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, per the employment contract, a commission on the sale as soon as revenue was recognized. Now your client cannot recognize revenue at the same time as before. This affects not only its accounting processes and sales contracts with customers but also its employment contracts with sales reps.
IFRS 15 is a cannonball of a law, and it’s making a splash in the business world in 2018. By walking your clients through it and making sure they’re complying, you can keep them from getting soaked.