Increasingly complex sales transactions have prompted the standard setters to amend the rules on revenue recognition. The new IFRS rules will be applicable for periods beginning on or after 1 January 2018. Here we look at the question of whether it’s possible to avoid transition effects by switching to Swiss GAAP FER.
In a joint project, IASB and FASB have formulated almost identical IFRS and US GAAP standards governing the key area of revenue recognition. IFRS 15, Revenue from Contracts with Customers replaces the existing standards, IAS 11, Construction Contracts, and IAS 18, Revenue. In the two-and-a-half years since the publication of the new standard, its impact on IFRS users has been shown to vary. While some entities have had to make major adjustments, for others revenue recognition has remained unchanged.
Core points of the new standard
Essentially the new standard determines when revenue may be recognised and in what amount. The core principle is that an entity recognises revenue when it transfers the goods or services as agreed with the customer. IFRS 15 implements this core principle in a five-step model. The first step involves identifying the contract with the customer. In the second step, the individual performance obligations in the contract are identified. In practice, however, rather than covering only the sale of goods, contracts often contain additional performance obligations to the customer, for example follow-up services or the right to future discounts or products free of charge. Such contractual components often constitute performance obligations that have to be treated separately, and revenue may be recognised on performance. The third step in the model involves determining the transaction price – in other words, working out how much revenue can be recognised for the contract in question. This raises interesting questions, for example if the contract contains a financing element or variability in the selling price. The fourth step involves allocating the transaction price to the performance obligations identified in step two. Generally this is done in proportion to the standalone selling prices of the individual performance obligations. After the fourth step, it is therefore clear how much revenue an entity may recognise for the fulfilment of each individual performance obligation. The fifth and final step clarifies the question of when an entity is deemed to have satisfied a performance obligation and when it may recognise the corresponding revenue. On the basis of a ‘transfer of control’ model, a performance obligation may be satisfied either at one point in time or over a period of time.
Revenue recognition on the basis of individual performance obligations essentially results in a meaningful representation of revenue in the financial statements. However, the model can pose major challenges for an entity if there are differences between the timing and amount of revenue recognised and the timing and amount of the invoice or cash flow.
Five step approach for recognising revenue
| 1 Identify the contract |
2 Separate performance obligations |
3 Determine transaction price |
4 Allocate transaction price |
5 Recognise revenue |
