Quantifying and disclosing the impact of IFRS 15
With the rapid changes in the global business environment and the brisk increase in crossborder trade and transactions, regulators, enterprises and stakeholders alike agree that it is vital to sustain the creation of International Financial Reporting Standards (IFRS) as a common and globally-accepted reference for financial reporting. However, given the depth, scope and complexity of global business, the adoption of new standards always comes with numerous challenges.
One such standard is IFRS 15, Revenue from Contracts with Customers, which will take effect globally on Jan. 1 2018. The adoption of IFRS 15 is expected to significantly affect the financial statements of many local and global entities as it will not only directly impact revenue, but it may also affect the timing of recognition of the revenue. Furthermore, the new standard mandates additional disclosures beyond the scope of the current revenue standards.
The requirements to quantify and disclose the impact of adoption of IFRS 15 are not confined to the year of adoption. Under International Accounting Standards (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors, entities are required to disclose the fact that they have not applied a new standard (in this case, IFRS 15) that has been issued, but is not yet effective. Furthermore, entities are required to disclose the nature of the impending changes on their accounting policies upon adoption of the new standard and any known (or at least any reasonably estimable) potential impact of such an adoption.
Simply stated, even though the entities are only mandated to reflect the impact of adopting IFRS 15 on their 2018 financial statements (assuming that IFRS 15 is not adopted early), they should initiate and execute their implementation project in order to quantify the anticipated impact of such adoption. This is because such quantitative disclosures are already required by IAS 8 for their 2017, and for some, even in their 2016, financial statements. Waiting until 2018 to begin would be, in almost every instance, too late, both from reporting and operational standpoints.
Bearing the requirements of IAS 8 in mind and with a view towards gauging the level of preparedness of entities and their quantitative disclosures of the impact of IFRS 15 adoption, EY (Ernst & Young) Global surveyed the 2016 annual IFRS financial statements of 207 Fortune 500 entities. The findings, which are briefly discussed in this article, were released in a report titled Are you ready to quantify the effect of adopting IFRS 15?
Some highlights of the report in terms of the disclosures about the impact of adopting IFRS 15 include:
• Only 3% of all the entities surveyed expect IFRS 15 to have a material impact on their financial statements, with 50% of these entities coming from the telecommunication sector.
• Notably, 35% ( a third of which are from the financial services sector) of the entities surveyed also disclosed that they do not expect the standard to have any material impact on them.
• The majority of the entities surveyed, however, indicated that they were unable to make a reliable estimate yet or they did not give a clear indication of the expected effect on their business.
For quantitative disclosures about the potential impact of the new standard, very few (1%) of the entities surveyed provided the said quantitative information. In fact, only one entity out of 207 surveyed was able to actually disclose the expected overall impact of the new standard.
However, for the qualitative disclosures on the adoption of IFRS 15, it was noted that more companies are disclosing such information, with 33% of the entities surveyed disclosing the specific provisions in the standard that could potentially have a significant impact in their 2018 financial statements. Some of the more common provisions cited by these entities are: • Identification of performance obligations • Expected change in the timing of revenue recognition
• Accounting for contract costs and variable considerations • Allocation of transaction price • Application of the guidance on licenses • Changes in the presentation • Principal versus agent considerations • Identifying the contract or the modifications to the contract • Disclosure requirements • Other topics such as accounting for customer options for additional goods or services and non-refundable upfront fees and how to measure progress over time.
Finally, the survey covered how companies are disclosing their methods of transition to IFRS 15. The new standard allows either full retrospective adoption (i.e., the new standard is applied to all the periods presented) or a modified retrospective approach (i.e., the new standard is applied only to the most current period presented or in the initial period of application). Of the entities surveyed, only 15% disclosed in their 2016 financial statements their expected transition method, with more than two-thirds of these entities disclosing their intention to use the modified retrospective approach.
In summary, while a majority of entities has indicated that they have started their implementation projects for IFRS 15, such a claim was not reflected in their 2016 financial statements as evidenced by the lack of relevant disclosures in the said financial statements.
Considering that IFRS 15 will be taking effect very soon, entities should be putting even more effort into their implementation efforts. It is also imperative that they disclose the quantitative impact of adoption in their 2017 financial statements, both in order to comply with IAS 8, as well as to demonstrate to their stakeholders that they are well on the road to a seamless adoption of the new standard. Given the current level of uncertainty in global financial and capital markets, this kind of reassurance to stakeholders may be instrumental in the continuing sustainability of a business.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.