Prepare for new revenue recognition requirements in 2018

FROM January next year, the new revenue recognition requirements, IFRS 15 – Revenue from Contracts with Customers, come into effect.

IFRS 15 will replace the previous revenue standards, IAS 18 – Revenue, and IAS 11 – Construction Contracts, as well as the related Interpretations on revenue recognition: Ifric 13 – Customer Loyalty Programmes, Ifric 15 – Agreements for the Construction of Real Estate, Ifric 18 – Transfers of Assets from Customers and SIC-31 – Revenue-Barter Transactions Involving Advertising Services.

Application of IFRS 15, which was issued in May 2014, is mandatory for annual reporting periods starting from January 1 (2018) onwards.

According to the SA Institute of Chartered Accountants (Saica), the new financial reporting standard establishes a single comprehensive framework for determining when and how much revenue a company should recognise in the financial statements.

Saica project director: financial reporting, Bongeka Nodada, said: “The new standard will impact the revenue profile of a myriad companies in South Africa, including those operating in the telecommunications industry, the retail industry, the transport industry and the construction industry.”

The new standard removes inconsistencies and weaknesses in the previous revenue requirements, improves comparability among revenue recognition practices across companies, industries, jurisdictions and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which companies refer.

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

The core principle of this new standard is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services, according to Saica.

“With the new requirements, some companies may recognise revenue earlier than before and in some instances, the revenue may be deferred or recognised over a period of time.

“The standard also permits a company to capitalise incremental costs incurred to acquire a contract, for example, sales commissions, and costs incurred to fulfil a contract,” said Nodada.

Contracts “Moreover, companies have been provided with guidance on how to account for contract modifications, warranties, royalties, rebates, discounts and loyalty programmes.

“Contracts should, therefore, be reviewed as the existing terms and conditions may have a significant impact on a company’s reported figures, key leverage ratios, debt covenants, and IT systems, among others.”

Nodada noted that these new requirements were applicable to companies that were required to prepare financial statements in terms of international financial reporting standards, including companies listed on the JSE and those required in terms of the Companies Act 71 of 2008 or any other legislation to comply with international financial reporting standards and others who have opted to apply international financial reporting standards.