IFRS 15 Revenue from contracts with customers - ICPAK · IFRS 15 –Revenue from contracts with...
Transcript of IFRS 15 Revenue from contracts with customers - ICPAK · IFRS 15 –Revenue from contracts with...
IFRS 15 – Revenue from contracts with customers
Presentation by:CPA Freda Mitambo
Partner, Deloitte & Touche
Uphold public interest
Why IFRS 15 is important
2
What does it mean for clients?
• Revenue recognition principles will change
• P/L may vary to a certain extent
• IT Systems, Accounting Policies, Internal Processes and Controls may be subject to change
What do I need to know now?
• Key challenges
New estimates & judgments required
Retrospective application includes associated data gathering analysis
Change of systems, processes and internal controls
• Key advisory opportunities
• Training services, consulting on IT systems, tax planning and more
What is it?
• More detailed guidance on revenue recognition which involve significant judgments
• Effective on 1/1/2018 with retrospective application
What does it mean for auditors?
• Identify the key impacts on your clients
• Early discussion with clients on the key impacts and help your clients prepare for the changes
Clients
Ch
alle
ng
e/
Op
po
rtu
nity
Auditors
Key fa
cts
IFRS 15
3
The Time is Now!
1 January 2017
Date of initial application
1 January 2018
First annual financial statements in
accordance with IFRS 15
31 Dec 2018
4
STEP 1 Identify the contract with the customer
Five-step Model Framework
• Paragraph 9 lists the criteria which must all be met to qualify as a contract with a customer
• Entities will need to consider whether the contract should be combined with other contracts for accounting purposes
5
Step 1 – Identify the contract with a customer
A legally enforceable contract (incl. oral or implied) must meet all of the
following requirements:
A contract is outside the scope if:
Contracts are approved and the
parties are committed to perform.
Payment terms can be identified.
It is probable that the entity will
collect the consideration to
which it will be entitled.
Each party’s rights can be
identified.
Commercial substance.
The contract is wholly unperformed and Each party can unilaterally terminate the
contract without compensation
6
Five-step Model Framework
• An entity will typically identify all the distinct goods or services, or contract deliverables, which have been promised. They may be implicitly or explicitly promised in a contract –these are “performance obligations”
• A good or service promised is distinct, if the good or service is capable of being distinct and the promise to transfer the good or service is distinct within the context of the contract.
STEP 2 Identify the performance obligations in the contract
Identify all (incl. implicit) promised goods/services in the contract
Step 2: Identifying performance obligations
Is the good/service distinct?
Can the customer benefit from the good or service on
its own or together with other readily available
resources?
Is the good or service separately identifiable from
other promises in the contract?
Account for as a separate performance obligation
Combine two or more promised goods or services
YES NO
CAPABLE OF BEING
DISTINCT
DISTINCT IN CONTEXT
OF CONTRACT
Step 1 Step 2 Step 3 Step 4 Step 5
AND
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8
Five-step Model Framework
• IFRS 15 typically bases revenue on the amount to which an entity expects to be entitled rather than the amount that it expects ultimately to collect (includes both fixed andvariable consideration)
• Variable consideration will only be included in the transaction price to the extent that an entity expects it to be “highly probable” that the resolution of the associated uncertainty would not result in a significant revenue reversal (the “constraint”)
STEP 3 Determine the transaction price
Transaction price
The transaction price would
not be reduced for the
effects of customer credit
risk.
Excluding credit risk
Variable considerationConsideration amount to which an entity
expects to be entitled in exchange for
transferring promised goods or services to
a customer.
Definition
The amount is fixed and not
contingent on the outcome of
future events.
Fixed consideration
• Consideration in a form other than
cash
• Shall be measured at FV
Non-cash consideration
Significant benefit of financing
• Estimated and
potentially constrained
• e.g., discounts, rebates,
refunds, etc.
Step 3: Determining the transaction priceStep 1 Step 2 Step 3 Step 4 Step 5
What is the transaction price? What does it include?
Consideration payable
to customers
• If identified, leads to adjustment in
transaction price.
• Practical expedient available.
Reduces transaction
price unless payment is
made for a distinct
good/service.
10
Five-step Model Framework
• After determining the transaction price at Step 3, Step 4 specifies how that transaction price is allocated between the different performance obligations identified in Step 2.
• Previously, IFRSs included very little in the way of requirements on this topic, whereas IFRS 15 is reasonably prescriptive.
STEP 4 Allocate the transaction price to the performance obligations
Determine standalone selling
price
• Estimate the price if unobservable
• Acceptable methods:> Adjusted market assessment approach >Expected cost plus a margin approach >Residual approach
Allocate the transaction price
• Allocate the transaction price to each performance obligation on a relative stand-alone selling price basis.
• Allocate discounts proportionally to all performance obligations unless certain criteria are met.
• Allocate variable consideration and changes in transaction price to all performance obligations unless two criteria are both met.
• Do not reallocate changes in standalone selling price after inception.
Step 4: Allocating the transaction price Step 1 Step 2 Step 3 Step 4 Step 5
Only allowed in limited circumstances
Maximize the
use of
observable
inputs and
apply
consistently
12
Five-step Model Framework
• The final step is to determine, for each performance obligation, when revenue should be recognized. This may be over time or at a point in time.
• Paragraph 35 outlines the criteria, of which one must be met, for revenue to be recognized over time.
STEP 5 Recognize revenue when (or as) each performance obligation is satisfied
Step 5: Recognizing revenue
The seller’s performance creates or
enhances an asset controlled by the
customer.
Performance satisfied over time = Revenue recognized over time
The seller does not create an asset that has
an alternative use to the seller and the seller has the right to be paid
for performance to date.
OR
Revenue recognized at a point in time
The customer simultaneously
receives and consumes the benefit of the
seller’s performance as the seller performs.
IF NOT
Step 1 Step 2 Step 3 Step 4 Step 5
OR
14
Audit Risk Assessment – Transition Versus Ongoing
Full retrospective
method
Modified retrospective
method
Risks relating to transition
Risks relating to on-going application
Modified Contracts
Completed contracts
Completed contracts with variable consideration
Transaction price allocated to remaining performance obligation
Practicalexpedientsfor:
Applies IFRS 15 retrospectively to all comparative periods presented. When chosen:
Full Retrospective Method
Prior yearcomparativesare restated
Practical Expedient:Modified contracts
Only contracts that are open at the date of initial application
Choose to apply the requirements to:
Modified Retrospective Method
All contracts at the date of initial application
OR
S3 17
When is an option to purchase additional goods recognized as a separate performance obligation (a
‘material right’) per IFRS 15?
When the seller is obligated to provide the additional goods at the discretion of the customerAWhen the option allows the customer to purchase goods at a discount that is incremental to the range of discounts typically given for those goods to that class of customer in that geographical area or market
B
When the customer is more likely than not to exercise the optionCWhen the entity has historical data on the expected level of use of the
optionD
Testing your Knowledge: Question 1
S3 18
When the seller is obligated to provide the additional goods at the discretion of the customerAWhen the option allows the customer to purchase goods at a discount that is incremental to the range of discounts typically given for those goods to that class of customer in that geographical area or market
B
When the customer is more likely than not to exercise the optionCWhen the entity has historical data on the expected level of use of the optionD
Testing your Knowledge: Question 1
When is an option to purchase additional goods recognized as a
separate performance obligation (a ‘material right’) per IFRS 15?
S3 19
Which of the following criteria must be met to capitalize the costs of fulfilling a contract in accordance with IFRS
15 (assuming the costs are not within the scope of another standard)?
The costs relate directly to a specifically identifiable contractA
The costs generate or enhance resources that will be used in satisfying the contractB
The costs are expected to be recoveredC
The costs relate to satisfied performance obligations D
Testing your Knowledge: Question 2
Select all that apply
S3 20
Which of the following criteria must be met to capitalize the costs of fulfilling a contract in accordance with IFRS
15 (assuming the costs are not within the scope of another standard)?
The costs relate directly to a specifically identifiable contractA
The costs generate or enhance resources that will be used in satisfying the contractB
The costs are expected to be recoveredC
The costs relate to satisfied performance obligations D
Testing your Knowledge: Question 2
Select all that apply
S3 21
How does IFRS 15 deal with variability that is linked to
customer actions or choices?
If a contract gives a customer the option to purchase additional distinct goods or services, those goods or services are not treated as performance obligations.
Instead, consider whether customer option gives rise to a
material right. If it does, the material right itself (and not
underlying goods or services) should be treated as a
performance obligation.
Highlight - Case Study 1: Key Areas of Focus
S3 22
Background
Force manufactures and sells aircraft engines and parts.
Unlike its competitors, Force does not build its engines or
spare parts on a contract by contract basis. Force delivers
within a 30-day timeframe and therefore has aircraft
engines and spare parts on hand, ready for immediate
delivery. Force frequently sells spare parts separately from
the engines and vice versa.
FlyJet is a commercial airline which travels internationally.
Note: the below contract has been assessed as being
within the scope of IFRS 15 and the assessment has been
adequately documented in the audit file.
S3 23
Contract
Force has entered into a written contract with FlyJet to
sell:
10 aircraft engines for $12 million each (excl. sales
tax) and
20 specific aircraft engine spare parts (part XY002) for
$300,000 each (excl. sales tax)
The 10 engines will be delivered together before the
end of December 2018. The 20 spare parts will be
delivered together during January 2019.
The 20 spare parts are for future replacement
purposes, as and when needed. Additionally, in the
contract, FlyJet has the option to buy additional XY002
parts (beyond the 20) for the next 5 years. Other
engine spare parts can also be purchased by FlyJet,
however these would be purchased outside of this
contract. The purchase of the optional spare parts is at
the discretion of FlyJet, but Force is obligated to
provide these optional spare parts if requested.
S3 24
Contract
FlyJet is not contractually bound to buy spare parts from
Force and they are available from other suppliers.
However, many countries require airlines to use engine
spare parts from the original equipment manufacturer
when flying in that country’s air space. Based on its
airline routes, in practice, FlyJet is compelled to buy
engine spare parts from Force. These spare parts are
needed for the aircraft engine to properly function for its
expected economic life.
Force deliberately prices the aircraft engines at less than
the cost of manufacture, knowing that they will earn a
very high margin on part XY002 (based on an estimated
average number of spare parts to be sold, as well as the
number of spare parts sold upfront) to recoup the initial
loss on the engine. If no optional additional spare parts
were purchased, the contract would incur a loss. This
pricing structure is known in the industry as a “loss leader
contract”.
S3 25
Contract
The standalone price of the aircraft engine is $20
million each. When Force sells the aircraft engines
by themselves (without the spare parts), the aircraft
engines are sold at a profit. The spare parts are not
sold at a discount to their standalone selling price.
Force estimates that a total of 75 optional spare parts
will be purchased by FlyJet and that the profits on the
spare part sales will more than compensate for the
discount on the selling price of the aircraft engines.
This is based on Force’s historical statistical
evidence of selling a large number of spare parts.
S3 26
Highlight - Case Study 1: Guide 1 Background
Force contracts with FlyJet to sell
• 10 aircraft engines for $12 million each
• 20 spare parts for $300,000 each
• FlyJet option to purchase additional specific spare parts
• Loss leader contract – aircraft engines priced at less than the cost of manufacture, in anticipation of spare parts securing profits
• Estimated sale of 75 optional spare parts over 5 years
S3 27
Highlight - Case Study 1: Guide 1 Solutions
STEP 2 Identify the performance obligations in the contract
STEP 3 Determine the transaction price
STEP 4 Allocate the transaction price to the performance obligations
S3 28
Highlight - Case Study 1: Step 2
Is the good or service distinct within the context
of the contract?
IFRS 15.10 - A contract is an agreement between two or more parties that creates
enforceable rights and obligations
REMINDER
Is the good or service capable of being distinct?
Identify material(explicit and implicit)
promised goods and services
S3 29
Highlight - Case Study 1: Step 2
Is the good or service distinct within the context
of the contract?
• 10 aircraft engines are
capable of being distinct and
distinct within context of
contract; and
• 20 spare parts are capable of
being distinct and distinct
within context of contract.
Is the good or service capable of being distinct?
Identify material(explicit and implicit)
promised goods and services
S3 30
Highlight - Case Study 1: Step 3
IFRS 15.10 defines a contract as an agreement
between two or more parties that creates enforceable
rights and obligations
Optional additional spare parts are not sold at discount to their stand-alone selling price. There is no material right to
customer and option will not be accounted for as a performance obligation
Force’s assessment of optional additional spare parts as a separate performance obligation is incorrect
S3 31
Highlight - Case Study 1: Step 3
Optional goods or services that are distinct:
•Exclude from performance obligations
•Exclude associated amounts payable from transaction price
•Assess whether material right
Variable goods or services that are not distinct:
• Include within performance obligation of which they form
part
• Treat variable amounts payable by customer as variable
consideration
S3 32
Highlight - Case Study 1: Step 3
The transaction price should only include amounts (including variable amounts)
to which the entity has rights under the present contract.
The transaction price is therefore $126 million:
• 10 aircraft engines at $12 million each• 20 spare parts at $300,000 each
S3 33
Highlight - Case Study 1: Loss Incurred on Aircraft Engines
An entity should recognize as expenses when incurred costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the contract
REMINDER
Full costs for sale of 10 aircraft engines and 20 spare parts should therefore
be expensed upon sale
S3 34
Highlight - Case Study 1: Step 2
Should the optional additional spare parts expected to be sold be included within the
performance obligations under the contract?
Is the option to purchase the spare parts a material right?
S3 35
Highlight - Case Study 1: Step 3
Should the estimated sales of the optional spare parts be included in the transaction
price as management proposes?
If the estimated sales relating to the optional spare parts are not included as performance
obligations in the original contract, how should the loss incurred on the aircraft
engines be treated? Could this be capitalized or is it required to be expensed?
Expensed
S3 36
Engines
Spare parts
Total stand-alone selling price
Engines
Spare parts
Transaction price
Allocation of the transaction price to the performance obligations
$200 million
$6 million
$206 million
$122.3 million
$3.7 million
$126 million
Highlight - Case Study 1: Step 4
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Factors to Consider
© 2017. For information, contact Deloitte Touche Tohmatsu Limited. S3 37
Degree of judgment /
objectivity in accounting
process
Accounting and reporting complexities
Complexity / simplicity of
related calculations
Degree of complexity or
judgment
The complexity of transactions
Size and composition
of the ABCOTD
Volume of activity,
complexity, and whether homogenous
Nature of the ABCOTD
Effect of quantitative
and qualitative
factors
Economic, accounting,
or other developments
Exposure to losses
Changes from the
prior period
Susceptibility to
misstatement due to error
or fraud
Transactions outside of
normal course of business
Risk of fraudExistence of Related Party Transactions
Possibility of Significant Contingent liabilities
Degree of automation /
Manual intervention
Degree of complexity and
judgment
Nature and composition of the
ABCOTD
Economic, internal and historic
factors
Audit Considerations
Factors to consider when identifying and assessing RoMMs
Evaluate the client’s risk assessment
Management estimates
•
Lessor accounting largely unchanged
One single
measurement
model
Determination of
whether a
contract contains
or is a lease
Two main changes are…
Lessor
and
Lessee
Lessee
What is the impact of IFRS 16 on clients?
Introduction
1 Jan 20191 Jan 2018
December year-ends:
Retrospective application
with restatement
Disclosure – reasonably estimable information (up to effective date)
December year-ends:
Effective date
Entities can elect to apply full retrospective approach or a ‘modified’ retrospective approach (with no restatement of comparatives)
31 Dec 2016
Introduction
Timeline to transition
PRACTICAL EXPEDIENT
Early adoption may
be permitted
Permits both lessees and lessors not to reassess whether a contract is, or contains a lease at the date of initial application.
Why now?
Introduction
Client impact and changes
KEY CLIENT ADVICE
Systems
Processes
Controls
Metrics
Key accounting focus areas
IFRS 16 versus IAS 17
T
e
x
t
Focus on
lessees
Definition of
a lease
Measuring the
lease liability
All leases now on the
statement of financial
position
IFRS 16 versus IAS 17Identification of a lease
IFRS 16 changesIFRS 16 retains
Definition of a lease Application of the definition
A contract, or part of a contract, that
conveys the right to use an asset for
a period of time in exchange for
consideration.
Concept of control is introduced
Identifying a lease may require significant judgment
Definition of a leaseIFRS 16 versus IAS 17
Is it a lease?
Identified asset Right to control the use of
identified asset
and
Right to obtain substantially all economic benefits from use
Right to direct the use
whether the customer has the right to control the use of an identified asset for a period of time.
IFRS 16 versus IAS 17Expected impact
Treatment under IAS 17
Expected conclusion under IFRS 16
Contracts that are or contain a lease
Generally, the same
Significant judgment was applied
Possibly different
IFRS 16 versus IAS 17
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2Leases
recognized on
statement of
financial position
Service contracts
recognized on
income statement
Operating lease
and service
component both
recognized on
income statement
IFRS
16
IAS
17
Non-lease
component
Identified and accounted for separately
from the lease component
Separating components
PRACTICAL EXPEDIENT
KEY CLIENT ADVICE
IFRS 16 versus IAS 17
Income statement
EBITDA XXXDepreciation XXXFinance cost XXX
Profit before tax XXX
Statement of Financial Position
Lease assets XXX
Lease liabilities XXX
Income statement
Lease payments XXX
EBITDA XXX
Profit before tax XXX
Statement of Financial Position
IAS 17 IFRS 16
Obligation to
make lease
payments
Right to use
underlying leased
asset
Depreciation on
lease assets and
finance cost of
lease liability
Single measurement model
Off-balance sheet
IFRS 16 versus IAS 17
Total assets
Total liabilities
• Significant impact on entities with material off-balance sheet leases.
• Impact on net assets
42,000
44,000
46,000
48,000
50,000
52,000
54,000
56,000
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Statement of Profit or Loss and OCI
IFRS 16 IAS 17
Finance costs
Operating costs
EBITDA
• Expenses are weighted towards at start of lease term and decrease as the lease matures (straight-line depreciation).
• EBITDA increases regardless of the entity’s lease portfolio.
IFRS 16 versus IAS 17• Areas of judgment
Most significant areas of judgment
Present value of
expected payments at
end of lease
Lease
liabilityPresent value of
lease rentals
Present value of future lease payments
Discount rate • Rate implicit in the lease• Incremental borrowing rate
Lease term
Non-cancellable term of the lease +periods covered by an option to extend and the option to terminate the leases
These concepts have
not changed
IFRS 16 versus IAS 17
The rate of interest that causes the PV of the lease payments and the
unguaranteed residual value to equal the sum of the FV of the
underlying asset and any initial direct costs of the lessor.
The interest
rate implicit in
the lease
Use the lessee’s incremental
borrowing rate.
If the implicit interest rate
cannot be determined…
Determining the discount rate
Revised discount rateAs a result of re-measurement of lease
liability
Discount rate at commencement
date
JUDGMENT
© 2017. For information, contact Deloitte Touche Tohmatsu Limited.
IFRS 16 versus IAS 17
JUDGMENT
Change in assessment of
option to purchase
Events to
remeasurement
Change in lease term
Changes in future lease payments
Change in residual value guarantee
• Re-measuring the lease liability
A lessee shall determine the revised discount rate and shall remeasure the lease liability by
discounting the revised lease payments
NO LONGER possible to compute a lease amortization schedule and simply roll that schedule
forward
Transition options
IFRS 16 versus IAS 17
A Apply a single discount rate to a portfolio of leases
Leases ending within 12 months of the date of initial application
Use hindsight in determining the lease term
Cumulative catch-up approachFor leases previously identified as operating leases
Lessees and lessors are permitted to grandfather assessments regarding whether a
contract existing at the date of initial application contains a lease.
Adjust the right of use asset by the amount of provision for onerous leases
Exclude initial direct costs
Full retrospective approachNo reliefs available
Impacts on client’s environment and audit risk assessment
IFRS 16 transition implications
Impact client’s
environmentKey accounting
focus areas
Impacts the audit risk
assessment
An effective risk assessment requires a deep understanding of the entity, its environment and its internal control.
Client’s decisions
Determining ROMMs
IFRS 16 transition implications
1
2
3
Degree of complexity and judgment
Nature and composition of the Account Balances, Classes of
Transactions and Disclosures
Economic, internal and historic factors
To assess ROMMs auditors need to understand our clients, their environment, internal
controls and their lease transaction process
Understanding the client’s selection and application of accounting policies
IFRS 16 transition implications
Processes Systems
MetricsControls
Process changes may
be required to capture
the data necessary to
comply with accounting
and disclosure
requirements
Changes to systems
and processes will result
in clients’ revisiting their
existing internal controls
to determine whether
they are still adequate
Lessees may need to
consider implementing a
contract management
module for leases
This could impact debt
covenants, tax balances
and an entity’s ability to
pay dividends
Impact on processes
IFRS 16 transition implications
Business
strategies
may change2Update
policies and
manuals3
Time and
effort to
gather data1
Education to
ensure policies
and procedures
are applied
consistently4
Update
policies and
manuals3
What could go wrong?
IFRS 16 transition implications
Not all lease
contracts are
captured and
recorded
(on-going
application) 1
A re-
measurement in
variable lease
payments is not
recorded2
Incorrectly
measuring the
lease term3
IFRS 16 has more data requirements for calculation and disclosure purposes. Clients need to assess adequacy of current systems.
Must ensure there is adequate time to allow for testing to avoid any last minute unforeseen problems
May be circumstances that further complicate IT system requirements
Systems need to be
able to store and
update the data on
an ongoing basis
Involvement of
IT specialists
Impact on systems
IFRS 16 transition implications
We need to determine if clients have processes to identify risks as a result of adopting IFRS 16 and whether appropriate controls are in place.
Auditors
Impact on controls
IFRS 16 transition implications
What could go wrong?IFRS 16 transition implications
Has the client designed and implemented new control
activities?
Evaluate the design and determine whether they have been implemented for control activities relevant to
the audit
Are there any control
activities missing?
IFRS 16 transition implications
What could go wrong?
IFRS 16
IAS 17
EBITDA
Management bias?
What areas
impacted?
IFRS 16 transition implications
Other considerations on transition
ROMMs may be a one-time risk on
transition
First time recognition may pose highest risk
Do not underestimate the time and
resources involved
10 Key questions for management
Getting your client ready
3
4
5
2
1
8
9
10
7
6
Do you know what discount rates you will be using for your different leases?
Do you know which transition reliefs are available, and whether you will apply any of them?
Have you considered whether your leasing strategy requires revision?
Have you considered the impact of the changes on financial results and position?
Are systems and processes capable of monitoring leases and keeping track of the required ongoing assessments?
How will you communicate the impact to affected stakeholders?
Have you considered the potential use of IFRS 16’s recognition exemptions and practical expedients?
Have you planned when you will consider the tax impacts?
Do you know which of the entity’s contracts are, or contain, a lease?
Are your systems and processes capturing all the required information?