United Kingdom

Revenue recognition 

The IASB has issued IFRS 15 Revenue from Contracts with Customers.  This completes one of the IASB’s major projects with the US FASB and overhauls accounting for revenue. Existing IFRS and US GAAP guidance is replaced with a single new revenue recognition model for contracts with customers. The sectors most likely to be significantly affected include telecoms, software, real estate, aerospace and defence, building and construction and contract manufacturing.  However, all companies will be subject to the extensive new disclosure requirements.

Overview of the standard

  • Contracts will be segmented into performance obligations and revenue allocated to each obligation. 
  • Revenue will be recognised when the control of the promised goods or services in each performance obligation are transferred to the customer and discounted for time value if this is significant.
  • Revenue will be measured net of customer incentives. 
  • Greater use of estimates and judgements in recognising and measuring revenue.
  • More extensive disclosures will be required in the financial statements, even if there is no change to the numbers. 
  • Greater use of estimates and judgements in recognising and measuring revenue.
  • IFRS 15 is effective (subject to EU endorsement) for accounting periods beginning on or after 1 January 2017. Transition to the new standard may be complex.

Practical Issues

  • Management will have to explain the impact of the changes to stakeholders, including analysts, shareholders, lenders and other creditors.
  • The new requirements may lead to changes in internal policies and procedures.  Sales forecasts and KPIs may also need to be revised.
  • For entities with numerous contracts investment in, or modification of, IT systems may be required.
  • Entities may need to consider the impact on existing bonus structures and other remuneration implications.
  • Changes to the timing of revenue recognition may change forecasted tax payments or other tax planning arrangements
  • Finance and sales staff will require training in the new standard and its impact on financial reporting.