New IFRS Revenue Recognition Standard – Addressing A Vital Metric

 
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The IASB has issued IFRS 15, Revenue from Contracts with Customers, effective for annual reporting periods beginning on or after January 1, 2017.

The standard is converged with a new U.S. GAAP standard issued at the same time. Here's how the IASB and the FASB sum up the importance of this step:

"Revenue is a vital metric for users of financial statements and is used to assess a company's financial performance and prospects. However, the previous requirements of both IFRS and U.S. GAAP were different and often resulted in different accounting for transactions that were economically similar. Furthermore, while revenue recognition requirements of IFRS lacked sufficient detail, the accounting requirements of U.S. GAAP were considered to be overly prescriptive and conflicting in certain areas.

Responding to these challenges, the boards have developed new, fully converged requirements for the recognition of revenue in both IFRS and U.S. GAAP—providing substantial enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and U.S. GAAP."

IFRS 15 defines revenue somewhat more simply than the existing standard IAS 18, as "income arising in the course of an entity's ordinary activities." The standard's core principle is that an entity "recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It sets out a five-step framework to apply in implementing this principle - the following is a very high-level summary of the framework:

Identify the contract(s) with the customer A contract is an agreement between two or more parties that creates enforceable rights and obligations.

Identify the performance obligations in the contract A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately.

Determine the transaction price The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

Allocate the transaction price An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct...

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