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New revenue standard, IFRS 15 Revenue from Contract with Customers, will affect entities in all industries

“IFRS 15 is a significant change from current IFRS. Although it provides more detailed application guidance, entities will need to use more judgment in applying its requirements, in part, because the use of estimates is more extensive,” says Martin Skácelík, EY partner, IFRS services.

► The new standard applies to all revenue contracts
► The standard will also affect the recognition of some common aspects of sales transactions, such as warranties
► It is important for Czech companies to start assessing the impact immediately to get ready for the new requirements
► The new standard is the final product of more than a decade of efforts

Prague, 30 May 2014 – On 28 May 2014, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) published their joint revenue recognition standard, IFRS 15 Revenue from Contracts with Customers, which replaces all existing IFRS and US GAAP revenue requirements. The new standard establishes a single global model and principles that will apply to the amount, timing and approach to the recognition of revenue earned from contracts for the delivery of goods and services to customers. The standard will apply to annual periods beginning on or after 1 January 2017, subject to EU endorsement.

IFRS 15 establishes a five-step model that will apply to revenue earned from contracts with customers (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard requires that a revenue contract be divided into separate performance obligations, with revenue recognized when, or as, control of the good or service underlying the performance obligation has transferred to a customer. In addition, the standard governs the identification of separate performance obligations and the allocation of consideration to which the entity is entitled. Unlike the current IFRS, the new revenue standard provides more detailed guidance on how to recognize certain transactions, such as with multiple-element arrangements.

Martin Skácelík, EY partner, IFRS services, explains: “We expect that the new revenue standard will affect all entities; however, in some industries, such as for telecoms, IT and software, long-term construction contracts or for manufacturing companies with long-term contracts, the impact will be more significant. Management should, together with the finance function, make an analysis of standardized customer contracts and consider the effects of the new standard. It is important, for instance, to identify in time contract clauses that will need to be adjusted to avoid unwanted surprises, including lower revenue levels recognized. Application of the new standard will also require the modification of internal processes and IT support systems.”

Alice Machová, EY senior manager, Financial Accounting Advisory Services, says: “Many companies will need to update their existing accounting procedures and related accounting systems as a result of the new revenue standard, so it is important to start assessing the impact immediately. Since the standard requires retrospective application on comparatives, companies will probably also have to analyze previous contracts with customers to identify any outstanding performance obligations, such as pending warranties.”