國際財務報告準則》第15號 -- -- 與客戶的合同收入 (IFRS 15 - Revenue from Contracts with Customers)

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Welcome to Deloitte Financial Reporting Updates, our webcast series for issues and developments
related to the various accounting frameworks.
This presentation is bringing clarity to an IFRS world, Clarifications to IFRS 15, Revenue
from Contracts with Customers, Understanding the Final Standard.
I’m Jon Kligman, your host for this webcast and I’m joined by others from our Advisory
and National Accounting Groups.
A couple of housekeeping items before I tell you about our agenda.
If you would like a copy of the slides, they are available for download on the same webpage
as where you accessed this webcast.
You can direct colleagues to the webcast link by referring them to the Deloitte Canada Center
for Financial Reporting, which is accessible from the IAS Plus website at iasplus.com.
Simply select Canada English from the dropdown menu at the top right of the webpage.
Ok, let’s get to our agenda.
First, you’ll hear from Nura Taef who will set the stage by providing us with a brief
summary of the new revenue recognition standard and some of the topics discussed by the Joint
Transition Resource Group.
Then, Nura and Maryse Vendette will speak to guidance and examples set out in the recently
issued IFRS 15 clarifications.
Maryse will also provide a comparison of IFRS in US GAAP amendments to the respective standards
and to provide some insight on implementation considerations for IFRS 15.
Cindy Veinot will then walk us through the case study.
Our comments on this webcast represent our own personal views and don’t constitute
official interpretation of accounting guidance from Deloitte.
Before taking any action on any of these issues, it’s always a good idea to check with a
qualified advisor.
No professional development certificates will be issued for attending this webcast.
We encourage you to check with your provisional institute or ordre regarding professional
development credits.
I now like to welcome our first two speakers, Nura Taef and Maryse Vendette.
Nura is a senior manager in our national office and part of our IFRS Center of Excellence.
Nura’s main area of focus is on determination of final technical positions on interpretations
and application matters for revenue recognition issues both, for other IFRS centers and client
service teams in Canada.
Maryse Vendette is a partner with our national office and is the co-leader of the Canadian
IFRS Center of Excellence.
She is a national subject matter authority in the field of revenue recognition as well
as the member of Deloitte’s Global Expert Advisory Panel on Revenue.
Thanks Jon.
Before we get started in to more detailed discussions regarding the amendments to IFRS
15, I just want to start off by providing a brief recap on some of the more significant
events related to the standard that have led up to this point.
So, just over 2 years ago on May 2014, the IASB issued IFRS 15, which was the result
of the joint project with the US National Standard Setters, the FASB.
Concurred with the release of IFRS 15, the FASB issued Topic 606 US GAAP equivalent and
in issuing this new standard, the board’s objective was really to address stakeholder
concerns around inconsistencies and weaknesses in existing revenue standards by providing
a comprehensive and robust revenue recognition framework.
Subsequently, the IASB and FASB jointly established the transition resource group for revenue
recognition referred to as the TRG.
With the intention to support implementation of this new standard and provide a form to
solicit, analyze and discuss stakeholder concerns.
Since the issuance of the standard, this joint TRG met 6 times.
As a result of these ongoing discussions, the boards are made aware of a number of requirements
in the new standard where different interpretations were emerging as to how these requirements
should be implemented and practiced.
In light of these ongoing discussions, the boards felt it appropriate to defer the effective
date of the standard by one year.
So, from an IFRS 15 perspective, this meant moving from mandatory effective date of annual
reporting periods beginning on or after Jan 1, 2017, to annual reporting periods beginning
on or after Jan 1, 2018.
This ongoing discussion also highlighted for the boards the need to clarify certain requirements
of the standard.
So, in April 2016, the IASB issued targeted amendments to the standard and introduced
some transitional relief as well.
With the issuance of these amendments, the IASB is of the view that the stakeholders
must focus on their implementation efforts as IFRS 15 will not be subject to further
changes.
In light of the IASB’s comments, we wanted to get sense of where our listeners are at
in terms of their implementation process.
When you registered for this webcast, you were asked to complete a number of survey
questions, one of which was where you are at in the process of adopting IFRS 15.
As you can see on the screen, the majority of our listeners were either in very early
stages of assessment or had not yet begun any sort of preliminary assessment.
Although 2018 may seem far away at this point, given the potential breadth of impacts of
the standard, I think it is important to empathize that we really need to shift focus to the
standard and its potential applications.
IFRS 15 includes some specific scoping considerations that may present some differences with the
existing revenue recognition guidance, which makes it important to be mindful of the details
of this guidance.
The scope of the standard is intended to cover all contract customers with the exception
of those contracts that are leasing contracts, insurance contracts, financial instruments
or other contractual rights or obligations and non-monetary transactions between entities
in the same line of business to facilitate sales to customers or potential customers.
In addition, the guidance and the standard as it relates to the transfer control will
need to be applied not just contracts with customers within the scope of IFRS 15, but
also to some transfers or sales of non-financial assets.
So, collaborators or partners or those that fall partially within the scope of IFRS 15
and partially within the scope of other standards will require additional consideration and
assessment.
I also wanted to emphasize that IFRS 15 has a broadened scope, as it not only addresses
revenue recognition but also addresses the requirement for contract costs, being incremental
cost of obtaining a contract and cost of fulfilling a contract.
As I mentioned earlier, the effective date of standard is now annual reporting periods
beginning on or after Jan 1, 2018, including interim periods.
Earlier application is permitted under both IFRS and US GAAP, however, as noted on the
slide, US GAAP prepares can only adopt as of the original effective date of standard
which should be annual reporting periods beginning after December 15, 2016.
I won’t spend too much time on this next slide and will refer listeners to our July
2014 webcast available at our Center for Financial Reporting, where we provide a more detailed
analysis of the new revenue model, if you require further context on the 5-step model
and some of the basic requirements of the standard.
What I will highlight is that the IFRS 15 model for revenue recognition is based on
5 steps, starting with identifying the contract with the customer, identifying the performance
obligation, determining the transaction price, allocating the transaction price to the performance
obligations and finally, recognizing revenue whenever the entity satisfies the performance
obligation.
The application of this 5-step model results in recognition of revenue in a manner to depict
that transfer of promised goods or services in an amount that reflects the consideration
that an entity expects to be a entitled to in exchange for these goods or services, which
is the core principle of IFRS 15.
In addition to the 5-step model, the standard includes application guidance to clarify how
the principles in IFRS 15 should be applied, including how those principles should be applied
to the features found in a number of typical contracts with customers.
Some examples are sales with the right of return, licenses, warranties and customer
options for additional goods and services amongst others.
As mentioned earlier, subsequent to the issuance of the new standard, the IASB and FASB jointly
established the TRG.
Although non-authoritative and the TRG does not issue guidance, TRG members will share
their views on issues that have been raised by stakeholders as they work through implementation.
The TRG may make recommendations to the board to further discuss and consider specific implementation
issues which have in fact occurred as demonstrated by the amendments most recently issued.
Up to the end of 2015, the TRG discussed in their joined meetings an approximate 48 papers,
the majority of which the TRG members determine to be sufficiently addressed by the existing
requirements and guidance in the standard.
Although not a comprehensive list, some of these topics are listed on the slide to provide
you with some context on the array of issues being discussed.
I do want to highlight an important announcement that was made earlier this year by the IASB.
When the board completed their decision making process, being their decisions around the
clarifications, the board also confirmed that they do not plan to further schedule any meetings
of the IFRS constituent to the TRG.
Nonetheless, the IASB will continue to use other forums such as their website, as a mechanism
for the stakeholders to submit any further potential implementation issues to ensure
that they continue to support the consistent and faithful implementation of IFRS 15.
Although not scheduled to meet, the IFRS constituent of the TRG are not disbanded and if necessary,
they can be re-called to discuss an issue.
This past April, another TRG meeting was held; however, for the first time, this meeting
was only amongst the US GAAP constituents of the TRG.
Some IASB board members and the IASB staff did participate as observers in this meeting
and may continue to do so for future meetings.
It is the IASB’s intention to continue to collaborate with the FASB and therefore monitor
these discussions that the FASB may have with the US GAAP constituents of TRG.
The papers discussed and the minutes of the TRG meetings are all publicly available and
we encourage you to be informed and educated on these discussions.
The topics of collectability, performance obligations, gross versus net, identifying
promised goods or services, licenses, non-cash consideration received from a customer, shipping
services and specific transition considerations are topics whereby the TRG concluded that
additional discussion was required on the part of the boards, as different views merged
from the TRG discussions on the implementation of these requirements.
Now, getting into the clarifications, throughout 2015 the boards discussed the topics from
the previous slide that were brought to their attention by the TRG and concluded that certain
amendments would be required which resulted in the issuance of clarifications to IFRS
15 issued in April 2016 by the IASB and a number of accounting standard updates issued
by the FASB throughout 2016.
The IASB has reiterated the objective of these amendments is not to change the underlying
principles of IFRS 15 but rather to clarify the board’s intentions when they initially
developed the requirements of IFRS 15.
In the decision to issue these clarifications, the IASB applied a high hurdle in considering
what amendments were required in order to minimize changes where possible and reduce
disruption to the implementation process.
The board acknowledged that anytime new standards are issued, a number of initial questions
arise, these questions generally get resolved over time as they are worked through.
However, the board wanted to balance this belief with the need to be responsive to the
issues and concerns raised that are challenging entities in their implementation efforts.
As such, the amendments are really focused on the areas whereby the IASB believed clarifications
are essential or where the benefit of conversions with FASB in topic 606 outweighs the potential
cost of making amendments.
It is noteworthy that although both boards issued amendments, the boards’ amendments
are not necessarily the same in all instances and there may be a level of divergence as
it relates to the approach taken by each board.
In addition, the FASB decided to make more extensive amendments to topic 606 and made
amendments for issues in which the IASB concluded that no amendments would be required.
We will provide a high level overview of these differences throughout the webcast.
The first amendment I wanted to speak to relates to step 2 of the revenue recognition model.
The focus of step 2 of the model is to identify promised goods and services and then to identify
the performance obligations that arise as result of these promises.
The objective of the step is really to identify a meaningful unit of account for the purposes
of recognizing revenue.
As such, step 2 is really a fundamental part of IFRS 15 because it will impact the accounting
in subsequent steps of the model.
The identification of performance obligations is premised on the principle of distinct goods
or services.
The standard includes two specific criteria that must be met in order for promised goods
or service to be considered distinct.
In order to meet the distinct criteria, and be classified as a performance obligation,
identified goods or services in question must be both, capable of being distinct and distinct
within the context of the contract.
Within the context of the contract is a new concept introduced in IFRS 15.
Underlying this concept is the existence of separable risks.
So, if the risk assumed by the entity in fulfilling an obligation to transfer one promised good
or service is inseparable from the risk of transferring another, these goods or services
are not distinct within the context of this contract.
Although the notion of separable risks is the basis for assessing whether the goods
or services are distinct in the context of the contract, in practice, the concept is
not necessarily practical and this terminology isn’t included in the standard.
Rather the boards included the notion of separately identifiable into the standard, which is largely
influenced on separable risks but more operable in practice.
So in the context of the contract, are the promised goods or services separately identifiable
from one another?
Although this is the question that requires judgement, to provide more of a framework
to make this determination, the boards included 3 specific factors to consider when determining
whether goods and services are separately identifiable from one another.
This being 1-significant service of integration, 2-significant modification or customization
and 3- high dependency or interrelated.
It is this concept of distinct in the context of the contract and the supporting factors
included in the standard that has resulted in some diversity in stakeholders’ understanding
of how this should be applied in practice.
The TRG discussion indicated that the 3 supporting factors introduced in to the standard to assist
in determining whether the goods or services are separately identifiable were being applied
more broadly than intended, resulting in an inappropriate combination of promised goods
and services in to a single performance obligation.
In addition, the TRG discussions highlighted that stakeholders may be interpreting these
factors as criteria to be met as opposed to a non-exhaustive list of factors to consider.
In order to alleviate the stakeholder concerns and address interpretation issues, the IASB
made some amendments to this part of the standard, specifically, the IASB added additional wording
to the standard to specify the objective in determining whether the goods or services
are separately identifiable.
The amendment specified that the objective of this concept is to determine whether the
nature of the promise within the context of the contract is to transfer each of those
goods or services individually, or instead, to transfer a combined item or items to which
the promised goods or services are inputs.
So, here we are trying to identify when an entity’s performance in transferring a bundle
of goods and services is to fulfill a single promise to the customer or not.
The importance here is really placed on understanding the relationship between the items in the
contract.
Items may be dependent on one another due to their nature, meaning a functional relationship.
However, a functional relationship does not necessarily imply that the items are not separately
identifiable from one another, rather the level of integration, interrelation, or interdependence
among the promises should be assessed to evaluate whether there is a transformative relationship
between the items in the process of fulfilling the customer contract.
So, is the combined item or items more or substantially different from the sum of the
individual promised goods or services?
In completing this assessment, the focus is on the characteristics of goods and services
themselves and not the way the customer may be required to use the items, so disregarding
contractual limitations.
For example, if a customer contracts to purchase equipment and installation services from an
entity and the installation is of such a nature that it is non-complex, but capable of being
performed by other service providers, just because the customer may be contractually
required to use the entity’s installation services, does not change the evaluation of
whether the installation services are distinct in the context of the contract.
The IASB also reframed the perspective from which the factors to assess the notion of
separately identifiable was being made.
Previously, the three factors were from the perspective of whether the goods and services
are separately identifiable.
Now, they are re-structured to be from the perspective of whether the goods or services
are not separately identifiable and therefore constitutes single performance obligation.
Just a reminder again that these factors are a non-exhaustive list and are not intended
to be evaluated independently of a separately identifiable principal.
An amendment was to specifically clarify the first factor around significant integration,
in that significant integration doesn’t only apply when a single output is created.
This factor may still apply even if the combined output includes more than one phase, element
or unit.
So, ultimately, the resulting output does not need to be one single unit.
The FASB’s decisions in terms of amendments made in this area are converged with that
of IASB.
So let’s work through an example, a customer enters into an agreement with a contractor
to build a hospital, the contractor is responsible for a variety of tasks which include engineering,
procurement, construction, finishing, etc.
The contractor is also responsible for overall management of the project.
Assume that each task or service can also be provided by another entity or by the contractor
itself and this is evidenced by the fact that the entity regularly sells each of these services
on their own to other customers.
As you can see, there are a number of identified promised goods and services in this contract.
Now, based on this, how many performance obligations are there in this contract?
To complete this assessment, we need to conclude whether the goods and services are firstly
capable of being distinct and secondly, separately identifiable or distinct within the context
of the contract.
So, if we go to the next slide, we’ll start by the assessment of being capable of being
distinct.
This is based on whether the customer can benefit from the good or service on its own
or together with other readily available resources.
The standard notes specifically that as an entity regularly sells a good or service separately,
this in itself, would indicate that the customer can benefit from the good or service on its
own or together with other readily available resources.
In this case, given that they are sold separately, they are capable of being distinct and meet
this criteria.
Now, for the second criterion, whether the promise to transfer the goods or services
are separately identifiable.
In this contract, there was a significant service of integration being provided by the
contractor.
As the contractor is managing and coordinating various construction tasks and assuming the
risk associated with the integration of those tasks, meaning, the contractor is taking the
inputs, so for example, the labour, the goods, and is transferring these inputs into a combined
output, being the hospital for which the customer has contracted.
Therefore, the individual promised goods and services are not separately identifiable from
one another.
As such, you would need to combine and re-evaluate to determine that there was a single performance
obligation in this case.
Let’s consider another example, this time the entity contracts with the customer to
provide a piece of off-the-shelf equipment, meaning the equipment is operational without
any significant customization or modification.
The contract also includes an obligation to provide specialized consumables to be used
in the equipment.
Consumables will be used at predetermined intervals over the next three years.
The entity is the only producer of these consumables, they are regularly sold separately by the
entity.
What are the performance obligations in this contract?
Again, going back to the criteria for identifying performance obligations, in this case, the
equipment and the consumables are each capable of being distinct as they are regularly sold
separately by the entity.
To determine if the promise to transfer equipment and consumables, are each separately identifiable,
we should look to the factors included in the standard.
First thing, integration, there is no significant integration service being provided here.
The equipment and consumables are not combined to create a combined output for the customer.
Secondly, customization and modification.
In this case, neither the equipment nor the consumables result in any sort of customization
or modification of the other good.
Lastly, interdependency.
This is the factor which I personally, like many stakeholders, find challenging to assess.
In this case, the argument can be made that the consumables can only be used after the
customer has control of the equipment, meaning consumables have no use on their own.
However, these goods do not significantly affect each other.
Think about it from the perspective of fulfilling the promises in the contract.
The entity would be able to fulfill its promise to transfer equipment even if the customer
did not purchase any consumable.
Similarly, the entity would be able to fulfill its promise to provide consumables, even if
the customer acquired the equipment separately.
So, really, the nature of the promise is to provide equipment and consumables, not the
equipment fueled with consumables.
As such, there are two performance obligations in this contract.
And with that, I’ll turn it over to Maryse who is going to speak to principal versus
agent considerations.
Perfect.
Great.
Thanks Nura.
So, I’ll continue with clarifications and deal specifically with, at this point, principal
versus agent considerations.
So, the TRG also discussed a number of issues in relation to the principal versus agent
assessment, which is useful in determining whether an entity should recognize revenue
on a gross or net basis when a third party is involved in transferring goods and services.
So, the discussions included whether control is always the basis for determining whether
an entity is a principal or an agent, how the control principal and the indicators work
together, how to apply the control principal to contracts that involve transferring intangible
goods or services.
And these discussions ultimately resulted in targeted amendments to the principal versus
agent guidance in the standard itself, in illustrative examples and in the basis for
conclusions and by the way, these changes are the same under US GAAP as well.
So, the amendments clarify that to determine the nature of a promise, i.e. whether to determine
the entities are principal and provides goods or services itself or whether the entity is
an agent and arranges for goods and services to be provided by another party.
Entities need to consider basically two things, the first one is to appropriately identify
what are the specified goods or services that are being transferred to the customer.
So specified goods and services is a new term that has been introduced here in the clarifications
and what it means is distinct goods or services.
So, it’s important to identify that, as a reseller, an entity can be a principal in
transferring a good or service and therefore their promise is the underlying performance
obligation of transferring that good or service, but they also can be an agent and transfer
or arrange for another party to transfer goods and services and therefore, transfer only
a right to those goods and services.
That’s why it is important to clearly identify what are the specified goods or services being
transferred for which we are assessing whether the entity controls those goods or services
before they are transferred to the customer.
As you can see in the slide, there are indicators of control, when the control is not clearly
determinable and there are three indicators now.
Those three indicators are primary obligor, so who is responsible for fulfillment or primary
fulfillment and acceptability from the customer’s perspective.
So, who is the primary obligor, that’s not a new factor, we have that currently under
IAS 18, who has inventory risk, inventory risk before the customer contract is signed
or even after transfer of control for example, on a right of return, who has discretion in
establishing price, again not a new indicator but does the vendor have reasonable discretion
in establishing the price at which the good or service will be resold to a customer.
There is additional guidance as well, and clarifications about how each of these indicators
supports the assessment of control and it is important to note that there are two indicators
that were previously included in the standard that have been removed, because they were
considered to be less helpful in the evaluation of the control and these include whether the
form of consideration is a commission and whether the vendor is exposed to credit risk
of the customer.
Those were considered to be less helpful in the evaluation of whether an entity actually
controlled the good or service before they were resold.
The clarifications also acknowledge that some indicators may be more or less relevant to
the assessment of control than others depending on the nature of goods or services in different
contracts and that this list is not an exhaustive list and its merely, they’re there to support
and not necessarily override the assessment of control.
So, moving on, the amendments also clarify that an entity can be a principal and therefore
control a specified good or service before it is transferred in various situations as
you can see there, in the gray shaded box, on the slide.
So an entity can be a principal, for example, when it transfers a good or another asset
like an intangible, from another party, we can think for example, if we are selling hardware.
An entity can be a principal when it has a right to a service to be performed by another
party that it then transfers to the customer i.e., it directs the other party to transfer
the specified service to the customer.
We can think here, for example, of a right to a meal or a right to a flight or a right
to the services to be performed by a subcontractor for example and we will see an example of
that in a minute.
The entity could be a principal when it transfers a good or service from another party that
it then would combine with its own goods or services that constitutes single performance
obligation under step 2 of the model, where we identify whether goods or services are
distinct as Nura just mentioned.
So in other words, are the goods and services provided by a third party distinct from the
goods and services provided by the entity itself.
If they are not distinct, then the entity would be principal for the combined integrated
performance obligation.
So, I think it’ll become clear as we go through some examples of gross versus net.
So, we will look at two examples which were added as part of the clarifications to the
standard on the next slide.
So, we have a set of facts here, an entity enters into a contract to provide office maintenance
services and the entity and the customer define and agree on the scope and price of the services.
The entity is responsible for ensuring that the services are performed in accordance with
the terms and conditions of the contract and the customer is invoiced an agreed upon price
monthly with 10-day payment terms.
We are told that the entity hires a third party service provider to provide the office
maintenance services to its customers and the payment terms in the contracts with the
service providers are aligned with the payment terms in the contracts with the customers
and the entity’s obliged to pay the service provider even if the customer fails to pay.
So the question is, is the entity principal or agent in this transaction?
So how would we go about making that determination?
On the next slide, we will see in this case there is another party that’s involved in
providing goods and services to a customer.
To determine whether the entity is principal or an agent, the entity must first identify
what are the specified goods or services to be provided to the customer here, and assess
whether it controls those goods or services before they are transferred to the customer.
In this case, the specified services are the office maintenance services and there is no
other goods or services that are promised to the customer.
So, the question is, does the entity control the maintenance services before they are transferred
to the customer?
So, even though the entity obtains a right to office maintenance services only after
they have entered into the contracts with the customer in this case, that right is not
transferred to the customer.
The entity retains the control to the right and that is demonstrated by the fact that
the entity can decide whether to direct the service provider to provide the office maintenance
services for that customer or for any other customer or for its own facilities for example.
And the customer does not have a right to direct the service provider to perform services
that the entity has already agreed to provide with the service provider.
So, the entity controls the services before they are provided, because it has the ability
to direct the service provider, the office maintenance service provider to perform or
provide the specified services on its behalf.
In addition, an analysis of the indicators would provide further evidence that the entity
controls the office maintenance services before they are transferred because for one, the
entity is primarily responsible for fulfilling the promise to provide the office maintenance
services, although the entity hired a service provider to perform that service, it’s the
entity itself that’s responsible for ensuring that the services are performed and are acceptable
to the customer.
The entity has discretion in setting the price for the services to the customer in this case
and although the entity may have mitigated inventory risk, because it doesn’t commit
itself to obtain the services before obtaining the contract with the customer, that fact
alone will not be sufficient to override the conclusion that the entity does control the
office maintenance services before they are provided to the customer.
So, in conclusion, in this example, the entity is the principal in the transaction and would
recognize revenue in the gross amount.
If you look at another example, in this set of facts, an entity sells services to assist
its customers and more effectively targeting recruits for open job positions.
It performs several services itself; however, in interviewing candidates, performing background
checks, etc., but as part of the contract, the customer agrees to obtain a license to
access a third party’s database of information on potential recruits.
The entity arranges for this license with the third party, but the customer contracts
directly with the database provider for the license and the entity collects payment on
behalf of the third party database provider, but as part of the overall invoice to the
customer and the database provider sets the price charged to the customer for the license
and they are responsible for providing technical support and credits for service downtime and
other technical issues in this case.
So, the question again is, is the entity the principal or agent in this contract?
So, again in this case, there is a third party that’s involved in transferring goods or
service to a customer, so we have to determine whether the entity is acting as a principal
or agent and to do that, we must first identify the specified goods or services to be provided
to the customer and assess whether those goods or services are controlled before they are
transferred to the customer.
So in this example, we assume that the recruitment services and the database access license are
distinct performance obligations.
As a result, there are two specified goods or services to be provided to the customer,
access to the third party’s database and recruitment services.
If you could just move ahead one slide please, thanks.
So, for the database license, the entity does not control the access to the database before
it is provided to the customer, because the customer contracts for the license directly
with the database provider.
The entity doesn’t control access to the provider’s database.
It cannot, for example, grant access to the database to a party other than the customer
and it can’t prevent the database provider from providing access to this customer.
So, also when we consider the indicators in turn, they provide evidence that the entity
does not control access to the database, because the entity is not responsible for fulfilling
the promise to provide the database service to the customer.
The customer contracts for the license directly with the third party database provider and
it is the provider that’s responsible for the acceptability of the data access, and
they provide technical support and service credits etc.
The entity does not have inventory risk, because it does not purchase or commit itself to purchase
the database access before it’s actually resold to the customer.
And the entity does not have discretion in setting the price for the database access
with the customer, because the database provider sets that price and so the entity concludes,
in this case, that it’s an agent in relation to the third party database service.
However, when they are looking at the recruiting services, the entity is principal in relation
to the recruiting services, because it performs those services itself and no other party is
involved in providing those services to the customer.
So, here we have an example of a case where an entity is principal for some goods and
services and an agent for other goods and services.
So, moving on now to licenses, another topic of discussion.
The TRG also discussed issues related to the application of the licensing guidance and
one of which was difficulties in determining the nature of the entity’s promise in granting
a license to intellectual property.
You will remember that IP licenses may include licenses of software technology, movies, music,
trademarks, etc., and the standard indicates that to determine whether the license transfers
over time or at a point in time, entities must first determine the nature of the promise,
whether it provides a right to access intellectual property as it exists throughout the term
of the license or whether it provides the right to use IP, as it exists when the license
is granted.
So IFRS 15 indicates that the nature of license provides a right to access, and should be
recognized over time if three criteria are met and those are, those that you see here
on the slide.
So, the first one, the contract requires that the entity undertake activities that significantly
affect the IP, the rights granted by the license directly expose the customer to positive or
negative effects of those activities and those activities don’t result in a transfer of
goods or service to the customer.
It’s on the first criteria here where it says amended on the slide, that application
questions where focused.
IFRS 15 will clarify by providing additional application guidance on when activities change
the IP to which the customer has the rights, in such a way, the ability of the customer
to obtain benefit from that IP is significantly affected.
So, the amendments clarify that the activities undertaken by the entity would significantly
affect the IP if either, activities significantly change the form which is the design or the
content of the IP or its functionality, which is the ability to perform a task, or the activities
which significantly affect the IP if the ability of the customer to obtain benefit is substantially
derived or dependent on those activities.
The IASB also acknowledged that if IP has significant standalone functionality, like
might be the case for software, for example, where the activities of the entity do not
significantly affect the form or the functionality of that IP, then those activities would not
significantly affect a customer’s ability to derive benefit from that IP and therefore,
the nature of the license would be to provide a right to use the license at the point in
time that it’s granted and recognized at a point in time.
So, it is important to know the FASB’s approach on licenses differs and it may result in differences
in application.
So, I think it is useful to look at an example to understand how the logic here might be
applied.
So on the next slide we have a set of facts and this is an example from the standard.
So, an entity, a music record label licenses to a customer a recording of a classical symphony,
the customer has the right to use symphony in all its commercials.
So this is sort of the use restriction, for two years and this is the time restriction,
in country A, here we have a geographical restriction.
In exchange for providing the license, the entity receives fixed consideration of CU
10,000 monthly and the contract does not include any other goods or services.
So, the question is, is the license grant a right to use or right to access IP in this
case.
So, for starters, in this case there is only one performance obligation which is to grant
the license to the record label and the term of the license 2 years, its geographical scope,
the customer’s right to use the recording only in country A, and the defined permitted
use for the recording which is in commercials are all attributes of the promised license
in the contract and those would not affect the nature of the license.
When assessing the nature of the entity’s promised to grant the license, the entity
does not have any contractual or implied obligations to change the license recording.
The contract does not require, the customer does not reasonably expect the entity to undertake
activities that would significantly affect the license recording and therefore, the license
recording has significant standalone functionality which is the ability to be played and enjoyed
and therefore, the ability of the customer to obtain the benefits of the recording is
not substantially derived from any of the entities’ ongoing activities.
So, because of that, the entity concludes that the nature of its promise is to provide
the customer with the right to use the IP as it exists at the point in time the license
is granted and revenue is recognized when control transfers to the customer, which is
when the customer can use and benefit from the license, most likely at the beginning
of the license term.
But if you were to contrast that to say a license of the brand like in the case of the
franchise agreement for example.
Well, the brand does not have significant standalone functionality and the capacity
of the customer to benefit from the brand is significantly affected by the ongoing activities
of the franchiser to continue to support the brand.
So, in that case, the nature of the license would be a right to access IP that would be
recognized over time.
So, moving on now to sales based or usage based royalties.
IFRS 15 requires an entity to recognize revenue for a sales based or usage based royalty promised
in exchange for a license of IP when the later of the two events occurs and this is represented
on the bottom right box of the slide here.
At the later of when the subsequent sales or usage occurs and the performance obligation
to which some or all of the sales based or usage based royalty has been allocated has
been satisfied and this is referred to as the royalty’s constraint.
So, stakeholders had indicated that it was sometimes unclear when the sales based royalty
constraint should be applied.
Is it whenever there’s a sales based royalty, even when the sales based royalty also relates
to other goods and services in addition to the license or it is only when the sales based
royalty relates to the license alone?
So, we can think of many examples where a sales based royalty can relate to both the
license of IP and other goods and services.
We can think of software license with maintenance and other services, franchise licenses with
training and consulting services for example.
So, the board decides to clarify in the same way under both IFRS and US GAAP, that the
application of the royalty’s constraint as highlighted as the amended portion here
on the screen, that the royalty constraint applies whenever a license of IP is the sole
or the predominant item to which the royalty relates and that would be the case if the
customer would ascribe significantly more value to the license versus the other goods
and services.
Otherwise, if that’s not the case, then the normal step 3 variable consideration constraint
would apply to the arrangement.
So, let’s look at an example.
Here, the facts are that we have a movie distribution company that licenses movie XYZ to an operator
of cinemas and has the right to show the movie in its cinemas for 6 weeks.
The entity also will provide memorabilia from the filming for display at the customers’
cinemas before the beginning of the screening period and they will also sponsor radio advertisements
for the movie on a popular radio station in the customers’ geographical area throughout
the screening period and the only consideration that’s received in exchange for providing
the license and the additional promotional items is a portion of the operator’s tickets
sales for movie XYZ.
And so basically, we have a form of variable consideration in the form of the sales based
royalty here.
And the question is, does the royalty constraint apply and how is the revenue recognized?
So, in this case, the license to show movie XYZ is the predominant item to which the sales
based royalty relates, because the entity has a reasonable expectation that the customer
would ascribe significantly more value to the license than to the related promotional
goods or services.
So, the entity recognizes revenue from the sales based royalty which is the only consideration
under the contract in accordance with the royalty constraint, which is the later of
guidance, the later of when the sales or usage occurs or when the performance obligation
is satisfied.
And in this case, if the license and the promotional items are separate performance obligations,
the entity would also allocate the sales based royalty to each of those performance obligations.
Ok, so, moving on now to a summary of the clarifications with respect to transition.
So, we list here the changes that were made by the clarifications in respect of some transition
requirements.
So, on the first row here, we deal with completed contracts.
Completed contracts, as you might remember under IFRS 15 are contracts for which all
the goods and services had been transferred in accordance with previous GAAP, meaning,
you know all the obligations of the entity had been fully performed under IAS 11 and
IAS 18 under various interpretations.
Under the full retrospective method, the IASB has added a new practical expedient which
would permit entities not to apply IFRS 15 to contracts that are completed as at the
beginning of the earliest period presented.
So, if we think of a calendar year end, that would be January 1, 2017, and under the modified
approach an entity would or may elect to apply IFRS 15 only to contracts that are not completed
as of the date of initial application and again, assuming calendar year end, here we
are talking about January 1, 2018.
Now, with respect to modified contracts, remember that IFRS 15 includes specific guidance dealing
with how to deal with contract modifications, which are changes in the scope or price of
the contract and those modifications under the standard can be either accounted for separate
contracts, can be accounted for as, you know, termination of a contract and creation of
a new contract prospectively or as a cumulative catchup adjustment.
There were concerns that applying the contract modification guidance retrospectively on transition
would be complex and impracticable, especially for long-term contracts that are frequently
modified.
So, the board included an additional practical expedient under both transition methods, whereby
an entity would not need to apply the contract modification guidance retrospectively to each
past modification.
Instead they could use hindsight at transition and reflect the aggregate of past contract
modifications when identifying the performance obligations and determining and allocating
the transaction price, instead of just accounting for the effects of each modification separately.
It is important to note that the IASB and FASB are not completely aligned with respect
to these changes, either on the dates or on the scope of these expedients.
So, we would suggest that if you are interested with US GAAP in this case that you take a
look at that.
So, here, let’s consider a few consider a few transition scenarios.
We have highlighted 4 in green at the top of the slide here and want to look at how
those scenarios translate in terms of transition impacts under the full retrospective method
or the modified retrospective method.
So, consider here contract A that begins in 2014 and ends in 2020.
Well, because the contract is not completed either at the date of initial application
or at the beginning of the earliest period presented, IFRS 15 must apply to this contract.
So, under the full retrospective method, the contract would have to be retrospectively
adjusted with restatements as at January 1, 2017, and under the modified retrospective
method, the contract would be retrospectively adjusted with no restatement but adjusted
in beginning retained earnings at January 1, 2018.
Let’s skip Contract B and go to Contract C. So, this is a contract that begins in 2014
and ends in 2020, but that is modified in 2017.
So, the contract is not completed at either of the dates, so we cannot apply the completed
contract elections.
But, what about the modification in 2017?
Well, we can apply the practical expedient under the modified retrospective approach
because of the modification occurred prior to the date of initial application, but under
the full retrospective approach, the expedient is not available because the modification
did not occur before the beginning of the earliest period presented which is January
1, 2017.
And, finally, Contract D, this one begins in 2014 and ends in 2016.
The contract is a completed contract and the completed contract expedient and election
can be used under both transition methods in this case.
Ok.
So that’s it for the clarifications to IFRS 15.
This slide here simply serves as a reminder of the status of the various amendments issued
by the IASB and FASB and we can see here in the grey shaded area the topics where the
FASB has made amendments but the IASB decided not to make similar amendments to IFRS 15.
So, let us briefly take a look now at those areas on the next few slides.
So, the first two issues here on the slide deal with collectability threshold in step
1 of the model.
You’ll remember that in order to have a contract to which you can apply IFRS 15, certain
criteria have to be met and one of those is ensuring the collection is probable.
In the new model, in the case that if collection is not probable, then step 1 is not met and
revenue cannot be recognized even if cash is received unless or until certain events
occurs, notably when the contract is terminated and the consideration received is not refundable.
So, there are quite a few discussions at the TRG.
They discussed implementation questions about how to apply the collectability criteria in
step 1 when the entity has received non-refundable consideration from the customer and that customer
was assessed as having poor credit quality.
This discussion led to the realization that there were potentially different interpretations
of, first of all, how to apply the collectability criteria when it’s not probable that total
consideration promised in the contract will be collectable and when to recognize nonrefundable
consideration received from the customer as revenue when the contract does not meet step
1.
So, on the first point, the FASB decided to amend topic 606 to clarify that an entity
should assess the collectability of the consideration promised for the goods and services that will
be transferred to the customer and not necessarily for all of the promised goods and services
in the contract.
That’s because when assessing collectability, if the entity can take certain actions in
order to manage its credit risk by no longer transferring goods and services, then collectability
of that consideration does not need to be assessed.
Rather collectability only should only be assessed with respect to services that will
be transferred to the customer.
On the second point, there were different views on when a contract may be considered
to be terminated.
Is that when the entity stops transferring goods or services or when the entity stops
pursuing collection.
So the FASB decided to amend topic 606 such that an entity that received non-refundable
consideration in a contract that doesn’t meet step 1, could recognize revenue when
the entity has transferred control of the goods or services to which the consideration
they received relates and the entity has stopped transferring additional goods or services
and has no further obligation to transfer additional goods or services.
So, for these topics, it’s fair to say, on these two points, that the IASB does not
expect differences in outcomes between US GAAP and IFRS because they’ve mentioned
that these amendments reflect their thinking and the intent of the IASB.
The last one here, immaterial promised goods or services, the FASB clarified that there
is no need to identify promises that would be considered not material in the context
of the contract.
That assessment of materiality should only be made at the contract level because it would
be difficult to require an entity to aggregate and determine the effect on its financial
statements of those items determined to be immaterial at the contract level.
IFRS 15, on the other hand, requires an assessment of materiality in the context of the financial
statements as a whole, but the board the indicated that it was not their intention that entities
identify every possible promise good or service in an arrangement, for example, helpline number,
training manual, etc. or that it was not their intent that many more promises should be identified
as compared to promises that are currently identified under the standard.
Moving on, here, we note three issues where the IASB acknowledged that differences may
arise with US GAAP.
The first one, shipping and handling.
The FASB introduced the policy election that would permit entities to recognize as a fulfillment
activity, a cost accrual, rather than as a performance obligation, revenue deferral,
for shipping and handling that occurs after control transfers.
So, there was no amendments similar under IFRS, so this could lead to a possible IFRS
difference and it could affect entities where control transfers, let’s say, at shipping
point and the entity ships over relatively long period of time.
With respect to presentation of sales taxes, the FASB introduced a policy election to present
certain sales taxes on a net basis as opposed to determining whether the entity is a principle
or agent for each tax and every tax jurisdiction.
So, again, here, there is a possible IFRS difference.
The IASB did not want to make any changes because they mentioned that this requirement
already exists today and people can manage that effort.
With respect to non-cash consideration, the FASB amended the standard and an example as
well to require non-cash consideration received, for example, shares in exchange for transferring
goods and services, to be measured at contract inception as opposed to either when the shares
are received or when the goods of services are transferred.
So, again, an IFRS possible difference and the illustrative example which was previously
converged on this topic now shows a different answer between IFRS and US GAAP.
So, definitely one item to look out for if you have non-cash consideration in your arrangements.
And, the final point I want to raise here on additional FASB only amendments, are license
renewals.
We can move to the next slide.
The FASB clarified that upon a renewal or extension of an existing license, revenue
should only be recognized when the license term begins or at the beginning of the renewal
period as opposed to when the parties agree to the renewal.
From an IFRS perspective, the board concluded that no amendment would be necessary here,
the way that they look at it, you would need to consider whether the renewal should be
considered a new license, in which case you would wait for the new license term to begin
or whether the renewal represents some modification of an existing contract in which case you
would have to consider the modification accounting guidance.
So, there could potentially be a difference here.
On contractual restrictions on time, geography or use of a license of IP, the FASB indicated
that these types of contractual restrictions do not replace the requirement to identify
the number of licenses in a contract.
So, you can consider, for example, movie rights with the time restriction.
Let’s say, you have a situation where you have a movie right, that can only be aired
at Christmas time in years 1, 2 and 3 and then in years 6 to 8.
While these are the different time restrictions in this arrangement.
So, the question is, is this one single license or is it two different distinct licenses where
there is a time restriction in its use?
So, here the IASB decided not to make any amendments but they believe that there`s sufficient
guidance on distinct performance obligations to make the assessments.
So, not necessarily thinking that there would necessarily be significant diversity here
between IFRS and US GAAP treatment.
And finally, when to consider the nature of an entity’s promise in granting a license,
an amendment here from the FASB’s perspective that an entity considers a nature of promise
in granting a license when applying the general revenue recognition model, whether the license
is distinct or not.
So, if the license is bundled with other goods or services, you still have to consider the
nature of the entity’s promised in determining what the appropriate revenue recognition should
be.
And again, no amendment from an IFRS 15 perspective and the board’s believe is that the basis
for conclusions provides adequate guidance.
So, that brings it to an end for me and I will give it back to Jon, I believe.
Ok.
Thank you very much Maryse and thanks to Nura as well.
Definitely a lot of complex application issues related to the application of this standard,
as they say, the devil is in the details.
Ok, to add more context, let’s turn it over to Cindy Veinot for a case study that sets
out some practical considerations related to the implementation of the new standard.
Cindy Veinot is a partner in Toronto and has over 20 years of public accounting experience
with Deloitte in both Canada and the United States.
She has worked with clients on revenue recognition issues on a different accounting frameworks
over the last 15 years, and is currently focused on working with clients on assessing the impact
of and the implementation of the new revenue recognition standard.
Over to you, Cindy.
Thanks Jon.
So, we thought we would take, I guess, a practical look at how you actually approach this and
if I just think back to the slides that Nura presented at the beginning of the Webcast,
she mentioned that something like 80 some odd percent of people that responded to the
survey have either not started their preliminary assessment or they are just in the process
of doing it.
So, I think there is good and bad news to that.
The bad news is that a lot of you have a lot of work to do, the good news is we thought
a case study might be helpful in terms of letting you think about how you are actually
going to get started, because it is clear that the standard is detailed and it is clear
that, you know, even the amendments that they’ve made were necessary to provide additional
clarity and so there is a lot of information out there and how do you actually get started
in terms of working through, what the impact is going to be to your organization.
So in terms of our case study, we’ve got companies Z Inc. or “CZI” and we’ve
constructed a company that’s an integrated real estate and construction company and it
has a few different divisions, so it has got a construction division, so it provides design,
build, refurbishment and or repair of commercial and industrial buildings.
So, you might think of that part of the business as having accounted for its primary revenue
streams under an IAS 11 model.
It has got property management, so overseeing landscaping, security, minor repairs, snow
removal and other services for commercial and industrial buildings.
So that’s a services model, which is probably an IAS 18 scenario and then, it also has a
leasing division where it lends out various commercial and industrial properties, which
we will take a look at in terms of scope.
So, we’ve got our person, head of financial reporting, Anne, and she has heard that there
are new requirements under IFRS 15 and she wanted to know really where does she start?
So, we are going to talk very briefly about some common implementation stuff and then
we are going to dive in to the assessment phase.
So, in the assessment phase, the first phase, really what you are trying to get, is to identify
and pinpoint what are the issues that apply to each of the business groups or the units.
You’re really not necessarily going to make a lot of detailed decisions here, but you
are trying to surface what the issues are and how are you going to actually approach,
thinking through what are you going to have to change from a process perspective and what
are your system implementation issues going to be.
You want to come out of that with a pretty clear road map and a pretty clear view of
who is going to do what in terms of getting through this process.
From then, you want to move on to things like scenario development and identifying requirements.
And then finally, you need to get into design and testing.
Scenario developments are really looking at, you know, if your revenue results in a specific
profile now, what is it going to result in, in the future and that’s really important
in terms of helping, you know, your senior management understand what the impact of the
standard is going to be, because the impact is either going to be, there is a change in
timing of recognition or there is a change in presentation.
So, Maryse talked a lot about gross versus net.
so you are going to be required to go through your transactions again and there definitely
could be changes and this analysis in terms of scenario development, you are going to
want to go through for transactions when they are first entered into and also with respect
to modifications, so again Maryse mentioned that standard has very detailed guidance now
on how to account for modifications and so if you are an organization that modifies contracts
on a fairly regular basis, then you are going to want to also understand how modification
accounting works in your particular organization.
And then you are going to get into determining what your requirements are, your business
requirements and your functional requirements.
So, what kind of additional information do you need?
What kind of system change do you think you are going to need to put in place?
We had asked one of the survey questions when you registered for this webcast to say, like,
what are folks doing in terms of systems for this.
It looks like about a third are planning to use something like Excel, which of course
has its own risks to it, in terms of being a system without a lot of system based controls
in it, but a third are going to look at something like an ERP module for a system that they’ve
already implemented.
So that could be like a SAP or an Oracle, and then a third are undecided at this point,
and I think until you get through this assessment phase, it is really hard to know how many
changes are required and then how you are going to manage through those.
And then, finally when we get to, design, development and testing of needed adjustments,
you want to make sure that you are thinking through exactly how you are going to translate
the changes in the required accounting into your systems and how it’s going to produce
financial information and how you do that with an appropriate timeline in place, so
that you can have time to do dual reporting and ensure that the information that you are
getting out of the system makes sense.
Ok, so then, if we take a deeper dive into assessment activities, a lot of these items
we have an additional slide on, so I am going to really cover those when I talk about the
slide.
The one that we don’t have slide on down at the bottom, a couple of them, one is modeling
the impact at a high level on the financial statements and understanding how your metrics
might change, so again that gets into just trying to be very clear on how is this going
to change your financial statements, is it going to push revenue further out, is it going
to result in margin being recognized in a different manner, are you going to be capitalizing
costs that you wouldn’t currently capitalize so understanding all of those and then also
figuring out what your training requirements are, so there are a lot of parties that are
going to be impacted by this standard and are going to want to understand what it means
to them and so thinking about who needs to be trained and at what point.
Ok, so let’s move on to identifying, evaluating and summarizing the contract types.
So, you know, undoubtedly contracts would have been reviewed in your organization for
the appropriate accounting, but in all of the work that I’ve done with clients over
the last 2 to 3 years on the standard, it really does require going back and looking
at those contracts again and so there are a couple of things that I think you want to
think about before you kind of dive into the contracts.
The first is who is going to do that work, because what I found is that people learn
a lot of information about contracting and about the business in terms of doing this
work, so I would give some thought to who it is that you want to be doing that work
and what they are going to take out of it.
And the second thing is, if you can make this more than just a compliance exercise, so if
you are going to be reviewing contracts across different business units, maybe contracts
in parts of the organization that have been acquired and so, you know, they started out
under different contracting model.
Can you look at things like risk management in terms of contract terms or other process
issues that you might want to take a look at in terms of picking best in class of what
you are already doing, so that you can leverage some of that information that you are gathering
as you go through.
In this particular case, we had said that there were three different divisions and so
we have got here just some profiling bullets in terms of each of the divisions and that’s
one thing that sometimes is really hard to get at.
So, you know, it’s pretty easy to say, ok, what’s the term of the contract and looking
at contracts now versus waiting till sometime in 2017 can be really important if you have
longer term contracts, because if you have construction contracts that are 3 to 5 years,
you are entering into contracts today that are going to be impacted by this standard.
So, I think it is really helpful to understand how the standard might impact your accounting
so that when you are entering into contracts now, you know what that’s going to look
like in the future.
Knowing how many contracts are currently active, so can you actually get at that data?
Do you know how many contracts are in place and probably more importantly, do you know
how standardized your contracts are or how unique they are, because the more unique your
contracts are typically the more work you are going to have to do in terms of understanding
what the impact of the standard is to your organization.
And if you use a standardized template, what is your process in place for making changes
to that standardized template?
Do you have a process whereby you are going to be able to identify those contracts where
individuals in your organization have been permitted to make a change to your standard
terms and conditions.
So, just getting at that data is really kind of step number 1 in terms of thinking through
how much work you are going to do, in terms of the assessment phase.
At the bottom here we’ve got, you know, just thinking through what is in scope and
what is out of scope, so back at the beginning of the webcast, Nura had mentioned that leasing
is out of scope, so certainly for the lease component of lease transactions outside of
scope, you do have to determine whether or not there were any non-lease components within
your leasing contracts to determine whether some of those should be recognized in accordance
with IFRS 15, and of course, if you’ve got arrangements that are not called a lease,
but, you know, are substantively a lease, you got to look at that guidance as well to
determine which standard you are going to account for those arrangements under.
So, now let’s look at what kind of issues you might capture and define as you go through
this.
So, first identifying performance obligations, so again Nura talked a lot about the changes
and the clarification to the standard in terms of first of all, you know, going through a
process to identify what all your promised goods and services are but then applying judgement
to determine what are your distinct performance obligations and in this situation we’ve
identified there’s a construction business, so maybe you’ve got lots of integration
happening between the different promised goods and services, and so you have like potentially
just one performance obligation in those contracts, but maybe you have more; there is a lot of
judgement that has to go on in terms of determining how many performance obligations you actually
have.
And performance obligations can be things that are in the contract today or they can
be things that you are offering in the future, and so the second item we have on this slide
is called identifying material rights and so in this particular scenario, you know,
perhaps there are options or renewal rates in the contract.
So, for example, in the servicing property management section of the business are there
options to extend the contract at a lower price or are there renewal fees and the standard
requires you to go through a process to determine whether or not that option is a performance
obligation that has value and whether or not you have to attribute value to that and that
comes along with its own set of valuation issues, tracking, whether those options are
actually used or they actually expire unexercised.
And so thinking about how those types of things work in your contract is important and we’ve
dealt with this quite a bit already and we’ve seen situations where there can be renewals
that are, you know, just like next year renewals and they are not so difficult to deal with,
but we’ve also seen situations where the renewals can be many, many years out and so
it can be tricky in terms of determining how to value those.
Then, you go on to determining, you know, what the transaction price is, fixed or variable.
You know, is there any other performance bonuses that are in these contracts.
Are there holdbacks that are in the contracts from a construction perspective and are there
any financing considerations that need to be taken into account?
And principal versus agent, as Maryse talked about, there is some clarifying guidance in
terms of going through that analysis and certainly when we think about both the construction
business and the property management business, oftentimes there are subcontractors involved
in that and so thinking through whether or not the entity remains or is the principal
in the transaction or in some cases, it is acting as an agent, is going to be important.
Of course, you’ve got to allocate the transaction price, so if you do end up with a contract
that has more than one distinct performance obligation, you have to determine how to allocate
the transaction price to the distinct performance obligations and taking into consideration
whether you have discounts or variable consideration in place and then actually determining how
to recognize revenue when the satisfaction of the performance obligation occurs.
So there are two different models in a standard, point in time versus over time and you are
going to have to go through for each of these divisions determining which model the contracts
meet and also if you are in an over time scenario, how is the entity going to actually measure
progress in the contract?
So using an input method, using an output method and understanding the implications
of those two methods under the new standard.
And then finally, just a point on modifications again.
This industry is typical of having significant number of modifications and so with the various
specific guidance that is in place now in the standard, you are going to have to have
systems in place to track accounting for modifications.
We’ve included a slide on tax issues and really the point is not to ignore tax in this,
so depending on what jurisdiction you are under, depending on how the taxing authorities
deal with when income is taxed and whether it follows the accounting or not, you want
to make sure that you have involved the tax folks in your organization at the right time
to ensure that you don’t leave these items to the last minute.
So, I wont spend a lot of time on this one.
I just want to give you heads up that, you know, tax shouldn’t be ignored.
The next thing we want to talk about is disclosure and every time I work with a client on the
standard, we always say, you know, think about what you are going to have to disclose early
on in the process and don’t leave that until the end, because the standard does require
a significant increase in the amount of disclosure and also disclosure on things that you might
not be tracking.
So we just included reference to one illustrative example here.
So there are requirements in the standard now to disclose the revenue that has not yet
been recognized for contracts that are in process and so example 42 is a good one to
take a look at.
Essentially, in a simplistic example you just have three contracts and this is pointing
out that 1, there are some practical expedients when you don’t have to do this, but it’s
a pretty rare practical expedients, essentially, it’s, if you were a contractor where you
are sort of billing by the hour and you recognize revenue based on the amount that is billed
and you may not have to provide this additional detailed information, but in the examples,
in the type of business that we’ve provided, where you got long-term contracts for property
management or you have construction contracts that take three to five years to complete.
You are going to have to provide information in the financial statements about the remaining
revenue to be recognized and when you expect it to be recognized and that’s a problem
for a lot of organizations because they don’t have a tracking system in place to actually
track remaining revenue by contract.
So it’s really a backlog concept, so, as always, take a look at disclosure early so
that you know if you are going to run into difficulties in terms of what you will have
to produce and thinking about things like data quality and those types of items.
There are of course many other considerations that you are going to have to take into account.
First, you know, developing a communication strategy for the various stakeholders.
If you think of all the people that are going to have to get up to speed on this in your
organization before the directors and the audit committee who may have already started
to ask questions, you got finance who’ll probably take the lead in this situation.
You got investor relations, they need to be up to speed on explaining the impact of the
standard and what is it going to mean on a go forward basis, information technology,
so when is the right time to bring them in?
Usually we find that if the accountants and finance groups get going first and really
get a sense as to what the impacts are going to be, at that point, then, they can start
to bring in the IT folks, you know, once you have a better sense of that.
Thinking about lenders and the covenants that are going to be impacted, operations or other
changes to processes that are going to be needed in order to capture information.
We talked about tax and also human resources.
So the standard is not just the revenue standard.
It also deals with the requirements to capitalize certain contract costs and some of those include
things like sales commission.
You are going to be dealing with human resources in all likelihood, understand exactly what
types of compensation schemes that are in place that maybe impacted in terms of the
accounting.
Of course, you are going to be developing new policy requirements and working through
all of those changes.
From a systems and processes perspective you are going to think about whether or not you
are going to have a period of dual tracking and how you do that may be determined by how
you actually implement the standard.
So Maryse talked about the fact that there are a couple of ways to implement in terms
of the changes that have been made, but they are both retrospective methods.
It’s just a case as to whether or not you restate the prior period or not.
And then, last but not least on this slide, internal controls, right.
If you change processes, what are the related changes to internal control that need to be
made?
So the last slide on just getting, kind of, your feet wet in terms of thinking about how
to go through implementation is to think about who has got time to do this and so we’ve
done just a quick little calendar here to say, like, if you sketch out until the end
of 2017, what’s your team already got on its plate in terms of correlating your annual
reporting.
People are going to hopefully take some vacation.
So what does that leave you with in terms of capacity to get this done and knowing that,
you know, as soon as you get IFRS 15 done and over, you’ve got IFRS 16 right behind
it to get done as well.
So, you know, if you look at it this way, there was not a ton of time to get everything
that you will need to get done and in place by the time you need to.
And then finally, you know producing a project road map, I think, is really helpful because
once you get through that preliminary assessment, you will have a much better idea as to what
you are dealing with and how much time it’s actually going to take your team to get this
done and as well then you have the ability to start reporting against your progress in
terms of the implementation.
So we always recommend to folks that they sketch out, you know, all the things that
they are going to need to do in terms of this implementation and then start doing it and
start tracking against it.
So, good luck everybody with implementation and with that, I will turn it back to Jon.
Thanks a lot Cindy.
There’s lots of work to be done over the next couple of years.
Ok, on your screen in a minute, you will see a list of resources that are available to
help you understand IFRS 15 including the clarifications and also to keep you current
on the transition resource group discussions.
We’ve also provided a list of our Deloitte IFRS 15 contacts for your reference.
Feel free to reach out to them as you need, you know, if you need help in the implementing
the standard.
Thanks once again to our speakers today, Nura Taef, Maryse Vendette, Cindy Veinot.
I would also like to thank our behind the scenes team, Alexia Donoghue, Chris Tynan,
Alan Kirkpatrick and Lie Zhu.
We hope you found this webcast helpful and informative.
If you have any questions or feedback, please reach out to your Deloitte partner or Deloitte
contact.
If you like additional information, please visit our website at www.deloitte.ca.
And to all of you viewing your webcast, thank you for joining us.
This concludes our webcast, Bringing Clarity to an IFRS World, Clarifications on IFRS 15,
Revenue from Contracts with Customers, Understanding the Final Standard.