From the IFRS Institute – August 30, 2019
IFRS 15 and ASC 606, Revenue from Contracts with Customers, went live for all IFRS preparers and most US public business entities in 2018. The standards go live for other US GAAP reporters in 2019. Interpretive questions persist: the IFRS Interpretations Committee has been issuing Agenda Decisions, the SEC is active in issuing comments and pre-clearance advice, and standard-setting activities continue under IFRS Standards and US GAAP.
IFRS preparers seek clarity on Steps 2 and 5 and interactions of IFRS 15 with other standards
The IFRS Interpretations Committee (IFRS IC) has addressed several questions related to the application of the 5-Step model that are particularly relevant for real estate developers, airlines, stock exchanges and contractors, but that may impact other sectors as well. Specifically, Step 2 (identify performance obligations) and Step 5 (recognize revenue at a point in time or over time) are common topics of interest. There are also questions about how the revenue recognition model interacts with other standards, such as IFRS 11 (joint operations), IFRS 10 (sale of single-asset real estate entities), and IAS 23 (capitalization of borrowing costs in long-term customer contracts; see our related article). See the complete list of topics considered by the IFRS IC at the end of this article.
US GAAP preparers and the SEC focus on Steps 2 and 5, disclosures and the agent / principal analysis
SEC registrants frequently consult with the Office of the Chief Accountant (OCA) of the SEC through the pre-clearance process regarding identifying single versus multiple performance obligations. Another common issue on which OCA is consulted relates to determining whether a company is a principal or agent in a transaction, including evaluating the application of the overall control principle under US GAAP.
Comment letters by the SEC’s Division of Corporation Finance have focused on companies’ Step 2 and Step 5 analyses, including the identification of multiple performance obligations; the timing of when performance obligations are satisfied; how this timing affects contract assets and liabilities; the rationale for recognizing revenue over time versus at a point in time; and support for the selected measure of progress under the over-time model. The Division has also questioned the completeness of disclosures, and has required some companies to provide more disclosures explaining the basis for their accounting conclusions to better inform investors of their significant judgments in applying the new standard.
Standard-setting that may be relevant to customer contracts
In January 2019, the International Accounting Standards Board (the Board) proposed amendments to IAS 371 to clarify how to determine if a contract, including a customer contract, is onerous. IAS 37 specifies that a contract is onerous when the unavoidable costs of fulfilling it outweigh its economic benefits. The Board proposed a full cost approach and clarified that the unavoidable costs of fulfilling a contract comprise those costs that relate directly to the contract. The proposed amendments included examples of costs that are identical to the examples of fulfilment costs in IFRS 15.
The period to comment on the exposure draft closed in April 2019, and the Board is expected to discuss the project’s direction at its September 2019 meeting. See KPMG’s article on differences between IFRS 15 and ASC 606 where we discuss onerous contracts under the two standards.
The FASB recently issued proposed guidance on two topics relating to revenue recognition.
The first proposal2 addresses the acquirer’s accounting for contract liabilities from the target’s revenue contracts in a business combination. It would align the recognition criteria for revenue contract liabilities in a business combination with the definition of a performance obligation in ASC 606.
The second proposal3 relates to accounting for modifications of licenses of intellectual property, specifically those under which:
- the contract term for existing rights is extended while other rights are added; and
- existing rights are revoked, including conversion of term software licenses to software as a service arrangements.
No similar amendments are being considered for IFRS 15. If the FASB proposals are approved, this could create further accounting differences between US GAAP and IFRS Standards. The eventual outcome could be additional guidance that IFRS preparers need to consider under the hierarchy requirements of IAS 84 as they continue to evaluate their revenue accounting policies.
IFRS IC Agenda Decisions
The IFRS IC supports the consistent application of IFRS Standards and helps the Board improve financial reporting through the timely identification and resolution of financial reporting issues within the framework. Agenda Decisions provide key interpretive guidance for companies to use as they apply IFRS Standards; see our recent article on the importance of Agenda Decisions. The following table summarizes the main revenue-related issues that the IFRS IC has considered.