IFRS 15 is a revenue recognition standard that affects all businesses that enter into contracts with customers to transfer goods or services – public, private and non- profit entities. Both public and privately held companies should be IFRS 15 compliant now based on the 2017 and 2018 deadlines. Is yours?
The IFRS 15 standard’s purpose is to eliminate variations in the way businesses across industries handle accounting for similar transactions. This lack of standardization in financial reporting has made it difficult for investors and other consumers of financial statements to compare results across industries, and even companies within the same industry.
Is your company IFRS 15 compliant?
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Centralize revenue streams in a single revenue recognition solution. Get compliant with the new ASC 606 & IFRS 15 standards. Automate calculations, reduce your period-end close and gain a complete picture of your organization’s revenue – both recognized and deferred.
In developing the IFRS standard, the governing bodies wanted to provide a framework to drive consistency in financial reporting, improve comparative analysis and reporting, and simplify the preparation of financial statements through a Five Step Model for Revenue Recognition.
We’ll break the IFRS 15 compliance recommendations down–based on the contract process–into the following 5 steps:
The rule, “Revenue from Contracts with Customers” standardizes and simplifies how companies record revenue in customer contracts. The impact might not be as significant for companies, such as retailers, that sell products and receive revenue at one time. But for companies that sell recurring services like subscriptions or licenses, the rule may improve the results.
Under the previous law, if a company for example, sold a 12-month software product license, it could apply only six months of revenue to its books. It would not be able to count the next six months of revenue until 2017. But under IFRS 15 (also ASC 606) it can count all the revenue at once.
Implementing IFRS 15 also has broad ramifications. Meeting the standard will impact not just your accounting and financial departments, but will impact your IT systems, HR policies and more. It’s these broader implications and unknowns that have many companies concerned.
If you aren’t armed with the proper information, making the best business decision can be difficult.
At some point in the transition process you’ll need to assess how the new standards will affect your company. This includes an evaluation of primary revenue streams and key contracts to identify the revenue recognition changes required and the business units where these changes may have the greatest impact.
The questions that come up during this phase are weighty. When you apply the new five-step compliance model to a sampling of mission-critical contracts, what happens to your revenue recognition profile? Will you need to change the design of your customer contracts? Can your sales process stay the same, or does it need tweaking? If you aren’t armed with the proper information, making the best business decision becomes difficult.
Know the scope of work required so you can assemble the right plan, team, and budget. Several factors will impact your resource allocation and cost calculations:
About 50% of spreadsheet models used operationally in large businesses have material defects. You’ll need to deliver the right reports internally and externally, to pass an audit—the crux of this entire endeavor. If your process is based on spreadsheets, this will be painful. Inefficient and error-prone, spreadsheets are notoriously difficult to audit. Furthermore, multiple user access easily leads to version-control problems, which degrades data quality. It’s not just anecdotal: the European Spreadsheet Risks Interest Group cites research stating that 50% of spreadsheet models used operationally in large businesses have material defects.
A robust technology solution, e.g. a revenue recognition cloud application, can offer two key ways of reducing the amount of required manual effort: automation and flexibility across your revenue recognition processes. First and foremost, the right solution helps you track various revenue streams, automate allocations and calculations, and configure different rules and templates for different calculations—all while eliminating your reliance on overly complex spreadsheets.
Additionally, a strong technology solution also eases the pain of implementing a transition method. Your choice of method should be driven by what’s best for investors, auditors, and financial statement readers, not by the capabilities of your IT systems (or lack thereof). With a strong technology solution, you can recognize revenue under the current standards up to the transition date, then seamlessly deploy retrospective or parallel recognition processes. Let your systems empower you to make the best choice for your stakeholders.
With the right system in place, you can produce clear audit trails and attach supporting documents and evidence directly to transactions. A robust tool also provides user-friendly reporting options, allowing you to slice, dice, and customize your data on a summary level or on an item-by-item basis. With better reports, your business teams will make better decisions.
Meeting the new compliance standards will take time and careful planning but it shouldn’t be a dreaded process. In fact, organizations large and small will find the transition provides an opportunity to transform their businesses for the better.