In order to attain the core principles of the revenue recognition standard, a company should apply the following steps: identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, recognize revenue when (or as) the reporting organization satisfies a performance obligation. Utilizing the company KPMG as an example, I will discuss some of the potential impacts and actions to consider regarding the standard.
The objective of the revenue recognition standard is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. When determining the impact and considerations at KPMG we will begin by looking at the arrangements. First taking a glance at the collaborative arrangements, many companies are more likely to enter a diverse arrangement and must consider all information to determine whether the arrangement is aligned with the new revenue standard. Therefore, it’s important that you and your collaborators, review the terms of the arrangement early that way you’re able to discuss any renegotiations and determine if the terms of the arrangement falls outside of the scope of the IFRS 15. Another arrangement to consider would be the take or pay arrangement in which the customer doesn’t exercise all his/her rights within the contract which could result in the customer taking a slice of what they’re entitled to instead of the whole thing. For example, under the IFRS if an oil company expects to be entitled to breakage, then it recognizes the estimated breakage amount as revenue in proportion to the pattern of rights exercised by the customer. Otherwise, breakage is recognized as revenue only when the likelihood of the customer exercising its rights becomes remote thus, changing the timing for recognition of breakage revenue. In this arrangement we must delegate the contractual terms and assess the implications of accounting and financial reporting and develop accounting procedures, process, system and internal controls.
Next, we focus on long-term contracts and contracts with multiple goods and services. Entities that enter into a long-term sales agreement will need to consider if the accounting for such contracts may change under the IFRS. Examples of clauses may require analysis include variable pricing, additional volume options and deferred or advanced payment terms. Entities will have to consider accounting for variable consideration, options to purchase additional products and time value of money when delivery of goods and payment are 12 or more months apart when making the evaluation. We also have to review the terms of the contract and practices relating to a long-terms sale contract and evaluate the implications on financial reporting. Contracts with multiple goods and services include a new requirement on determining whether goods are accounted as a separate performance or single performance obligation, including a series of goods or services. The oil and gas companies are required to allocate the transaction price to the performance obligation on a stand-alone selling price if separate performance obligations are identified. Each obligation has to be assessed to determine if revenue is recognized at a point in time or over a period of time, which can result in a different revenue profile. When dealing with contracts with multiple goods and services we have to deliberate it performance obligation under the new standard and assess billing management and related internal controls can support the allocation methodology and generation of information to allocate revenue.
In conclusion the IFRS may be adopted retrospectively, by restating comparatives and adjusting retained earnings at the beginning of the comparative period. On the other hand, it may be adopted as a part of the application date, by adjusting retained earnings at the beginning of the first reporting year. There are a few ways to go about transitioning into the new revenue recognition standard so, the information is useful to users of financial statements but, it is our job to evaluate each option and consider the transition that’s most beneficial.