Investors need to assess how the new revenue recognition standard will affect earnings
It’s no secret that investors are struggling to get their heads around the impact that the new revenue standard will have on a company’s track record, disclosures and potential for earnings surprises.
IFRS 15 promises much greater transparency over revenue mix – companies may need to publish new analyses of revenues by geography, market or type of customer, sales channel and/or contract type. But investor concern is rising as companies start to announce potential revenue and profit impacts.
So what do investors need to look out for (PDF 403 KB), particularly those covering sectors where long-term contracts or contracts with bundled goods or services are common?
Revenues may get lumpier as certain contract activities will give rise to revenue and some will not.
IFRS 15 changes how and when companies recognise revenue. Some
revenues may be pulled forward, and others pushed back. Applying the new ‘five-step’ model is complex, but some examples of the changes are as follows.
The impacts may average out for a business in a steady state, but this won't be the case on transition for a growing business.
Increased management judgement is involved in identifying performance obligations and how consideration is allocated to each.
IFRS 15’s emphasis on transfer of control means that invoicing does not drive revenue recognition. More accounting judgement is needed to
determine the components of the contract, the time when goods and services have been transferred for each component, and the revenue to allocate – leading to fluctuations in margins.
With less linkage between revenues and billing schedules, we’re already seeing much greater liaison between commercial teams and finance teams when new products are launched. Companies want to be sure that they can book the earnings they expect, when they expect them.
There’s a risk that transition adjustments could obscure underlying trends in companies’ track records.
Companies can choose whether they will adjust their 2017 results when they adopt IFRS 15 in 2018. Transition adjustments may create surprises for investors, particularly when 2017 results are not restated.
Companies are required to explain their transition adjustments, but only in the year of transition. A clear understanding of how these adjustments affect the revenue track record will be key.
IFRS 15 primarily impacts the timing of revenue recognition, but in some cases the total amount of revenue recognised over the life of a contract may change. The most common circumstances are likely to include the following.
If you haven’t started already, I’d recommend opening up a dialogue with companies on how they’ll be affected. They should be at an advanced stage with their transition assessments now. Looking forward, their IFRS 15 disclosures will be key to understanding underlying performance.
You can find more information on KPMG’s Revenue page.
Comments? Questions? Join the conversation on KPMG's IFRS showcase page on LinkedIn.
Matt runs KPMG’s Better Business Reporting network, helping companies improve the investor relevance of their corporate reporting.
© 2019 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved. KPMG IFRG Limited, registered in England No 5253019. Registered office: 15 Canada Square, London, E14 5GL, UK.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.