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IFRS 15 - An impending performance obligation

IFRS 15 - An impending performance obligation

1 January 2018, the effective date of IFRS 15, is looming large. We take a look at why the new standard, and its labyrinth of complexities, should not be underestimated.

David Littleford, a partner in KPMG's UK audit practice and KPMG’s global IFRS presentation leader


KPMG in the UK


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If you have completed your IFRS 15 conversion project – decided which of the numerous transition alternatives work most effectively for you, implemented systems to capture changes in timing or amount of revenue and new disclosures, quantified the effect for the purposes of any restatement and prepared a communication plan – then read no further. 

Alternatively, if you are one of the many companies that are still working your way through the labyrinthine complexities of the standard in the hope of finding light at the end of the tunnel, then here’s a ball of string...

At the end of the day, revenue will often equal the cash you expect to get and, for companies that sell large quantities of standard goods to customers, there may be no change to the amount or timing of revenue. Extensive new disclosures (for example disaggregation of revenue and remaining performance obligations) may still necessitate system changes and will alter group reporting needs (challenges that apply to all companies), but all that may be left is to document your conclusions and explain to the market that (despite transition to IFRS 15), your historical trends remain relevant.

However, as you move away from this simple scenario, changes emerge: master service agreements, customised products, bespoke tooling, bundled goods and/or services, services generally(!), variable consideration, discounts and licences are all proving a challenge. And that’s before the new requirements on costs to obtain and fulfil the contract (yes, that’s part of the revenue standard) are considered. There have been widely-publicised effects in some sectors such as Telecoms (bundled goods) and contracting businesses, but we are seeing less-publicised changes in many other sectors. 

Faced with a new standard, I always hope that there is a kernel of common sense, identifiable principles to hold onto in the dark, that intuition will generally help me navigate the way. And indeed some things feel familiar, for example separating performance obligations essentially when the thing you’re selling can be used on its own. But, technically, IFRS 15’s rules are often difficult to apply to real life: a standard that is based on transfer of control rather than risks and rewards, either at a point-in-time versus over time, that doesn’t permit work in progress etc, necessitates we often start from scratch, interpreting the standard and applying judgement at a level of detail.

So how to navigate your own way through this labyrinth? 

There is no short cut. You’ll need to understand the requirements and then assess your sales contracts and practices against them. The standard plus application guidance runs to over 50 pages (excluding the basis of conclusions). Our own in-depth guide amounts to over 350 pages and is supplemented by an ever-growing set of sector specific guides that identify the issues we have seen in practice as we help companies to prepare for adoption. In our transition toolkit, you will find practical guidance and insight to get you moving or add momentum if you are already on your way.

Multiple transition options either (i) to apply (broadly) retrospectively and restate comparatives, or (ii) to apply prospectively from 1 January 2018 (with various additional reliefs, for example to avoid restatement of completed contracts) then provide a final challenge. Designed to ease adoption (a clue as to how easy the IASB expects the changes to be), the transitional reliefs detract from something that investors prize: ease of comparability between periods and across a sector. So whatever transition choices you make and whatever the effect on your reported revenue and profits, at some point you’ll need to explain it to the market. Pity the poor investor (and the preparers trying to help them to understand). The transition options, and the lack of historical trend data is going to create considerable uncertainty as investors struggle to discern what IFRS 15 tells them about the future direction of the biggest number in the financial statements. The 2016 reporting season saw the first disclosures of the effect, but many more companies merely noted that they are still assessing the impact.

So follow the links below for a ball of string and please contact Nick Chandler if you, like many others, can’t yet quite see the light.

For up to date news and to join the conversation, follow KPMG's IFRS page on LinkedIn.


David Littleford

Partner, Audit, KPMG

© 2020 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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.

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