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IFRS 15 Revenue: What should you be doing?

IFRS 15 Revenue: What should you be doing?

An investigation into the impact of IFRS 15 on the FTSE 100 and questioning whether companies are ready for the new standard.

Nick Chandler


KPMG in the UK


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It’s not often that an accounting issue hits the national headlines, but IFRS 15 will clearly result in major changes for some businessesand is something that has piqued the interest of investors, analysts and the press. In this article we investigate what FTSE 100 companies have reported to date about IFRS 15 adoption. What are the impacts and are companies ready for the new standard?

The question I get asked most by my clients about IFRS 15 is “What is everyone else doing?”  IFRS 15 is complex and nobody wants to be out of line with their peers. Despite the prominent headlines from a few companies, it has been all too easy to put off getting into the detail of the standard.  Many have been waiting until others have disclosed the effects before making any insightful statements. This is despite calls from the FRC and ESMA
as far back as July 2016 that companies should be demonstrating “significant
progress” with their implementation and making every effort to quantify the
anticipated change as soon as possible.

With under 4 months to go until the new standard is effective, we have reviewed the latest reporting of the FTSE 100 to compare and contrast their disclosures on IFRS 15 adoption. These disclosures highlight the level of progress made to date and the expected impacts across a broad range of sectors.

It is important to set the scene that of the 71 companies that
have made a qualitative statement about IFRS 15 adoption to date, 91% have disclosed that they expect the impact of the new standard to be immaterial. If just 9% of those disclosing impacts think that it would be material, you might ask, what is all the fuss about? 

The fuss is about the work that has been required to prove
that there is or is not a material impact. For many businesses, the small size of the overall impact does not reflect the amount of work that they have done. Many highlight that the new standard is complex and will require changes, even if there is not a material financial impact.  We also note that despite the high proportion who stated that the impact will be immaterial, only 26% noted that they have completed an initial assessment of the potential impact of IFRS 15, with a further 43% indicating that work is ongoing to evaluate the effects of adoption. This suggests that there is still a lot of work to do.

Many businesses provide guidance on where the changes will be felt, and there are recurring themes. Areas such as reassessing principal vs agent, treatment of penalties and upfront payments or costs lead 19% to disclose that the amount of revenue recognised would change. A further 33% expect some change to timing of revenue recognition from requirements such as separating contracts into performance obligations, combining/separating contracts, or changes to the treatment of mobilisation costs or the method used to reflect progress.

Even where companies have disclosed that the new standard will not affect a large proportion of their arrangements, there is commonly a division or a type of arrangement which will be impacted. The change is significant for the areas affected, but in the context of the group results, it is not material. Herein lies the challenge for all businesses – how do you know where those areas are if you haven’t looked in detail at all revenue streams in your business?  Do the areas affected have the resources to identify, quantify and manage the change in a controlled way? 

Despite confidence from the majority of companies that the impact will not be material, surprisingly few (21) have yet disclosed which transition method they plan to adopt – whether they will apply the new rules retrospectively, or trade off lower comparability with a lower level of transition work and take the cumulative effect option, booking all adjustments at the start of 2018.  For those who have disclosed their chosen method, it is almost 50/50 between the different methods.  It will be interesting to see whether the remainder are now able to adopt the fully retrospective method, given the limited time remaining and data required to produce auditable restated 2017 results.

The 9% of companies that expect a material impact operate in a range of different sectors, including Telecommunications, Business Services, Construction, Aerospace & Defence and Travel & Leisure. There is no “pack” of those who will be and will not be affected – it really is in the detail of contracting practices and current accounting policies. One of the aims of the standard was to align accounting across sectors and ensure consistency.  The differences in the challenges faced and in the impacts seen is demonstration that the standard was required! 

I’d like to be able to give my clients a one-size-fits-all list of impacts and to reassure them that their changes and challenges will be the same as their peers. In reality though, they are unique, and are right to be working hard in advance of the new standard to ensure that they have captured all of the impacts relevant to them. They can know that almost everyone else is (or should be) still doing the same!

Helena Watson

Senior Manager, Accounting Advisory Services, KPMG in the UK

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