The Financial Reporting Council (FRC) has issued a further thematic review on the application of IFRS 15, which focusses on those areas that have previously provided the greatest cause for concern.
The FRC’s report includes examples of both good and inadequate disclosures against which companies can benchmark their own draft disclosures. The FRC will continue to challenge companies whose future disclosures do not meet its expectations.
The FRC requires entities to disclose accounting policies and other entity-specific information that provide a clear understanding of how entities have applied the requirements of the standard to their own circumstances. The FRC noted that poor disclosures often made it difficult to assess whether the underlying accounting was appropriate or not. Looking ahead, the FRC will focus in particular on the following areas in its reviews of annual and interim reports:
- Timing of revenue recognition: Entities are expected to disclose accounting policies that clearly specify when the entity satisfies its performance obligation (e.g. upon delivery of goods and customer acceptance). Further, for revenue recognised over-time, FRC expects entities to disclose the method used to measure the stage of completion and why such method is appropriate to the entity’s circumstances.
- Variable consideration: Entities should disclose the types of variable consideration that exist within contracts and how are they estimated and constrained. For variable consideration constraints, the FRC expects entities to disclose information about the methods, inputs, assumptions and judgements used in assessing whether constraints should be applied.
- Significant judgements: Significant judgements affecting the timing and amount of revenue recognised should be clearly explained and should be customised to the facts and circumstances of the entity. The FRC has reminded entities that judgements that require disclosure under IFRS 15 could be in addition to those required to be disclosed under IAS 1.
- Costs to obtain or fulfil a contract: The FRC has expressed concern that some entities have overlooked the accounting requirements in relation to costs to obtain or fulfil a contract, suggested by the absence of an accounting policy or quantitative disclosures for such costs.
- · Linkage and coherence: Entities should ensure there is consistency between revenue-related information in the strategic report and information in the financial statements, including, for example, disclosure of disaggregated revenue.
For financial statements reviewed as part of the thematic review, the FRC will be engaging with entities whose financial statements didn’t meet the FRC’s expectations and will continue to challenge entities on revenue disclosures in its future reviews. Accordingly, entities are advised to consider the FRC’s thematic review when preparing their next annual and interim financial statements.
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