Dear,
From January 1st 2018, a new Accounting Standard becomes mandatory for reporting the Revenue Recognition in Contracts with Clients IFRS 15, becomes effective.
IFRS 15 enhances the process of Revenue Recognition by establishing a 5 steps process.
1) Identify the contract with the customer.
A contract with a customer falls within the scope of IFRS 15 if all the following conditions are fulfilled.
- The contract has been approved by the parties to the contract
- Each party’s rights in relation to the goods or services to be transferred can be identified
- The payment terms for the goods or services to be transferred can be identified
- The contract has commercial substance; and it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.
2) Identify the performance obligations in the contract.
Usually, operational systems represent the Performance Obligations in the contract but there are two possible exceptions:
- Several Operational Items representing the same Performance Obligation. For instance, in a Desktop Computer (represented by a Sales BOM), several Items are detailed in the Sales Order (Monitor, CPU and Keyboard) but they represent the same Performance Obligation of delivering the Computer.
- One Operational Item representing several Performance Obligations. For instance some Computer Manufacturers offer one year technical support service (Performance Obligation) with every computer sold (Performance Obligation).
3) Determining the Transaction Price.
The transaction price is the amount that the vendor expects to receive in exchange for the goods or services.
4) Allocating the Transaction Price to performance obligations.
Once the transaction price for the contract has been determined, IFRS 15 requires to allocate it to the performance obligations of the Contract. Considering the two cases above, in which the Operational System Items does not represent univocally the Performance Obligations, we can understand the challenge of allocating the Transaction Price to the Performance Obligations.
First, IFRS 15 requires to determine the Stand-Alone Selling Price which is the price that the vendor expects to receive in exchange for delivering the goods or services of the performance obligation are sold separately to a customer. Be aware of the difficulty of estimating the Stand-Alone Selling Price when several performance obligations are sold together with a bundle price.
In order of determining the Stand-Alone Selling Price, IFRS 15 permits three approaches.
1. Adjusted Market Assessment. Estimating the Stand-Alone Selling Price according to the conditions of an specific market, reflecting the vendor costs and margins.
2. Expected cost plus margin. Estimating the Stand-Alone Selling Price according to the expected costs of the performance obligation for the vendor, plus its correspondent margin.
3. Residual Method. In case of bundle prices for grouped performance obligations, in which we can not estimate the Stand-Alone Selling Price of all the performance obligations, IFRS 15 proposes the following two-steps approach.
First we have to estimate the Stand-Alone Selling Price of the performance obligations of the group, that can be estimated with one of the previous approaches. The we will estimate the Stand-Alone Selling Prices of the rest of the performance obligations, by deducting the Stand-Alone Selling Price of the performance obligations already estimated, from the total contract price of the group of performance obligations.
5) Recognize revenue when each performance obligation is satisfied.
In case of a good or service delivered in one step, the performance obligation is satisfied at the moment of the final delivery to the customer, but in case of services or goods delivered during a period of time, IFRS 15 requires that the revenue is recognized according to the percentage of the performance obligation that has been delivered in every financial period.
Although, IFRS 15 impacts other industries much more than Banking (which is much more impacted by IFRS 9), there are some banking services impacted by the requirements of IFRS 15.
Fulfilling IFRS 15 requirements, requires Information Systems with strong sub-ledger capabilities, that we described briefly in a previous blog.
http://sapbank.blogspot.com/2016/02/fulfilling-ifrs-9-and-ifrs-15-sub.html
Additionally, SAP provides the Revenue Accounting and Reporting module for IFRS 15, which supports all the requirements of the 5 steps approach for Revenue Recognition described above.
We have worked recently in the design of an IT architecture, combining Bank Analyzer and SAP Revenue Accounting and Reporting for IFRS 15, for supporting IFRS 15 requirements in Banking.
I’ll give you some details in a future blog.
Looking forward to read your opinions.
Kind Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
From January 1st 2018, a new Accounting Standard becomes mandatory for reporting the Revenue Recognition in Contracts with Clients IFRS 15, becomes effective.
IFRS 15 enhances the process of Revenue Recognition by establishing a 5 steps process.
1) Identify the contract with the customer.
A contract with a customer falls within the scope of IFRS 15 if all the following conditions are fulfilled.
- The contract has been approved by the parties to the contract
- Each party’s rights in relation to the goods or services to be transferred can be identified
- The payment terms for the goods or services to be transferred can be identified
- The contract has commercial substance; and it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.
2) Identify the performance obligations in the contract.
Usually, operational systems represent the Performance Obligations in the contract but there are two possible exceptions:
- Several Operational Items representing the same Performance Obligation. For instance, in a Desktop Computer (represented by a Sales BOM), several Items are detailed in the Sales Order (Monitor, CPU and Keyboard) but they represent the same Performance Obligation of delivering the Computer.
- One Operational Item representing several Performance Obligations. For instance some Computer Manufacturers offer one year technical support service (Performance Obligation) with every computer sold (Performance Obligation).
3) Determining the Transaction Price.
The transaction price is the amount that the vendor expects to receive in exchange for the goods or services.
4) Allocating the Transaction Price to performance obligations.
Once the transaction price for the contract has been determined, IFRS 15 requires to allocate it to the performance obligations of the Contract. Considering the two cases above, in which the Operational System Items does not represent univocally the Performance Obligations, we can understand the challenge of allocating the Transaction Price to the Performance Obligations.
First, IFRS 15 requires to determine the Stand-Alone Selling Price which is the price that the vendor expects to receive in exchange for delivering the goods or services of the performance obligation are sold separately to a customer. Be aware of the difficulty of estimating the Stand-Alone Selling Price when several performance obligations are sold together with a bundle price.
In order of determining the Stand-Alone Selling Price, IFRS 15 permits three approaches.
1. Adjusted Market Assessment. Estimating the Stand-Alone Selling Price according to the conditions of an specific market, reflecting the vendor costs and margins.
2. Expected cost plus margin. Estimating the Stand-Alone Selling Price according to the expected costs of the performance obligation for the vendor, plus its correspondent margin.
3. Residual Method. In case of bundle prices for grouped performance obligations, in which we can not estimate the Stand-Alone Selling Price of all the performance obligations, IFRS 15 proposes the following two-steps approach.
First we have to estimate the Stand-Alone Selling Price of the performance obligations of the group, that can be estimated with one of the previous approaches. The we will estimate the Stand-Alone Selling Prices of the rest of the performance obligations, by deducting the Stand-Alone Selling Price of the performance obligations already estimated, from the total contract price of the group of performance obligations.
5) Recognize revenue when each performance obligation is satisfied.
In case of a good or service delivered in one step, the performance obligation is satisfied at the moment of the final delivery to the customer, but in case of services or goods delivered during a period of time, IFRS 15 requires that the revenue is recognized according to the percentage of the performance obligation that has been delivered in every financial period.
Although, IFRS 15 impacts other industries much more than Banking (which is much more impacted by IFRS 9), there are some banking services impacted by the requirements of IFRS 15.
Fulfilling IFRS 15 requirements, requires Information Systems with strong sub-ledger capabilities, that we described briefly in a previous blog.
http://sapbank.blogspot.com/2016/02/fulfilling-ifrs-9-and-ifrs-15-sub.html
Additionally, SAP provides the Revenue Accounting and Reporting module for IFRS 15, which supports all the requirements of the 5 steps approach for Revenue Recognition described above.
We have worked recently in the design of an IT architecture, combining Bank Analyzer and SAP Revenue Accounting and Reporting for IFRS 15, for supporting IFRS 15 requirements in Banking.
I’ll give you some details in a future blog.
Looking forward to read your opinions.
Kind Regards,
Ferran.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
1 comment:
Useful, thanks for sharing the information.
IFRS technical support
Post a Comment