Dear,
Since January the 1st 2018, Banks and Corporates should be compliant to the new Accounting Standards IFRS 9 and IFRS 15.
In my opinion, most of Banks and Corporates are far from being ready to be compliant to these legal requirements and we will see some examples in the oncoming months.
On the other hand, there is some confusion about the implications of IFRS 9 and IFRS 15, so I’ll try to make a short description with a practical example.
IFRS 15 is relevant for Contracts with customers with particularly visible implications in contracts combining the delivery of Services and Goods.
For instance, a Telecommunications company confirms a contract with a customer committing to deliver Internet access for 12 months for 35 EUR/month and a subsidized Wifi Router for 50 EUR.
Before the IFRS 15 Accounting Principle was implemented, the above contract would produce a revenue in the Telecommunications company of 35 EUR every month, and a one-time revenue of 50 EUR (for selling the Router).
With the implementation of IFRS 15 the company is required to adjust the revenue recognition to a Fair Price of the two sold elements (Router and Internet Access) and the completion of the commitment with the client (deliver the Router and provide the Internet Access). For instance, the Router has been sold to a lower price (subsidized) because the client has committed with a 12 months contract of Internet Access, so it seems logical that a portion of the revenue for selling the router is distributed during the 12 months of the Internet Access.
The International Accounting Standard Board proposes a 5 steps process for fulfilling the IFRS 15 requirements.
Step 1.- Identify the contract with the customer.- This first step has been run just above, identify the contract with the client, in which the company commits to deliver a bundle of services and goods.
Step 2.- Identify Separate Performance Obligations.- Performance Obligations are the promises to the client to transfer Goods or Services. In the above example, the two Performance Obligations are, delivering the Internet service and the Router. At the same time, the company must identify the Stand Alone Selling Price of each Performance Obligation, which is a “Fair Price” that the company would charge for the goods or services if they were sold separately.
The current version (1.3), SAP Revenue Accounting and Reporting does not have the capacity of determining the Stand Alone Selling Prices, but the company can use average historical prices for determining the Stand Alone Selling Price of each Performance Obligation.
In this example we would assume that the Stand Alone Selling Price of the Internet Access is 40 EUR/month and the Stand Alone Selling Price of the Router is 55 EUR.
Step 3.- Determining the Transaction Price which is the actual price that the company is charging to the client for each Performance Obligation. In this case the Transaction Prices are 35 EUR/month for the Internet Access and 45 EUR for the Router.
Step 4.- Allocating the Transaction Price to each Performance Obligation in an amount that depicts the revenue that the company can recognize for delivering the Goods/Services to the client. In our example, they are the following.
Performance Obligation
|
Transaction Price
|
Standalone Selling Price
|
Allocated Amount
|
Calculation of the Allocated Amount
|
Router
|
50 EUR
|
55 EUR
|
48 EUR
|
470*55/535
|
12 month Internet Service
|
35*12=420 EUR
|
40*12=480 EUR
|
422 EUR
|
470*480/535
|
470 EUR
|
535 EUR
|
470 EUR
|
Step 5 .- Recognize revenue when each performance obligation is satisfied.
Month 1.- Performance Obligation 1 is fully satisfied and Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 48 EUR + 35.17 EUR
Month 2.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR
Month 3.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR
Month 4.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR
….
Month 10.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.17 EUR
Month 11.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.16 EUR
Month 12.- Performance Obligation 2 is satisfied in 8.33%. Revenue Recognition is 35.16 EUR
On the other hand, when the company issues the invoices to the client, the company assumes a Credit Risk that the client is not paying the due amount.
IFRS 9 describes the process for measuring the Expected Loss, which starts by determining the Probability of Default of the Client, based in a Credit Risk model which classifies the Client according to the payment behavior of the clients belonging to the same Risk segment. This process is called Historization and is supported by the SAP Bank Analyzer System.
The second step is determining a Fair Value provision that will reduce the recognized revenue until the client makes the payment. The provision amount is determined by the Key Date Valuation of the AFI-Bank Analyzer module, by discounting the Cash-Flow (due amount) with a Yield Curve with the same maturity of the Cash-Flow and the correspondent Spread of the client’s Probability of Default.
Obviously the provision will increase if the client does not make the payment on time, and the Account Receivable becomes impaired.
SAP offers a complete business suite for fulfilling the requirements of the new Accounting Standards. Unfortunately, technical and functional skills for implementing them are scarce, making the implementation projects very challenging.
Looking forward to read your opinions.
K. Regards,
Ferran.
Join the SAP Banking Group at: https://www.linkedin.com/group
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
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