The new revenue recognition standard - Financial Reporting Update (Deloitte Canada)

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Hi everyone, welcome to Deloitte Financial Reporting Update, our webcast series for issues
and developments related to the various accounting frameworks. Today, we present bringing clarity
to an IFRS world - IFRS 15 Revenue from Contracts with Customers. I am Jon Kligman, your host
for today’s webcast, and I am joined by Maryse Vendette, Cindy Veinot, and Joyce Lam.
I will tell you more about our speakers a little later on. Before we get to our agenda,
a few housekeeping items. In the lower right hand corner of your screen, you will see the
webcast links including a link to download and print today’s slides and links for webcast
assistance, Deloitte updates, upcoming sessions, and archive sessions. If you have a pop-up
blocker on your computer, you will need to disengage it in order to download the slides
and participate in our polling questions. If you know of colleagues who could not attend
today’s live event, they can simply register at any time the same way you did and they
will be able to view the archived webcast within 48 hours. So, invite your colleagues
to take advantage of this feature. Although you are on a listen-only mode, you can ask
our presenters content related questions at any time by entering your question in the
box at the bottom of the screen and clicking on submit. We will do our best to respond
to your questions and comments during the presentation. We also have interactive polling
questions that will appear on your screen throughout the webcast. We invite your participation
by simply answering these questions. A summary of the results will be provided on the screen
shortly afterwards. Okay, let us get to our agenda. First you
will hear from Maryse Vendette, who will provide us with an introduction to the new standard
and to speak to a scope. As well Maryse will begin walking us through the steps of new
revenue model. After Maryse, Joyce Lam will continue to walk us through the remaining
steps of the new revenue model, will then be joined by Cindy Veinot, who provide us
with some guidance and some of the other matters related to the standard and to speak to some
of the expected impacts, challenges and issues. We will conclude by highlighting some resources
for future reference and with a brief question and answer session. You can read the bios
of our presenters and access the agenda and technical support in the navigation area of
your screen. We have a lot of material for a 90-minute webcast, so we will need to keep
the discussion at a fairly high level. I would like to remind our viewers that our comments
on this webcast represent our own personal views and do not constitute official interpretive
accounting guidance from Deloitte. Before taking any action on any of these issues,
it is always a good idea to check with a qualified advisor.
Okay, to kick things off, let us start with our first polling question. We are going to
ask everyone online to participate in this webcast by answering the polling question.
Can we have the question please, there we go.
Okay, so the question is, have you started assessing the impact of IFRS 15 - Revenue
from Contracts with Customers and the answers are:
• Project plan is in place • Aware of the new Standard and will start
assessment in the near term • No plan to commence work at this time
• Not applicable After you select your answer, which is the
best in your circumstances, please remember to hit submit answer to register your response.
While we are waiting for the responses, I would like to remind you that today’s webcast
maybe counted towards your continuing professional education. If you stay with us for the whole
webcast, you can credit yourself with one-and-a-half hours towards your yearly total. This applies
to those in public practice and those working in industry. We do not issue certificates
for the webcast, but your email registration confirmation conform part of your documentation
in support of your attendance. Okay, let us see if we have the responses
please. There we go. Okay almost 45% are going to start their assessment in the near term
and 11.7% have a project plan in place, that is a very healthy percentage of folks online
who are either already started or near starting. As you will hear on this webcast, the new
standard can have significant impact on both the accounting and on the information requirements.
Okay, I would now like to welcome our first two speakers, Maryse Vendette and Joyce Lam.
Maryse Vendette is a Partner at our National Office and is a co-deputy leader of the Canadian
IFRS Centre of Excellence. She is the National subject matter authority in the field of revenue
recognition as well as a member of Deloitte’s Global Expert Advisory panel on revenue. Joyce
Lam is a Senior Manager in the Advisory Services Group of Deloitte and specializes in providing
accounting advisory services to clients in all industries. Joyce has extensive experience
in assisting clients on accounting matters in the areas of revenue recognition, business
combinations and share-based payments under IFRS and US GAAP.
Over to you Maryse.
Thanks Jon. Good afternoon, I guess good morning for some of you across the country. Let us
start with some background information on IFRS 15. We received what I would refer to
exciting news in the accounting world on May 28, 2014, when IFRS 15 was finally issued.
It was issued concurrently with Accounting Standards Update ASU 2014-09 it is US GAAP
equivalent. The issuance of IFRS 15 completes a long-standing project that began back in
2002 between the IASB and the FASB to develop a high quality global accounting standard.
For all intents and purposes, IFRS 15 and US GAAP are converged. There are minor differences
between the two standards and those have been identified in an appendix to the standard
in the basis for conclusions. This standard addresses how to account for all contracts
of customers using one model of accounting that will apply to all types of transactions
in all industries in capital markets. Currently, we have diverse pieces of guidance under IFRS
over some 200 pieces of literature dealing with specific transactions or industries under
US GAAP. This new standard will replace all or most of that by one model. We will have
to wait and see how it is interpreted how it is interpreted and implemented, but the
objective is that the new standard will increase comparability, reduce diversity in accounting
for similar transactions across industries. We wanted to highlight that the IASB and FASB
have created a joint Transition Resource Group. So, the members of the resource group have
been announced and they include financial statement preparers, auditors, users, obviously
the boards and members of the regulator community, people in various industries and geographic
locations. The purpose of the Transition Resource Group is not to issue guidance, but is really
to solicit, analyze and discuss issues arising from implementation, inform the boards about
the issues that are being dealt with so that the boards can take decisions about actions
that need to be taken, provide a form for stakeholders to learn about the new standard.
The boards expect that the Transition Resource Group will meet twice in 2014 and four times
in 2015 and the first meeting is scheduled July 18. All the meetings will be public and
anybody can submit a potential implementation issue for discussion at the Transition Resource
Group meetings. The boards will evaluate those submissions and prioritize the issues for
discussion. I realize that the text maybe a bit small on the slide, but we have here,
to the left of the screen, the requirements currently found in IFRS on revenue in the
main standards as well as in the interpretations and this contrasts with the new requirements
to the right of the screen. A couple of points to bring to your attention here.
The first one is as you see IFRS 15 has a
broad scope. It has guidance on a number of aspects that are now included in various pieces
of literature under IFRS. IFRS currently has guidance on construction contracts in IAS
11, sales of goods, sales of services under IAS 18, construction of real-estate under
IFRIC 15 and IFRS 15 will replace all of that and IFRS 15 will not distinguish explicitly
or does not distinguish explicitly between sales of goods or serves, but rather it provides
guidance on whether revenue should be recognized overtime similar to a service or long-term
construction contracts or revenue should be recognized at a particular point in time similar
to a sale of good and we will discuss that in more detail later on. IFRIC 13 is superseded
and replaced by broader guidance on options granted to customers to acquire additional
goods or services or at a discount and provides broad guidance on breakage, customer unexercised
rights. IFRIC 18 and 631 dealing with Transfers of Assets from Customer and Advertising Barter
Transactions are superseded and IFRS 15 includes guidance on how to deal with noncash consideration
and nonmonetary exchanges generally and finally where are previously IAS 18 contains specific
guidance on accounting for interest and dividends. These are now scoped out of IFRS 15 and dealt
with by IAS 39 and IFRS 9. Consequential amendments were made to those two standards to incorporate
guidance that was previously included in IAS 18 and its appendices.
Moving onto effective date and transition options. IFRS 15 is effective for annual reporting
periods beginning on or after January 1, 2017 including interim periods. For an entity with
a calendar year-end, it would apply IFRS 15 in the first interim period and on March 31,
2017, early application is permitted under IFRS 15, but it is not permitted under US
GAAP. The boards have provided a bit of relieve by way of transition methods. An entity can
choose between two transition options. So it can elect to either apply the standard
fully retrospectively or apply it retrospectively but taking into account three practical expedients
to retrospective application, which are identified obviously in standard and if any of the practical
expedients are used, they have to be applied consistently to all reporting periods. They
have to be disclosed to the extent that it is possible an entity will have to include
a qualitative assessment of the likely effect of applying the practical expedients or an
entity can also choose to apply the standard using a modified approach, so that means that
it would apply the revenue standard retrospectively, but only to contracts that are not completed
as of the date of initial application of the standard so that is again January 1, 2017
and it would recognize a cumulative catch-up adjustment to retained earnings as of that
date without restating comparative figures. The use of the modified approach may reduce
the cost and complexity of adopting the standard because there is no need to make an assessment
of contract completed prior to the year of adoption, but it also has its drawbacks and
that some revenue will not be presented in profit and loss, but instead would be included
in the beginning retained earnings as a cumulative catch-up adjustment and obviously some parallel
accounting will be required in 2017 to be able to disclose the information that is required
by the standard.
The following slide provides a tabular example that is intended to illustrate visually the
two transition methods. Under the full retrospective approach, it is clear from here that for new
contracts and existing contracts you have to apply IFRS 15 in the current year, but
also in the prior that is presented and also to produce our opening balance sheet that
would be required under IAS 1 when you apply a new standard. Under the modified approach,
the standard would be applied to any new contracts entered into on or after the initial application
date of January 1, 2017 for a calendar year-end example.
An entity would also need to evaluate those
contracts that are not complete at the date of initial application using the new revenue
model and determine the cumulative catch-up adjustment to be recorded to beginning retained
earnings and finally any contracts completed prior to the year of adoption would not need
to be re-evaluated or accounted for under the modified approach, that means that revenue
from these contracts recognized in prior periods presented would not be restated under this
approach. If an entity decides to employ this modified transition approach, it is required
to provide some additional disclosures, of course, to show to users how they transition
from the legacy guidance to IFRS 15. The first of which is to present the financial statement
line items and the related amounts that are affected in the current year in 2017 because
of the application of the standard and second a description of significant changes between
the new standard and the legacy guidance.
As mentioned previously, IFRS 15 has a broad and all-encompassing scope. It applies to
contracts with customers except those that are within the scope of other IFRSs. It is
important to understand how IFRS 15 defines a contract and defines a customer. Under IFRS
15, a contract is defined as an agreement between two or more parties that creates enforceable
rights and obligations and a customer is defined as a party that has contracted with an entity
to obtain goods or services that are an output of the entity’s ordinary activities in exchange
for consideration. IFRS 15 includes in its scope transfers of assets that are not an
output of the entity’s ordinary activities. For instance, transfers of sales of property,
plant and equipment, real-estate or intangible assets would be within the scope of certain
aspects of the IFRS 15 model. Specifically, the criteria for determining the existence
of a contract, measurement and control principles would apply to these transfers or sales of
non-financial assets to determine when and for what amount the asset should be derecognized.
With respect to contracts with collaborators or partners, during the re-deliberations,
the boards acknowledge that parties to collaborative arrangements, which are common in certain
industries such as in the pharmaceutical industry or biotechnology industry could represent
customers and that therefore certain collaborative arrangements would be within the scope of
IFRS 15. To determine whether a transaction or a collaboration arrangement is in or out
of scope of IFRS 15, an entity would consider the structure and purpose of the arrangement
to determine whether the transaction is for the sale of goods and services as part of
the entity’s normal business activities and whether the counterparty represents a
customer and if that is the case then the collaborative arrangement would fall within
its scope. The revenue model does not apply to contracts within the scope of other IFRSs,
so IAS 17 contracts those within the scope of IFRS 4 for insurance contracts, those within
the scope of financial instruments and other contractual rights or obligations, which would
be in the scope of IFRS 9, IFRS 10, IFRS 11 for instance and finally nonmonetary exchanges
between entities in the same line of business whose purpose is to facilitate self to customers.
On this one, I believe this requirement is a bit different from the scope exception currently
found in IAS 18, which would exclude non-monetary exchanges of goods and services that are of
a similar nature and value. There could potentially be differences there in terms of accounting
for non-monetary exchanges to watch out for.
Moving on the core principle of IFRS 15 that you see highlighted here at the top of the
screen is to recognize revenue to depict the transfer so the transfer of control of goods
or services in an amount that an entity expects to be entitled to. The word expects seems
to bring in some element of potential variability and we will touch up on that a bit later.
There is a five-step approach to applying this principle, which is not too unfamiliar
in terms of an approach and we name all these steps here, but we will cover those in turn
in more detail. 1. Identify the contract.
2. Identify the performance obligations in that similar to separating a multiple element
arrangement into different units of account. 3. Determine the transaction price so that
would be the amount the entity expects to be entitled to under the contract.
4. Allocate the transaction price amongst the performance obligations identified.
5. Recognize revenue when or as performance obligations are satisfied, so that is when
control of the goods and services is transferred to the customer.
Note that this is not exactly how the standard itself is laid out. It is not necessarily
laid out sequentially in terms of steps. It deals with recognition first, so steps 1,
2, and 5 and then measurement pieces that is step 3 and 4 and then presentation disclosure
and effective date. We have highlighted that for you on the slide. It is also important
to point out that this revenue recognition model is based on a control approach and that
differs from the risks and rewards approach that you are still applying under current
IFRS. The boards decided that an entity should assess the transfer of good or service by
considering when a customer obtains control of that good or service as opposed to when
the supplier gets that control or when the risks and rewards have been transferred.
Okay, now that we have gone through scope, transition, effective date and the overall
model, let us get started with the first step in applying the model, which is to identify
the contract with customer. This is basically identifying the unit of the account to which
the IFRS 15 analysis will apply. We mentioned previously that a contract creates a legally
enforceable rights and obligations. A legally enforceable contract would only be deemed
to exist if the criteria on the slide here are all met.
1. The parties to the contract have approved the contract that can be in writing, orally
or in accordance with customer business practices and the parties are committed to perform under
the contract. 2. The entity can identify the payment terms
for the goods and service. 3. The entity can identify each party’s
rights. 4. The contract has commercial substance in
the sense that future cash flows are expected to change because of the contract.
5. Finally, it is probable, which means more likely than not under IFRS that the entity
will collect the consideration to which it is entitled in exchange for the goods and
services. This collectability threshold is assessing
the customer’s credit risk and you may recall that in the exposure draft, there was no collectability
threshold. In this final standard, they reintroduced the collectability threshold of probable.
It is also important to note that there is a difference between consideration from a
customer not being collectible and the entity offering a concession to a customer and the
standard goes into some discussion about that and we will provide an example of that later.
If the arrangement fails to meet these criteria that we have just gone through for identifying
a contract, the entity will have to reassess every reporting period whether it subsequently
meets this criteria. However, an entity would not be able to recognize revenue from a contract
as serves this step until either it reassesses its collectability and concludes it becomes
probable and/or the amounts received are non-refundable and either the entity has satisfied all its
performance obligations and all the consideration has been received and it is not refundable
and the contract has been terminated or canceled and whatever consideration has been received
is non-refundable. As well as the final point on this step, IFRS
15 also includes guidance under step 1 and how to determine whether contracts need to
be combined when they are entered into at or near the same time with the same customer
and also deals with some questions about contract modifications and we will discuss that a bit
later as well.
Step 2, identifying the performance obligations. This is basically identifying that deliverables
are identified, the elements of the arrangement that maybe terms that you are more used to.
What is a performance obligation under IFRS 15? It is a promise to transfer to the customer
a good or service or a bundle of goods or services that is distinct. The first thing
to do is to identify all the promised goods and services in the contract. IFRS 15 provides
a list of typical promises you may find in a contract, but this list is not all-inclusive.
These promises in a contract can be explicit or they can be implicit, meaning that they
are implied by customary business practices, published policies or specific statements
that create valid expectations on the part of the customer that they will receive those
goods and services. An example of that maybe a practice of offering a free one-year maintenance
with a sale of a product. The second thing you need to do is to determine whether the
promised goods and services that you have identified are distinct from other goods and
services in the contract and there is two criteria that have to be met to conclude that
they are distinct. The first one to the left of the screen there in the light blue box
is, is the good or service capable of being distinct. Basically, the question is can the
customer benefit from the good or service on its own or together with other readily
available resources? So that is similar to the standalone value that we may be familiar
with and we do not necessarily expect change in practice in this regard.
The second criteria is, is a good or service distinct in the context of the contract? Is
the good or service separately identifiable from the other promised goods and services
in the contract and that is a new requirement that goes over and above the standalone value
test. IFRS 15 sets out a number of factors to consider in making that determination and
we expect a lot of discussion around this application of the second criteria, which
could lead to more combining of promises than it is currently the case. If the good and
service is deemed to be distinct than you would account for as a performance obligation.
If not than you would have to combine two or more promised goods and services and re-evaluate
what is the lower level that you can find that is distinct within the arrangement.
Final point on this that I would like to make here is IFRS 15 also identifies that it is
possible that you have a promise to transfer to a customer a series of distinct goods or
services that are substantially the same and have the same pattern of transfer to the customer
and the guidance explains what is meant by that exactly and they say that in that case
if you meet this criteria then you should account for the series of distinct goods and
services as a single performance obligation. An example of that is contract by a payroll
provider to provide weekly payroll services over a 12-month period. One might conclude
this is really 12 months of different services or 365 days of services, but in this case
IFRS 15 would lead you to a conclusion that is only one performance obligation. The contract
includes one because the entity is providing a series of distinct services that are substantially
the same and have the same pattern of transfer throughout the year. Let us know look at an
example, here we have an example of how step 2 might apply to a specific fact pattern,
so the facts are working with an entity’s manufacturer enters into a contract to sell
a customer a printer and a ink cartridge that is shipped two weeks later. The printer cannot
work without the ink cartridge, but both the printer manufacturer and the sellers of generic
ink cartridges sell ink cartridges for the printer separately. The question is, are these
performance obligations? The entity here would identify two promises, the printer and the
cartridge and two performance obligations in this fact pattern.
Both the printer and the cartridge represent distinct goods because first of all it is
clear that the customer can benefit from the good on its own or together with other resources
that are readily available to the customer and secondly the entity’s promise to transfer
the good or service to the customer is separately identifiable from other promises in the contract.
The customer does not need to buy the cartridge or the printer from the entity in order to
use the other good. There is a point of caution here though this conclusion is based on our
current understanding of the IASB’s intention for interpreting this requirement. However,
there is some debate among preparers, users and auditors as to whether in this case the
two products are separable in the context of the contract because of the notion of are
the goods and services highly dependent or are they highly interrelated. So, we expect
further discussion on this issue and it may actually be an issue that will be raised at
an upcoming Transition Resource Group meeting later this year. So that is all from me for
step 2. I think I will hand it over to Joyce to go through the next steps in the model.
Thanks Maryse. The third step of the revenue model is to determine the transaction price.
Under IFRS 15, transaction price is defined as the amount of consideration to which an
entity expects to be entitled in exchange for transferring promised goods or services
to the customer. In determining the transaction price companies will need to consider the
amount of fixed consideration, variable consideration as well as any non-cash consideration in the
contract. An example of non-cash consideration can be shares of the customer common stock.
Under the new standard, we are required to adjust the transaction price to exclude the
fact of time value of money if there is a significant financing component embedded in
the contract price. Also the transaction price should be adjusted for any consideration payable
to the vendor, to the customers. This last requirement to adjust a transaction price
by consideration payable to the customers is essentially the same as what we are used
under EIC 156 under the old Canadian GAAP. We should also note that in determining the
transaction price, we do not adjust for the effect of customer credit risk. As Maryse
has mentioned and also you may recall, back in 2010 exposure draft it was proposed that
the transaction price be measured based on the amount that the entity expects to receive,
which effectively requires the entity to reflect the customer’s credit risk in measurement
of the transaction price; however, because nearly all respondents expressed concerns
about applying that concept, the boards decided to not adopt that proposal. The boards later
came up with another proposal in 2011, but proposing to have the fact of the credit risk
presented as an adjacent item to the revenue line in the statement of earnings, which they
have also later abandoned that proposal. One of the main concern is that they were concerned
company may be grossing up the revenue balance with an offsetting impairment loss. In the
new standard, the boards ultimately decided that they would include the consideration
of collectability in step 1 of the revenue model and the reason for including that in
step 1 essentially provides a critical consideration point in determining whether or not the contract
is valid.
What constitutes variable considerable? Variable consideration is any consideration that is
subject to uncertainty other than collectability. For example, discounts, rebates, sales credits,
sales incentives, performance bonuses or price concessions. When the transaction price is
variable, the standard requires the entity to estimate the variable consideration using
one of two methods, the expected value method or the most likely amount method. The expected
value method is calculated using the probability weighted method, which is appropriate when
the entity has a large number of contracts with similar characteristics. The most likely
amount method is appropriate when the contract only has two possible outcomes. For example,
the entity is entitled to a performance bonus only if it achieves a specified outcome. However,
if there is a high probability that a subsequent change in the variable consideration estimate
will lead to a significant revenue reversal, the variable consideration should be excluded
from the determination of transaction price. In assessing the likelihood and the magnitude
of a potential revenue reversal, company should consider the following factors: Whether the
consideration is highly susceptible to factors outside the company’s control or influence.
For example, for an asset management company, usually they will have a portion of the fee
earned on the investment portfolio based on the performance at a certain point in time,
which in their case there may be a lot of factors effecting the value or the performance
of investment portfolio and those factors are typically outside of the control of the
asset management company.
We also need to look at whether or not there is any uncertainty relating to the amount
of consideration and whether or not that uncertainty will take a long time to resolve. As you may
expect, the longer the time it takes to resolve the uncertainties around the variable consideration,
the higher the likelihood that those estimate is going to change. Also we should consider
whether or not the entity has limited experience with similar contract and therefore limiting
their ability to estimate variable consideration. Also if the entity has a significant historical
experience in offering a broad range of price concessions or made significant changes to
the payment terms of the contracts as well as any relevant provisions, it will also increase
the likelihood of changes in the future.
The last indicator is whether or not the contract itself contains a large number and a wide
range of possible consideration amounts. If any of these factors exist, it is an indicator
that there is a high probability that a significant revenue reversal will occur and that the entity
should not include the variable consideration in the determination of transaction price.
Let us go through an example to illustrate the point. In this example, the entity sells
a prescription drug for a $1 million payable in 90 days to a customer located in a country
that is experiencing economic difficulty. At the time when the contract was entered
into, the entity determines that there is a significant risk that the customer will
accept the product and also there is a high probability that the customer will ask for
a price reduction, which is a customary business practice in that country. The entity estimates
that the parties will ultimately settle on a price of $400,000, which the entity is willing
to accept as it will still make a profit at that price. The entity also assesses that
it is probable that it will collect the $400,000. In this example:
• Is the transaction price variable? • Does this contract meet the criteria laid
out in step 1 of the revenue model? With respect to the first question, the transaction
price contains a variable consideration component because both the customer and the entity expects
to ultimately settle at $400,000, which is, in fact, means the entity expects to offer
a price concession of $600,000. The transaction price is variable.
In terms of whether the criteria in step 1 are met?
• You can see on the slide that we have concluded all criteria are met. Based on the
case facts, both parties have approved the contract and are committed to perform under
the contract. The entity has transferred the drug and expects the customer to pay a portion
of the contract price. • The entity believes that it is probable
that it will collect, however expects to offer a price concession based on the expected amount
to collect. • The contract has commercial substance.
• The entity has identified each party’s rights regarding the prescription drug.
• The payment terms is also identified in the contract.
The important point that we want to highlight in here is that the entity has adjusted the
transaction price for the estimated price concession and not for the customer credit
risk. Also, the criteria relating to collectability is assessed based on the amount that the entity
expected to be entitled to, which in this case is the amount after the adjustment for
the price concession and because this is probable that the entity will collect the $400,000
transaction price, therefore collectability criterion along with the other criteria in
the step 1 are met. The reason that we address the criteria in the step 1 in this example
is to reiterate that the consideration of collectability should be based on the entity’s
transaction price after adjusting for any variable consideration and not necessary based
on the contractual price. If the assessment is based on the collectability of the contractual
price, the entity would not meet the collectability criteria in step 1 of the revenue model.
Let us move on to step 4 of the revenue model allocating transaction price model. Under
the IFRS 15, transaction price will be allocated to the different performance obligations identified
in step 2 based on the relative stand-alone selling prices. If the stand-alone selling
price are not observable either because this is a new product or a new service or the entity
has never sold those products or service on the stand-alone basis, the entity is required
to estimate the stand-alone selling price. To estimate stand-alone selling price, there
are a few acceptable methods under the standard. The expected cost-plus margin method, which
we are all familiar with. The adjusted market assessment method, which is estimated by reference
to prices of similar goods or services in the market and adjusted for the entity specific
cost and margins or the residual method. Note that the residual method is expected to be
used if the price is highly variable or uncertain. In situations where the transaction price
changes from the initial allocation, for example due to change in estimate of variable consideration,
the changes should be allocated to the performance obligations based on the relative selling
prices unless the change in the transaction price related entirely to one or more, but
not all of the performance obligations. Also the initial allocation of transaction price
does not need to be adjusted if the stand-alone selling prices of those performance obligations
change in subsequent periods. This concept is the same as the current practice.
The Standard also provides guidance for situations where it would be appropriate to allocate
the discount or any other variable consideration to one or more, but not all of the performance
obligations. For example, in transactions where the entity sells the customers three
different products, product A, B and C for $430. The entity sells each of those products
on a stand-alone basis and has a stand-alone selling price for each of them at $50 each.
In this transaction, the sum of the stand-alone prices equals to $150. Comparing to the $130
transaction contract price, there is a discount of $20 in this arrangement. The entity also
sells product B and C in a bundle on a stand-alone basis and also usually thrice the bundle at
$80. The bundle itself contains a discount of $20. In this case, because the discount
that typically offered for the bundle of product B and C is equal to the discount being offered
in the current transaction, the entity would under IFRS 15 allocate the entire $20 discount
to product B and C only.
Once the transaction price is allocated, the entity will have to determine when to recognize
revenue for each performance obligation. Note that there is only one single model for recognizing
revenue for goods and services. The new standard does not distinguish recognition of revenue
for goods or for services. Under IFRS 15, revenue is recognized when control of the
good or service is transferred to the customer, sounds simple. There are actually many situations
where it is not clear as to when control is transferred particularly when the arrangements
involve construction of an asset or rendering of services over a period of time. The standard
does provide some indicators to help companies in their determination of whether performance
obligation is satisfied over time or at a point in time. It is considered that the entity
satisfies a performance obligation over time if one of the following indicators exist:
1. The first indicator is that the customer receives and consumes the benefit as the entity
performs. An example of such contract is when an entity provides cleaning service to a customer
where the customer is simultaneously receiving and consuming the benefit of the cleaning
service as the entity renders the service. 2. The second indicator is that the entity’s
performance actually creates or enhances an asset that is controlled by the customer.
An example is a home addition contract, where the entity is contracted by the customer to
renovate the customer’s house. 3. The last indicator is the situations where
performance by the entity does not create an asset that has alternative use meaning
there is limitation as to the entity’s ability to use the asset created for another customer
or redirect the asset without having to incur significant cost and that the entity has an
enforceable right to payments for performance completed to date and expects to fulfill contract
as promised. The amount that the entity is entitled at any point in time during the term
of the contract should approximate the selling price for the asset created or partially created.
We will illustrate this point in an example in the later slide. When the performance obligation
is considered to be satisfied over time, the entity would recognize revenue based on the
progress towards completion, which the progress can be measured using either the input or
output method. On the other hand, if the performance obligation is not considered to be satisfied
over time, revenue should be recognized at a point in time, which is at the time when
control of the asset is transferred to the customer.
The determination as to when control of the asset has been transferred can be made based
on the following indicators: • When the entity has a present right to
the payment for the asset • When the customer has legal title to the
asset When the entity has transferred physical possession
of the asset, when the customer has significant risks and rewards of ownership of the asset
or when the customer has accepted the asset. To illustrate whether revenue should be recognized
at a point in time or over time. Let us walk through an example.
A manufacturer enters into a contract with a customer to produce 52,000 units of a customized
part, which cannot be sold to any customer without substantial rework. The entity expects
to produce and ship 1000 units per week. Under the contract, if the customer cancels the
arrangement for reasons other than entity’s failure to perform. The customers require
to pay the entity and amount equal to cost plus a reasonable margin for each unit produced
or partially produced, but not yet delivered. So, should the entity recognize revenue at
a point in time or over time? To help make this assessment, we should ask ourselves two
questions. 1. Does the product have an alternative use?
2. Does the entity have an enforceable right to payment?
For the first question, because the parts produced or customized and cannot be sold
to other customer without substantial rework, these products deemed to not have alternative
use.
Regarding the second question, as agreed in the contract, the customers require to pay
the entity an amount equals to cost plus a reasonable margin for each unit produced or
partially produced, but not yet delivered if the customer cancels the contract. As such,
the entity has an enforceable right to be reimbursed for each unit produced or partially
produced even if the product has not been delivered to the entity prior to its cancelation.
Therefore, in this example, our conclusion is that the entity will recognize revenue
over time on the basis that the asset produced does not have an alternative use and that
the entity has an enforceable right to payment that approximates the selling price of the
goods produced to date. What if we change the fact of the previous example and stated
that their contract terms require the customer to pay the entity an amount equal to just
the cost for each product or each unit produced or partially produced. Should the manufacturer
recognize revenue over time or at the point in time? With this change, the entity does
not have an enforceable right to payment that approximates the selling price of the goods
transferred to date. It does not meet the criteria to recognize revenue over time. Therefore,
revenue would be recognized at a point in time. The entity would recognize revenue when
control of the product is transferred to the customer. To make this assessment, the five
indicators laid out on this slide should be considered and determining at what point has
control been transferred to the customer. Whether or not it would be at the time when
the entity has present right to payment for the asset or when the customer has the legal
title to the asset. When the entity transferred the physical possession of the asset, when
the customer has the significant risk and worth of ownership of the asset or when the
customer has accepted the asset. Now, I am going to turn it back to Jon for
a second polling question. Thank you very much Joyce and thank you Maryse and let us
move onto our second polling question. What step of the revenue model do you think
will have the most significant impact on your organization?
Identifying the performance obligations, determining the transaction price, allocating the transaction
price to the performance obligations and the contract or determining when to recognize
revenue? Once you select your answer, remember to click on submit answer to register it.
While we are waiting for the boats to come in, I have a question here for Maryse and
it deals with the scope of IFRS 15. The question is how about those contracts that are only
partly in scope. For example, leases, financial instruments and similar kind of subject areas.
How will these fit under IFRS 15? Sure Jon. That is a good question. As you
mentioned, a contract with the customer maybe partly within the scope of IFRS 15 and partly
within the scope of another standard and the examples you gave are good examples, so leases
could be one of them. So, you could have lease with the service element or you could have
even in maybe an investment banking situation where you have a mini-deal, you could have
an investment banker that enters into some type of financing arrangement, but also has
other services like M&A services. So, the idea is that if the other standard that applies
specifies how to separate or initially measure any parts of contract while the entity first
applies those separation and/or measurement requirement so that other standard takes precedence
over IFRS 15. If the other standard is quiet on that topic, so it does not specify how
to separate or initially measure any parts of the contract, then entity would apply the
recurrence of IFRS 15 to separate and initially measure those parts and consideration based
on a relative stand-alone selling price method. I hope that answers the question Jon. It certainly
does. Thank you very much.
Okay. Let us see if we can get our results of polling question #2 up there. I finally
guess, which will be the most popular one, but as 41% is determining when to recognize
revenues, people views are the most challenging with the third saying allocating the transaction
price of the performance obligations and the contract. Eileen this is going to depend very
much on the nature and complexity of our particular business, exciting, it might actually vary.
Okay. I will now welcome our next speaker Cindy Veinot. Cindy Veinot is a Partner in
Toronto and has over 20 years of public accounting experience with Deloitte in both Toronto and
the United States. She has worked with clients on revenue recognition issues under multiple
different accounting frameworks over the last 15 years, has currently focused on working
with clients and assessing the impact of the new revenue recognition standard. Over to
you Cindy. Thanks Jon. Okay, now that we walked through model. Let
us talk about aspects of the standard that provide new or more specific items of the
number of areas. First area that we have selected to focus on is contract modifications. Modifications
to contracts have been rarely in some industries, but actually happen quite regularly and others.
So, think about your own cellphone contract, maybe of added features to it. You are now
data sharing with someone. You have added some additional bells and whistles. There
were modifications there or you can think about a home renovation or a major construction
contract for a highway or a new manufacturing plan where there can be numerous change orders
and a standard has specific guidance to deal with the accounting for modifications. Depending
on the nature of the medication, the impact can be to treat the modification prospectively
or to record accumulative ketch up in revenue. So, started the top of the slide, when you
have a modification, you need to determine whether the additional goods or services are
distinct, so that is for Maryse talked about in step 2 and whether they been priced at
their stand-alone selling price. So, Joyce touched on that a little bit in terms allocating
the transaction price. If both of these conditions are met, then the new performance obligations
and the transaction price associated with them are accounted for as a separate contract,
but if that is not case, then the contract modification is accounted for on a combined
basis with the original contract, but the impact on that accounting still depends on
whether goods and services in the modification are distinct. If they are, we are on the far
left at the bottom of the slide. There is no impact on revenue already recognized, but
the remaining performance obligations are allocated revenue based on the remaining revenue
not yet recognized under the original contract and the revenue from the modification. We
will go through an example of this. If the goods and services are not distinct,
which maybe the scenario in the case of a change order for a construction project where
there may just be a single performance obligation, they have to look at the modified contract
in its entirety and determine if there was a cumulative catch up at the date of modification
regarding the amount of revenue already recognized. Based on applying either an input method or
an output method or whatever the appropriate model is as Joyce touched on. Finally, down
there on the right hand bottom side, you could have a combination of these two types of modifications
and you have to apply judgment to account for modification in a way that is consistent
with the principles that we just discussed. So, let us walk through an example.
In this case, we have an entity that enters
into a three-year contract to provide daily cleaning services. The customer pays the stand-alone
selling price of $100,000 at the beginning of each year. So, at $300,000 contract in
total. At the end of the second year, the contract is modified and the fee for the third
year of services is reduced to $80,000 plus an additional $200,000 to extend the contract
for three additional years. The stand-alone selling price of the services at the beginning
of the third year is $80,000 per year and the entity stand-alone selling price multiplied
by the number of years is deemed to be an appropriate estimate of the stand-alone selling
price of the multiyear contract. So, in other words, if you take the stand-alone selling
price for four years, which is four times $80,000 that stand-alone selling price would
be $320,000. So, in terms of determining how to account for this modification, there are
two steps. First, are the services in the modification district and second is the additional
consideration reflective of the stand-alone selling price of the services. So, when I
start looking at the chart on the top right corner of the slide and so in the first column
of that chart we have got all the years, so now it is a 60-year contract after the modification
was three years to begin with and an additional three years were added. In the middle column,
we have got the initial amount of revenue that was agreed to buy the party, which was
$100,000 in each year of the first three years. Then, in the last column, we have got the
modified amount, so as we noted on the previous slide, at the end of year 2, the price for
year 3 was reduced to $80,000 and there was an extension to the contract for three additional
years at $200,000 now. Let us go back to the questions now.
First are the services distinct. We would say yes. Daily cleaning services
that is something that customer can benefit on its own and it would be separately identifiable
on the contract. The second question is, is the additional consideration reflective of
the stand-alone selling price of the services. In this case, we would say no because the
amount of the additional consideration or the remaining consideration to be paid is
$280,000, $80,000 for this third year and $200,000 extension, and this does not reflect
the stand-alone selling price if the services to be provided. So, in this case, it does
not meet the requirement to account for as a separate contract and you have to account
for this as a termination of the original contract and the creation of a new contract
with the consideration of $280,000, which is $80,000 left from the third year and $200,000
for the remaining new three years, to recognize the over the four remaining years of cleaning
services or $70,000 per year. The closing thought on modifications is there is now a
lot of detail guidance, so it is going to take some work to ensure that the processes
and controls are in place to monitor them and then determine what the appropriate accounting
should be? Next we are going to talk about licenses.
The main point here is that a license depending on its attributes can be accounted for in
one of two ways. It can be accounted for as a performance obligation that the entity satisfies
at a point in time or it can be an obligation at the entity satisfies over time. So, Joyce
touched on those two different models of recognizing revenue and depending on the circumstances,
both can apply when you are talking about licenses. The first step is to consider whether
the license is distinct or included in a bundle of goods, so back to step 2. So, an example
that you might think about as I walked through the rest of the slide is a software license
and in the software industry, often an entity also sells maintenance contract, which provides
the customer with one of available upgrades. So, the license is evaluated as distinct from
the maintenance contract and is only the initial license that we are talking about in terms
of making this next assessment. The key question is what is the nature of the entity’s promise?
They have a right to access the intellectual property of the company throughout the license
term or just to use the intellectual property as it exists when the license is granted.
A few consideration points that are noted there on the right hand side of the slide,
is there an explicit or implicit understanding that the entity will undertake activities
that significantly affect the intellectual property due to rights granted by the license
expose the customer to any positive or negative effects to the activities result in a transfer
of a good or service to the customers if those activities occur. I would say there are some
very interesting examples in the standard that cover the licensing of intellectual properties
in various forms. So, I touched on software, which we just thought about the software license,
you might come to the conclusion that it would be satisfied at a point in time when you are
only thinking about the license like license to use Word or Excel or something like that
in this example, but there are also other examples that cover things like patterns for
drug compounds, franchise rates, images, music recording, movies, logos, so if you are in
the business of licensing intellectual property, I would certainly take a look at those examples,
because I think it is going to be a challenging determination in some cases to determine what
the appropriate model is. This next area might be a bit of a sleeper, but there actually
is guidance in IFRS 15 in terms of how to treat cost and those include cost to obtain
a contract and cost to fulfil a contract. With respect to cost to obtain a contract
either capitalized if they are incremental and expected to be recovered. So, the most
frequent example of these types of cost are sales commissions. There is a practical experience
in the standard where if you expect that you would amortize the cost over one year or less,
you do not have to capitalize it. Then, we have got cost that are encouraged to fulfil
a contract and these costs are accounted in accordance with other standards to the extent
that they are within the scope of another standard, so inventory or property, plant,
and equipment would be accounted for under their respective IFRS’s, but if they are
not within the scope of another standard, then this guidance applies and this guidance
requires an entity to capitalize the cost of fulfil a contract if they relate directly
to a contract or anticipated contract, if they generate or enhance a resource that will
be used to satisfy obligations in the future and if they are expected to be recovered.
There are specific exclusions in the standard for types of costs cannot be capitalized,
so things like general administrative cost, waste of materials, there are a number of
things to think about, like cost to obtain a contract once capitalized. These costs are
amortized on a basis consistent with the transfer of the goods or services. In addition to standard
does include guidance on assessing these costs for impairment and then potentially reversing
the impairment charge if the circumstances change. This slide includes mattering of other
matters, so just things we wanted to bring to your attention in terms of guidance being
in the standard. I am going to talk about them, starting at the top left and going clockwise.
So, product warranties. There is guidance in the standard on accounting required for
standard, assurance, warranties, so the type of warranty you would get if you bought a
product and it basically has a warranty that says we will perform based on the status for
a year and if it does not recover by warranty. Those types of warranties will continue to
be accounted for using a cost accrual method, but there are other types of warranties like
extended warranties or things that are called warranties, but they are more extended service
contracts and those will be accounted for as separate performance obligations. Moving
on to the box on the top right, we will talk about options to acquire goods or services.
This is the guidance in the standard that requires you to assess whether something in
the contract provides the customer with the right acquire future goods or services for
free or at a discount. So, this is where the guidance from IFRIC 13 fits into this new
standard regarding wealthy point programs. Now to the bottom right. Customers unexercised
rights, this is the concept that we refer to as breakage. So, a simple example is if
I sell a prepaid phone card and I sell thousands of these cards and I know from historical
experience that customers do not use up all of the reminisce, the question is when to
recognize revenue for those minutes that will never be used and the standard basically pointed
to evaluate the same criteria as Joyce talked about when looking at variable consideration
to determine if you can recognize that expected revenue as the delivered service or whether
you have to wait until it is remote that the customer is going to exercise at its rates.
Finally, the last box is repurchase agreement and so, if an entity has an obligation or
right repurchase the asset, then generally the customer has not obtained control over
the asset and therefore, you do not have a revenue contract to account for what you have
a least or financing arrangement. A final topic in the other matters section
I am going to touch on is disclosures. So, the disclosure requirements with respect to
revenue recognition have increased significantly. We have bucketed the disclosure requirements
into three different categories and the first is at the top, groups those are related to
disclosures with contracts customers. So, first step disaggregation of revenue.
This then requires more granular detail about revenue to be disclosed and to determine how
you actually go about that, you need to consider information presented about revenue and other
documents such as investor presentations and also consider how the chief operating decision
maker looks at the information. The disaggregation could be by type of service, by geography,
by type of customer, by contract duration. It really depends on how the contracts are
impacted by economic factors. With respect to contract balances, there is required disclosure
for what is sitting on your balance sheets, so receivables, contract assets, contract
liability balances if they are not already separately presented. As long as what I would
refer to as information about transactions that stand over multiple periods. So, for
example, there is a requirement disclosed, revenue recognized in the current period,
that was included as a contract liability at the beginning of the period. There is also
requirement to disclose revenue recognized in the period from performance obligations
that were satisfied in prior period. So, if you think of the variable consideration that
Joyce is talking about, you could be constrained and recognizing that until the uncertainties
resolved, but the performance obligation could have been recognized long ago, so this standard
is requiring you to provide disclosure with respect to that. There are also several required
disclosure about performance obligations including what remained at standing at the end of the
period and when the entity expected to recognize that revenue as long as general information
and the entity satisfies performance obligations. You might typically satisfy performance obligation
upon statement of good or upon delivery. Also, information about significant payment terms
as well as other items such as types of warranties. Then looking at the bottom row, there is disclosure
quite a bit significant judgments including those related to timing of recognition of
revenue as well as transaction price and its allocation. Finally, there is required disclosure
about policy decisions, for example if you utilize any of the practical experience as
an example that when I touched on in terms of not having to capitalize costs of obtaining
a contract of the amortization period would be less than one year. We have to disclose
information about the contract cost themselves whether they be cost to obtain a contract
or cost to fulfil a contract including both closing balance information by category of
asset as well as methods and amounts of amortization and that is a number of examples with respect
to disclosure, I would just say that there are many many more, so I think it is an area
to start thinking about early. Even if you do not think, you are going to have that many
impacts from the standard in terms of timing or measurement, I think you will impacts from
disclosure. Jon, I will turn it back to you. Okay. Thanks Cindy and we will pause there
for another polling question. Do you believe the new standard will require
significant changes to current IT systems and processes?
Potential answers are; 1. Yes.
2. No. 3. Not assessed at this time.
4. Not applicable. Remember to click on submit answer. While
we are waiting for the polling question to accumulate the results, there is a question
here for you Cindy and it relates to contract cost.
What if I sell a bundle that includes a lost leader, though I still capitalize the cost
to fulfil related to the lost leader? Well. I would say that probably the first
thing you need to do is go through your allocation process in terms of allocating revenue to
your deliverables because if you have a lost leader, then I guess I would first question
in terms of how you are allocating fair value to your transaction, but then there are requirements
in the standard to consider impairment analysis for contract cost, so I think that would be
the second step of working through that analysis to determine whether you would have contract
cost to capitalize. Okay. Let us see if we got the results for
this third polling question. Well, 44% says that this is not yet assessed
and almost there is statistically insignificant difference between those who think that will
have an impact on IT systems and processes and those who do not. On this subject, Cindy
is going to now speak about some of the impacts on processes and systems. Okay, thanks Jon.
So, we walked through a lot of technical material over the last hour and a bit. We have never
going to spend some time on recapping and thinking about how to begin implementing the
impact of this new standard. Certainly, I think as Jon mentioned earlier given the diversity
and in terms of how organizations generate revenue and how they contract with their customers,
the impacts of adopting this new standard will be just as diverse, but on this slide
we have tried to highlight some of the significant impacts from the standard and I think step
1 from any organizations will be figuring out at a high level where the hot spots are
for your organization. So, for example, do you have contracts with
multiple performance obligations and there is a separation guidance in this standard,
going to change how you currently separate those obligations or is that going to change
how you allocate consideration to the performance obligations that you have identified? Do you
have contracts with variable consideration and how are you accounting for that variable
consideration today? In some cases, depending on the nature of the variable consideration,
the standard may require you to come up with an estimate and Joyce talked about the two
methods that exist either expected value are most likely amount and actually record that
or once you goes through all of those criteria that need to be taken into consideration in
terms of assessing whether you might have a significant revenue reversal, you may find
that you actually have to delay recognition of variable consideration as compared to what
you are doing now. I am just touched on contract costs and you may need to rethink what you
are doing there in terms of capitalization and if you have to capitalize those costs,
then you need to think about how you are going to amortize them and how you would assess
them for impairment and I think the guidance from my perspective on modifications and licenses
is fairly complicated, so if those are areas that impact your business, I would take a
good look at those new provisions and the examples. Finally, as I noted, earlier disclosures
really going to impact every organization that has material transactions within the
scope of the standard and I think for the most part that is going to be almost every
organization, certainly there will be a view that how all their contracts with customers
or revenue transactions within another standard, but most organizations are going to be hit
someway by this new standard and we often leave sorting out disclosure until after we
figured out the accounting, but because there are so many new disclosure requirements, I
will drive the need to collect data is probably something to make sure you touch on in terms
of doing your initial assessment. So, there are many ways to approach working
to the impact of a new standard like IFRS 15 and these are just some initial thoughts
on one approach, so, across the top of the slide, we got three different I would say
steps, so the assessment phase, business analysis phase and then implementation phase and then
just start down the column on the left hand side of all the various things that you would
want to be thinking about. Technical accounting, we probably will all have, but I think data
and systems definitely could be impacted and will be impacted for many organizations looking
at controls and then just program management and other things like taxes, communication,
training, all those things need to put in place, so during the assessment phase, you
might start that by, first of all going through a completeness check for scope to ensure you
have captured all the revenue that will be subject to the requirements of IFRS 15 and
then maybe taking a sample of contract or revenue streams and just walking them through
the standard to ensure that views identified all of the areas of potential change. I am
also at the good time to start identifying system impacts and once you have done that,
then I think you would be in a position to develop a preliminary project plan including
your communication requirements. In the second stage, I think you start to delve deeper and
start to develop policies and determine the adoption methods and restarts done earlier
in the presentation, about the different alternatives that are available and you might want to think
through what method you want to flexed because I think especially if you are doing full retrospective,
you might want to get started earlier rather than later and then figuring out the system
requirement. So, what rules the system is to recognize the revenue now and if your timing
and recognition changes, can your system actually accommodate that or what you need to do in
terms of building a bridge or doing something different in terms of ensuring that your system
is going to be able to handle these changes. I am thinking about impact on controls though,
again all these modifications as an example, do you have controls in place to capture modifications
and look at the impact of modifications because the accounting can be different depending
on the type of modification. I think this is the good time to also start evaluating
training requirements, update stakeholders and to consider any tax implications that
may result from the standard. Finally, implementation. By this time, you will be into preparing disclosures
ensuring that your auditor is up-to-date with all of the decisions you have made to date
and concurs with them certainly well into systems testing, rolling out training and
updating stakeholders, so, I think it is quite a process to go through and of course, we
need each of those steps. There are numerous other steps too to consider. Finally, we will
just touch on what we will call the broader impact, so on this slide, we have identified
a number of stakeholders down the left hand side that will be potentially interested and
understanding what the impact will be. So, you have got lenders, market, investors, employees,
the board and across the top, the different types of impact that actually could come into
place, though things like perception and understanding of analysts and broader market impacts. Certainly,
the markets will want to know if your revenue recognition model is going to change significantly.
Does it impact the availability of profits for distribution? Does it change key performance
indicators and other metrics that you might use to manage our business internally? If
you could just advance the slide. Are there things like potential noncompliance with loan
covenants? You are going to have new assets and liabilities on your balance sheet, you
are going to have potentially different timing in terms of revenue recognition, so how does
that impact the covenants that you may have in place and then finally last but not least,
if you have compensation and bonus plans in place that relate to financial performance
and financial performance is going to change, then those are things that you are also going
to want to look at in terms of thinking through what these impacts are, so I think once you
get started in terms of assessing the impacts and I know you are going to be starting that
soon. I think about the fact that the impacts maybe broader than initially thought and it
is worthwhile spending some time to think through all of those stakeholders that maybe
impacted. Jon, I will turn it back to you. Thank you very much Cindy.
I think we have our final polling question now.
What level of impact you believe the new revenue standard will have?
1. Will that be a significant change to current practice
2. Any material change to current practice. 3. Not assessed
4. Not applicable. Remember to click on submit answer. So, we
are waiting for the results. There is another question for you Cindy and it relates to implementation.
The question is: Why can start it now? The standards mandatory
effect to date is still more than two years away. It seems like a quite a bit of time.
I think that that maybe true for some entities, but if you look at the way that some industries
that are impacted like the telecom sector. They have actually been working on this for
at least a year, if not more. So, I think you got to start at least thinking about how
bigger an impact is this on your organization and how are you going to actually implement
a standard. If you do full retrospective, which you may want to do maintain trends,
then you are going to have to sort out what the impact is on your contracts in the near
term. I think to give big system implications related to the scanner, those take a lot of
time to deal with. So, I think from our experience certainly some larger companies and that all
started to deal with it prior to the finalization of the standard, but I think what we talked
to more and more companies about it, they are getting started now. The standard is final
and it is a good time to at least do a preliminary assessment and figure out how much work it
is going to do to implement to standard. Thanks a lot.
Let us see, we have got the results. This is an interesting split. 38% have not
yet assessed, 28% think that the change will be immaterial and almost a quarter say it
will be significant. Again, it is going to take some time to figure all of this out and
I guess the devils going to be in the details. Okay, please do not hesitate to take advantage
of our global publications and resources related to IFRS 15 and look out for the Canadian versions
of IFRS 15 industry insights for a number industries that will be headed your way soon.
Also, please do not hesitate to contact any of our experts and you will see the names
on screen. A couple of them should be familiar to you now. They will be more than happy to
assist you with any questions or concerns that you might have. This is the formal part
of our presentation, but before we begin our question and answer period, just a note to
say that we do appreciate your feedback and kindly ask that you fill out our survey. You
should expect to see a pop-up survey appear on your screen shortly. This has some development
of our future webcast, we take these surveys very seriously, so please continue to send
us suggestions and feel free to also let us know what we are doing well so we can keep
it up. We do have quite a few questions in the queue today, so we will not be able to
get all of them, particularly those related to specific fact patterns for your organizations.
I would recommend that you discuss your questions with your Deloitte Partner or Deloitte Contact,
so they can help you resolve any questions or concerns that you might have. So, I think
getting to the questions, let me just get to the queue here. The first one is for Maryse
and the question is: On a long-term construction contract, with
the revenue recognition be based on a milestone schedule for example. Is that of measuring
percentage of cost completed?
Okay sure. Good question. I guess with IFRS 15, I think similar to what we had under IAS
11 on construction contracts, the standard acknowledges there are different methods of
measuring the extent of satisfaction of performance obligation and the standard basically says
that there are different methods that might include output method and input method. In
output method, it is well acknowledge that there are different methods again, so it could
be a milestone method, it could be units produced or some type of measure based on some output.
I think the idea is that although IFRS 15 acknowledges that you can use and input and
output method that encourages or tells you that the method chosen, needs to reflect faithfully,
the entity’s performance in satisfying a performance obligation. It also indicates
that you have to challenge yourself on that, so if you do choose an output method and the
example given in the standard based on units produced that may not necessarily reflect
the entity’s performance and satisfying the performance obligation, if for example
there is work in progress or there are some finished goods that are controlled by the
customer, that are included in that measure of progress.
So, we have to take a note of that and also the standard highlights that certain costs
need to be expensed and costs that related to satisfy performance obligations or partially
satisfied performance obligations in a contract also need to be expensed. So, those are things
that I would put out there as consideration points Jon.
Okay, thanks Maryse. Actually we have Lloyd in question for Joyce. The question is any
fundamental changes to construction contract, revenue recognition under the new standard.
I mean currently under the existing IFRS guidance when you have a construction contract, you
are following scope of IAS 11 and it gives the revenue recognition guidance and there
are typically as over time and taken to consideration, recoverability of the consideration to be
received and that will dictate how you account for the construction contracts from the revenue
perspective. Under the news, there is extensive guidance that talks about whether or not you
would recognize revenue at a point in time or over time and particularly with constructing
an asset or construction contract, in situations where you are not delivering benefits to the
customers throughout the construction process, then you fall under the section where you
need to consider whether or not and what you have constructed, has alternative use and
whether or not the entity is able to enforce payment and an amount that is approximating
the purchase price or the selling price of that asset whether or not it is fully constructed
or partially constructed. So, in order to be able to recognize revenue over time, we
need to meet those two conditions, which is not something that we currently need to assess
in terms of the amount that you can enforce payment for. I would say in applying the new
standard, company would need to look at all their contracts, how it is being structured
particularly around the payments term, the amount that has been paid and whether or not
at any point during the contract term the entity is entitled to an amount that approximate
the selling price of the assets in progress in order to be able to support revenue recognition
over time; otherwise, then the center would pursue that you would need to recognize that
at the point in time and you need to then assess when that happen, you need to assess
when control has been transferred to the customer. Okay. Thanks Joyce.
Another question for Maryse here. What would
consider at or near the same time i.e. what period related to contract combinations?
Another very common question I think that we previously had as well in application of
prior GAAP. So, under IFRS 15, I think there is no clear or explicit threshold or guidance
to look to in terms of determining what time proximity you need to consider. I think the
closer the time period, the more likely that some contracts will need to be combined to
further away the time period. Obviously, at the other end of the spectrum less likely
that the contracts will be combined, but it is not just a question of time proximity,
the standard talks about a number of criteria and they say, if contracts are negotiated
at or near the same time with the same customer and you meet one of the following criteria
then you should combine those contract and those criteria are that the contracts are
negotiated as a package, so we will need to do one single project, the amount of consideration
in one is dependent on the price of performance of another contract and the goods or the services
promised in the contracts or a single performance obligation in accordance with assessing the
other pieces of the literature that would cover today. So, hope that helps Jon. Yes.
Thank you. There is a question here for Cindy. What are
the significant differences between this new standard and equivalent US GAAP standard?
Okay. Actually, I think the boards did a nice job and actually in laying out those differences,
so, there is an appendix to the basis for conclusion, which lists five different areas
where IFRS 15 differs from FASB Topic 606 in terms of a new standard. They are first
of all related to collectability threshold, so as we have about on this webcast, there
is a requirement to assess probability of collectability because probable has a different
meaning under IFRS and US GAAP that is identified as a difference. There is some different disclosures
required with respect to interim disclosures, the US having additional disclosure requirements.
There is a difference with respect to being able to adopt a standard early, so, I think
as Maryse mentioned under IFRS you can and under GAAP you cannot. There is a difference
related to impairment reversals though I touched on having to assess contract cost for impairment
and then having to assess whether or not those impairment charges could be reversed when
you can reverse them under US GAAP and then finally there is different requirements in
terms of dealing with non-public entities. So, those are then listed differences. The
only other thing I would point out is when you are dealing with like this standard and
another standard. So, Maryse touched on if you have contracts under multiple standards.
The other standards could be different rate. So, you could run into actually differences
in treatments not because of what is an IFRS 15, but because of how IFRS 15 relates to
the other standards or the equivalent US standard related to the other standards. One more question
for you Cindy. The question is, I have read through these disclosure requirements of the
standard, and we use the word shell, what does that mean. Does that mean that all disclosures
are required? If you read through all the disclosures, there are a lot and I think that
you certainly have to into consideration what material and the guidance does talk about
some objectives with respect to disclosure requirement. So, I am not sure at the point
where we would say everything go and line item is required from an IFRS perspective
that is certainly you need to go through them to assess how they apply to your organization
and whether they provide meaning information to the readers of the statements. Thank you.
Thanks again to our speakers, Maryse Vendette, Joyce Lam and Cindy Veinot. Also thanks to
our behind scenes team Nura Taef, Karen Dooley and Elise Beckles. We hope you found this
webcast helpful and informative. If you want additional information, please visit our website
at www.corpgov.deloitte.com and to all of you viewing our webcast today, thank you for
joining us and happy Canada Day. This concludes our webcast bringing clarity to an IFRS world
- IFRS 15 revenue from contracts with customers.