Today’s presentation is “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 and Cindy Veinot. Let’s have a look at our

agenda. First, you’ll hear from Maryse Vendette who provide us with some background on the

revenue recognition standard, inform us of recent developments and begin walking us through

some of the proposed amendments. Next, we’ll hear from Cindy Veinot who will continue speaking

to the proposed amendments as well as sharing some insights and important considerations

related to the implementation of the standard. We’ll conclude with providing information

on some resources for future reference and a brief question and answer session. Please

keep in mind that 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 don’t constitute official

interpretative accounting guidance from Deloitte. Before taking any action on any of these issues,

it’s always a good idea to check with a qualified advisor.

I would now like to welcome our speakers for this webcast. Maryse Vendette is a Partner

in our National Office and is a co-leader of the Canadian IFRS Center 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. 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

under different accounting frameworks over the last 15 years and is currently focused

on working with clients in assessing the impact of the new Revenue Recognition standard. With

that, I will pass it over to Maryse. Thanks Jon. Good day to everybody on the line

today. So, before we get started on recent developments, we thought we would level set

and provide some brief background information on IFRS 15. So, as you know, the IASB and

FASB issued a new converged revenue standard in May 2014, that replaces all existing revenue

standards and these standards have a broad scope. They address how to account for all

contracts with customers across all industries except those that are within the scope of

certain other standards as you can see on the right side of your screen here. So, the

revenue model does not apply to contracts within the scope of IAS 17 lease contracts,

IFRS 4 insurance contracts, contractual rights or obligations within the scope of other standards,

primarily various types of financial instruments and non-monetary exchanges, whose purpose

is to facilitate or sell to another party. Parties to collaborative arrangements, which

are common in certain industries such as pharmaceuticals, biotechnology, oil & gas for instance may

require assessment to determine whether they are in the scope of IFRS 15 or not. So, an

entity would be required to assess the structure and the purpose of the arrangement to determine

whether the transaction is for the sale of goods or services as part of the entity’s

normal business activities and whether the counterparty represents a customer and if

that’s the case, then the collaborative arrangement would be within the scope.

Another item, transfers of assets that are not an output of the entity’s ordinary activities,

such as sales of non-financial assets, property, plant and equipment, and real estate or intangible

assets would be within the scope of certain parts of the standard, specifically the guidance

on determining the existence of a contract, measurement and control principles would apply

to those transfers to determine when and for what amount the asset should be derecognized.

IFRS 15 also deals with incremental cost of obtaining a contract and cost incurred to

fulfill a contract, so when should those cost to be capitalized and they provide guidance

on amortization of those costs and how to test them for impairment. Finally, here a

contract with a customer maybe partially within the scope of 15 and partially within the scope

of other standards like IAS 17 for leases or IAS 39, IFRS 9 for financial instruments.

So, IFRS 15 indicates how to assess, which guidance to consider to separate these elements

and initially measure each parts of those contracts. So, the effective date has officially

been deferred by one year to annual reporting periods beginning on or after January 1, 2018,

including interim periods. So, for a calendar year-end entity, they would apply the standard

in their first interim period and in March 31, 2018. Early application is permitted under

IFRS 15 and is also permitted under US GAAP, but not earlier than the original effective

date of January 1, 2017. The boards have provided a bit of relief by way of transition method

and they have also proposed additional relief as we will see a bit later on in the presentation.

An entity has the option to choose between two transition methods. So, the first one,

which I called full retrospective approach, an entity would elect to apply the standard

fully retrospectively taking into account certain practical expedients. So, in this

case, they would restate for instance are beginning retained earnings at January 1,

2017. Certain expedients, as I mentioned, are currently available in IFRS 15 under the

full retrospective method and if any of those practical expedients are used, they need to

be applied consistently to all reporting periods presented and their use and likely effect

must also be disclosed. So, an entity could also elect to use a modified transition approach.

In this case, they apply the revenue standard retrospectively to contracts that are not

completed as of the date of initial application of the standard, which is January 1, 2018,

and recognize a cumulative catch up without restating comparatives. This modified approach

may reduce the cost and complexity of adopting the standard because it limits the assessment

performed only to contracts that are not completed contracts prior to the year of adoption, but

it also has certain drawbacks as we will discuss a bit later when we discuss the advantages

and drawbacks of each approach later on the presentation.

So, the standard supersedes all existing revenue standards and creates a single model for recognizing

revenue. The core principle as you can see here on the screen is to recognize revenue

to depict the transfer of promised goods or services to customers in an amount that reflects

the consideration the entity expects to be entitled in exchange for those goods and services,

and the model includes a five-step approach for applying this principle and that five-step

approach is not too unfamiliar for Canadian practitioners because it is close to what

we have been applying in the past in terms of a five step approach, but is really in

the details of each of these steps that you will see differences come up. So, the first

step is to identify the contract, so does an enforceable contract exist. Step 2 is to

identify the performance obligations in the contract, which is similar to the notion of

separating multiple element arrangements into accounting units. Step 3 is to determine the

transaction price and that’s the amount the entity expects to be entitled to under

the contract. Step 4 is to allocate the transaction price that we just determined under step 3

to the various units of accounting. Finally, step 5 is to recognize revenue when or as

the performance obligations are satisfied, and that’s when control of a good or service

is transferred to the customer. So, this is an important point under the new revenue recognition

model. It is based on a control approach, which differs from the risks and rewards approach

that’s currently applicable under IFRS. The boards decided that an entity should assess

the transfer of a good or service by considering when a customer obtains control of that good

or service, and the control is defined the ability to direct the use of and obtain substantially

all of the remaining benefits from the asset. So, the IASB and FASB have created a joint

transition resource group and the purpose of the TRG is to solicit, analyze, discuss

stakeholder issues arising from implementation of the standard, inform the boards about those

implementation issues, which will help them to identify you know what they need to do,

any action if needed to address those issues, provide a forum for stakeholders to learn

about the new standard from others that are involved with implementation. So, the TRG

doesn’t issue any guidance. The members of the TRG include financial statement preparers,

auditors, users representing a wide spectrum of industries and geographical locations.

They also include public and private companies as well as representatives from various organizations,

and basically any stakeholder can submit a potential implementation issue for discussion

at TRG meetings. So far, the TRG has met five times. All the

meetings are public and are co-chaired by the vice-chairman of the IASB and FASB, and

you can access the meeting papers, the summaries of the meetings, the submission tracker, that

lists all the issues and a summary of the issues on the current status of each of the

issues that have been submitted. So, as of July 2015, 75 issues had been submitted to

the TRG, which resulted in 43 papers that have so far been discussed at the TRG. Out

of those 75 issues, 36 issues had been discussed with no further action at this time. 15 issues

have been submitted to the boards for further deliberations, which resulted in proposed

amendments to the standard as we will see later. 8 issues are pending potential future

discussions and 13 issues are pending minutes of the July TRG, and the next meeting is scheduled

for November 9, 2015. So, I like this timeline because it clearly

demonstrates that a lot has happened since the standard was first issued in May 2014.

As previously mentioned, there have been 5 TRG meetings, which are highlighted there

in the blue boxes, which have resulted in issues being raised with the boards for further

deliberation and those are highlighted by the green boxes indicated FASB and IASB discussions

have been held. The IASB has issued one ED of clarifications to IFRS 15 with a comment

period ending October 28, 2015, which includes clarifications to identifying performance

obligations, licensing and royalties, principle and agent considerations, practical expedients

and the FASB, they have issued three proposed ASUs as you can see here on the slides, which

include more or less similar topics. Some of those, for which the comment period has

ended, and one of those which has a proposed ASU on narrow scope improvements and practical

expedients, the comment period ends November 16, 2015. So, we will be discussing these

proposed amendments throughout the presentation today. This slide summarizes the topics included

in each of the IASB and FASB proposals and we can see here that the IASB does not propose

for the time being to make amendments on certain topics that have been included in the FASB

proposals. On certain of those, notably the last three topics that you can see here on

the slide, sales taxes, non-cash consideration and collectability. The IASB has included

a question in their ED asking stakeholders whether they agree that amendments are not

necessary at this time, if they think amendments are required, and if so, what those amendments

are that they would suggest and so on. The IASB has set a higher hurdle for making changes

to IFRS 15 and set out in the basis for conclusion, the rationale for that decision and so they

clearly indicated that they wanted to minimize changes to the standard to the extent possible,

and we will get into some of those details on the next two slides. Of particular note

here, the FASB finalized on October 5, their discussions on the proposed ASU on performance

obligations and licensing, and they have instructed the staff to begin the balloting process so

that we would expect the final ASU before the year is out.

So, let’s kick-off the discussion on the proposed amendments to step 2 on identifying

performance obligations. So, there are three here and I will discuss the first two issues:

determining whether promised goods and services are distinct in the context of the contract.

So, you may recall that IFRS 15 includes two criteria to determine whether a good or service

is distinct. There is a first criteria that effectively acts as a floor, which is to determine

whether the good or service is capable of being distinct, and that is similar to the

standalone value test that you may be familiar with, and the other criteria is whether the

good or service is distinct in the context of the contract, and that’s a new requirement

and is basically to ensure that the good or service retains its distinct characteristic

in the context of the contract. So, factors that indicate that our promised good or service

is distinct in the context of the contract, there are three of them in the standard. The

first one, the entity does not provide a significant service of integrating the good or service

with others. The good or service does not significantly modify or customize another

good or service, and the good or service is not highly dependent on or highly interrelated

with other promised goods or services. So, stakeholders indicated that it was unclear

how to interpret these factors, particularly the last one on whether the goods or services

are not highly dependent on or highly interrelated with other goods and services. Noting that

many such goods or services may be seen as being highly dependent on or highly interrelated

with others. So, the IASB decided to clarify the intent

of the distinct criteria here by adding some examples and changing some of the existing

examples as well as improving the articulation in the basis for conclusions. However, the

FASB also proposes to amend the standard itself. So, as you can see here on the top right corner

of your slide, the following decisions were made by the FASB to define the term separately

identifiable and explained that the objective there is to determine if the nature of the

overall promise is to transfer each good or service individually or combined item, to

reframe the separation criteria, to focus on a bundle of goods or services and if they

significantly affect each other and to reframe the factors to when they are not separately

identifiable as opposed to when they are separately identifiable. So, this is one example, although

the decisions are different in terms of how the standard is effectively amended because

they are intended to clarify the guidance and the boards agree on the outcomes of each

of the examples, the IASB expects no difference in application.

The other topic I want to discuss here is the one on shipping and handling services

as a promise service or activity to fulfill other promises. So, IFRS 15 focuses on transfer

of control versus transfer of the risks and rewards of ownership as we have mentioned

before. There may be more situations where control of products has been transferred,