IFRS 15: Tips for Transitioning | KPMG | QA

IFRS 15: Revenue: Tips for Transitioning

IFRS 15: Revenue: Tips for Transitioning

With the effective date of 1 January 2018 on the horizon, companies need to discuss how and when the company will transition to the new standard.

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With the effective date of 1 January 2018 on the horizon, companies need to prepare to adopt the new IFRS revenue standard and one key decision needs to be made as soon as possible - how and when will the company transition to the new standard. Making that decision may, however, not be so straightforward.

IFRS 15 offers a range of transition options. At one end of the spectrum, an entity can choose to apply the new standard to all its contracts and retrospectively adjust each comparative period presented in its 2017-2018 financial statements. The entity will also be required to present the disclosures required by IFRS 15 for comparative periods as well as the obligatory change in accounting policy note.

Optional practical expedients may simplify the restatements process or reduce the number of contracts that need to be restated. For instance, an entity may elect to exclude a contract from restatement which was entered into and completed in the same reporting period. While these expedients may ease the transition burden for companies, they reduce comparability which can cause challenges for financial statement users.

At the other end of the spectrum, an entity may elect to apply the new standard as of 1 January 2018 with no restatement of comparative amounts. The cumulative effect of initial application will be recognised in the opening balance of equity at the date of initial application. Further easing transitioning is the option to elect to apply IFRS 15 to only open contracts instead of all contracts. 

Although it is clear that retrospective application of IFRS 15 offers the greatest quality of information to financial statement users, there are several factors that management will need to consider before deciding on a transition option:

  • First off, entities will need to determine the significance of the impact of applying IFRS 15. This will involve an assessment of the nature and volume of contracts the business has entered into. For entities where application will have a significant impact, cumulative restatement will be less onerous than retrospective application.
  • Application of IFRS 15 may have a significant impact on revenue figures and ultimately profit. Management will need to carefully assess the impact of the selected transition option on bonus and incentive schemes.
  • Entities will need to determine the expectation of external users on the financial statements. Publicly traded entities and entities applying for financing will likely value comparability of financial information and elect retrospective application.
  • Entities with income statement based debt covenants will need to consider the impact of IFRS 15 on the ratios applied. It may be necessary to engage with bankers to amend covenants to accommodate transitioning.
  • Management will need to determine if IT systems and internal controls are capable of providing the required information and assurance required to adopt the elected transition method. This is especially important for entities looking to apply IFRS 15 retrospectively, as internal controls and IT systems may need to be upgraded for the 2017 financial year to enable them to produce the appropriate information.

It cannot be stressed enough that companies need to start assessing the impact of IFRS 15 on their business as soon as possible as failing to grasp the full impact of the standard may result in unintended repercussions for management and users alike. 

© 2017 KPMG Advisory Services (Namibia) (Pty) Ltd, a Namibian private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained in this newsletter is of a general nature and should not be used or relied upon as a substitute for detailed advice or as a basis for formulating business decisions. Please contact the writer for advice relating to your specific circumstances. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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