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.
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:
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.