ASC 606 and IFRS 15 compliance and automated revenue recognition. Although substantially converged when originally published, subsequent amendments have resulted in a few areas of divergence between the two standards, which are important to identify for US GAAP preparers and UK subsidiaries of US groups. Under IFRS, an entity recognises a reversal of an impairment loss that has previously been recognised when the impairment conditions cease to exist. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Entities determine the significance of a financing component at an individual contract level rather than at a portfolio level. IFRS 15 is the new standard on revenue to replace all existing revenue standards, including: The new Standard sets out a five-step model and is generally considered to be more detailed and prescriptive than existing guidance. This model covers the following: The transition between the old and new rules will create several M&A challenges, explain experts from Berkeley Research Group, Effective data governance is reliant on data integrity and uniformity and with a raft of new regulation on data governance, organisations need to understand what is expected of them, IASB clarifies how to apply IFRS 15 revenue recognition standard. Delivered to you weekly, straight to your inbox. Explore challenges and top-of-mind concerns of business leaders today. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. The ASC 606 5 Step Model. 18 Ease of reporting revenue may also … Despite the many differences, there are meaningful similarities as evidenced in recent accounting rule changes by both US GAAP and IFRS. These differences may be challenging for companies that report under both US GAAP and IFRS – e.g. Under IFRS 15, the entity needs to estimate certain variable consideration for disclosure purposes only, even when those estimates are not needed for the recognition of revenue. Except for the amendment to the principal vs. not a performance obligation). New guidance Current US GAAP Current IFRS US GAAP Under ASC 606, IP that is licensed to a customer is classified as either “functional IP” (e.g., music, film, software or completed media content) or “symbolic IP” (e.g., brand names or logos). Under IFRS, the deconsolidation guidance (IFRS 10) applies and the gain or loss is measured using the fair value of expected proceeds. With more international understanding and a closer alignment of global accounting standards when doing business, the possibility for increased capital flow and international investments could increase. KPMG’s insights on the latest of everything you need to know about ASC 606. Nonpublic business entities that have an IFRS parent may need to adopt the revenue standard one year earlier compared to what would be required for US stand-alone financial statements. Additional to the two exceptions under IFRS 15, ASC 606 permits not including variable consideration in the disclosure of remaining performance obligations when variable consideration: –   is a sales- or usage-based royalty for a license of intellectual property; or. There’s a corresponding tweak to international accounting standards called IFRS 15. We will continue to update this publication periodically for new developments. IFRS 15 has fewer disclosure requirements for interim financial reporting than ASC 606. a US subsidiary of a foreign multinational company that uses IFRS for group reporting with local reporting under US GAAP, or vice versa. Peush Patel - Zuora. An entity needs to disclose the aggregate amount of the transaction price allocated to unsatisfied or partially satisfied performance obligations and when it expects to recognize this amount as revenue, unless: –   the contract is one year or less; or. We share how private companies can review revenue contracts and give examples of contract terms to watch out for. Although most of these new developments brought US GAAP and IFRS closer together, some other … While the implementation of all new accounting standards requires CFOs to think through its implications — because revenue is at the heart of all profit orientated business — the impact of IFRS 15 could fundamentally change the profit, forecasts and thus the business model of some companies.  Other challenges to CFOs include the training of finance teams and communication to investors and other stakeholders. IFRS 16 vs. ASC 842: Differences and Considerations If so, some revenue is allocated to the shipping activity and deferred until shipping and handling occurs. To thrive in today's marketplace, one must never stop learning. Our analysis generally does not include any guidance related to IFRS for small and medium-sized entities or Private Company Council (PCC) alternatives that are embedded within US GAAP. Here we offer our latest thinking and top-of-mind resources. Communication of the impact of the transition to IFRS 15. In addition, ESMA ‘expects that entity-specific quantitative and qualitative disclosures about the application of the new standards will be provided’ and that since ‘the 2017 annual financial statements will be published after the requirements in IFRS 9 and IFRS 15 (and IFRS 16, if early adopted) will have become effective, ESMA expects that issuers will have substantially completed their implementation analyses (1). Our US GAAP/IFRS accounting differences identifier tool, which helps entities identify some of the more common accounting differences between US GAAP and IFRS that may affect an entity’s financial statements when converting from US GAAP to IFRS (or vice versa), has been updated. The combined effect of both of the following: 2.1. We have identified a few areas which could have a significant impact on the current accounting for revenue for companies. disaggregated revenue, contract balances and remaining performance obligations. IFRS 15 is effective for periods commencing on or after 1 January 2018. For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance. Each transaction is bifurcated into separate POB and in some cases multiple transactions are also clubbed into a single POB depending on the nature of the service or the nature of contract. 2. by the IASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes ASC 605-35. The new accounting standards under ASC 606/IFRS 15 support convergence between the International Standards Board (IASB) and Financial Accounting Standards Board (FASB) to create compliance with an international system. Nonpublic entities in the United States may therefore decide not to take advantage of the one year deferral offered by ASC 842 if they are also IFRS preparers. They can potentially impact the growth engines at the heart of any business—and subscription-based companies are particularly vulnerable … The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their new revenue recognition standards, Revenue from Contracts with Customers, way back in 2014 (ASC 606 and IFRS 15). A Converged Standard? A simple enough concept that isn’t necessarily different to current recognition models; however, those companies used to recognising revenue over a period of time may fall foul of the prescriptive requirements in the Standard for such recognition. The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs. For example, if a subsidiary that has only a building and does not represent a business is sold for a fixed price plus a contingent fee: Onerous contracts:  Determination of provisions for loss-making and onerous contracts, Transition:  Effective date for nonpublic companies, Transition:  Definition of 'completed contract', Disclosures:  Remaining performance obligations. Policy election to treat shipping and handling activities undertaken by the company after the customer has obtained control of the related goods as a fulfillment activity (i.e. Revenue recognition: IFRS 15 and ASC 606 were issued; Lease accounting: IFRS 16 and ASC 842 were issued; Financial instruments: IFRS 9 was completed and FASB issued many subtopics such as 815-10, 820-10, 825-10, 946-320; ASC 860); Insurance: IFRS 17 and ASC 944 were issued. Outside a lack of technology, part of the challenge is also interpreting the rules. This includes partial sale transactions.Â, Sales of a subsidiary or group of assets that constitutes a business or not-for-profit activity continue to be accounted for under the deconsolidation guidance (ASC 810). Â, Onerous revenue contracts are accounted for under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. not a performance obligation). Here are the differences explained in more detail. Both ASC 605 and 606 have to do with revenue recognition from customer contracts, so first off it’s important to realize that the accounting standards change affects accrual accounting on the income statement and shifts some assets and liabilities on the balance sheet, while operating cash flow on the cash flow statement will … The IFRS 15/ASC 606 standard’s detailed disclosure requirements arose in part because regulators and the board members believed that existing financial statements inadequately disclosed revenue information and because of the nature of the new revenue recognition standard which requires more judgments and estimation. Corporate strategy insights for your industry, Explore Corporate strategy insights for your industry, Financial Services Regulatory Insights Center, Explore Financial Services Regulatory Insights Center, Explore Risk, Regulatory and Compliance Insights, Explore Corporate Strategy and Mergers & Acquisitions, Customer service transformation & technology. © 2020 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. A performance obligation is a promise to transfer to the customer either ‘a good or service (or a bundle of goods or services) that is distinct’ or ‘a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer’. The US GAAP practical expedient simplifies the presentation of sales taxes, in line with current US GAAP. ASC 606 and IFRS 15. IFRS 16 is effective January 1, 2019 for all calendar-year companies, similar to ASC 842 for calendar-year public business entities. All rights reserved. ESMA guidance on the disclosure objective includes their expectation for issuers to ‘provide information about the accounting policy choices that are to be taken upon first application of IFRS 15’, ‘disaggregate the expected impact depending on its nature (i.e. Therefore, those team members, such as procurement or sales teams should be aware that contractual terms that they negotiate and agree could have a direct impact on the recognition of revenue. government) on a jurisdiction-by-jurisdiction basis (i.e. ... Corporate turnarounds and impairments Derivatives and hedge accounting Fair value measurement Financial instruments IFRS in the US Income tax and tax reform … Early adoption is permitted, although the level of update from early adopters has not been extensive. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Contract and Revenue Management is an Intacct module that provides an automated solution for the effects of ASC 606 and IFRS 15. (1) ESMA public statement: “European common enforcement priorities for 2017 IFRS financial statements”, issued 27 October 2017, (2) ESMA public statement: “Issues for consideration in implementing IFRS Contracts with Customers”, issued 20 July 2016, Ben Levy is a senior manager in Mazars’ Financial Reporting Advisory team. Since the new revenue standard was released, companies have been hard at work to achieve compliance. In ASC 606 and IFRS 15, Revenue recognition criteria are applied separately for each Performance Obligation (POB). 4. Outputs are the result of inputs and processes in a business and are goods or services finished and transferred to the customer. It also has built-in reports that show … Private company ASC 606 adoption: Contract review considerations. This release reflects guidance effective in 2019 and guidance finalized by the FASB and the IASB generally as of … Legacy IFRS revenue guidance continues to apply to revenue or adjustments to revenue arising from completed contracts after the transition date. In fact, that makes it even … The International Accounting Standards Board (IASB) has issued two major accounting standards, which will be effective in 2018: IFRS 15 Revenue from Contracts with Customers (IFRS 15, or the “Standard”) and IFRS 9 Financial Instruments. Contract Revenue Management, a solution for ASC 606 and IFRS 15. Sales of a subsidiary or equity method investee continue to be accounted for under the deconsolidation guidance (IFRS 10 and IAS 28, respectively). In an effort to simplify the transition, both GAAPs permit not applying the new requirements to completed contracts. For example, building improvements carried out on the customer’s land and buildings; or. IFRS 15 establishes a restrictive definition of the costs that shall be recognised as an asset when obtaining a contract. Where companies expect to be significantly impacted by IFRS 15, it is important that all relevant areas of the business are trained on the impact of the transition to IFRS 15.  For example, as seen above, the timing of the recognition of revenue could be impacted by the contractual terms, such as the right to be paid. The main aim of IFRS 15/ASC 606 is to recognize revenue for transfer of goods/services promised to customers in an amount reflecting the expected consideration in return for those goods or services. Completed contract for the purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP. For the first time in several decades, the organizations that establish accounting and reporting standards for public and private companies – the Financial Accounting Standards Board (FASB) in the USA and the International Accounting Standards … Archived recordings can be accessed anytime. The impact on Sales, Finance, and Legal teams. All revenue and costs are then recognised on transferring control of the goods to the customer. Except for the amendment to the principal vs. agent guidance (revenue being presented on a gross or net basis), these amendments may create differences in certain areas. However, four ASUs later, the standards are moving further apart. When the customer obtains control of the goods before shipping, the shipping and handling activities may be a separate performance obligation. US GAAP vs IFRS: Key Similarities. Current guidance is unchanged except for losses on long-term construction- and production-type contracts, where an entity is allowed to determine the provision for losses at either the contract level or the performance obligation level. Any reversal of the impairment loss is limited to the carrying amount, net of amortization, that would have been determined if no impairment loss had been recognized. The convergence of ASC 606 and IFRS 15 is predicted to promote clarity, transparency, and comparability of financial reporting between different countries. Revenue from Contracts with Customers — A guide to IFRS 15 21 Mar 2018 This detailed guide is intended to assist preparers and users of financial statements to understand the impact of IFRS 15 and includes a high-level executive summary of the new requirements, followed by a specific focus on the important issues and choices available for entities on transition to the new Standard. Connor Group has reviewed SEC comment letters issued to date as of March 31, 2018 regarding the adoption or implementation of ASC 606 Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15). Mandatory effective dates and early adoption provisions: Annual periods: For public business entities and certain not-for-profit entities* the effective date for annual periods is the fiscal years beginning after Dec. 15, 2017. The US standard setter (the Financial Accounting Standards Board; FASB) issued ASC 606 at the same time IFRS 15 was issued by the IASB.  Although substantially converged when originally published, subsequent amendments have resulted in a few areas of divergence between the two standards, which are important to identify for US GAAP preparers and UK subsidiaries of US groups. This means the delivery of the committed product or service must be fully complete for its revenue to be included in the respective accounting period. The complex revenue-recognition requirements of ASC 606 and IFRS 15 mean finance teams face some of the most sweeping changes since Sarbanes-Oxley. This criterion will be relevant if a contract transfers ownership to the customer as the asset is constructed. This population of relevant SEC comment letters was determined and the filings were retrieved via searches within CompanyIQ™¹ However, businesses should also consider engaging with their shareholders through other means if they are aware of a significant impact on transition to the new Standard. Under ASC 606, there is a policy election to treat shipping and handling activities undertaken by the company after the customer has obtained control of the related goods as a fulfilment activity (i.e. Financial statements are required to disclose the impact of forthcoming accounting standards; therefore we should be able to have first sight of how market leaders in their sectors have been affected. Its requirements have driven organizations to track revenue at more detailed levels than they have previously. 2018 is expected to be a year where changes to the financial reporting environment are so extensive, the implications will seep into the financial management of the company, Ben Levy, senior manager in Mazars’ Financial Reporting Advisory team, explains the impact of new financial reporting standards. Revenue is a core element of the financial function and it is the prime identifier of your business' performance. The entity then tracks the progress toward completion of the contract by measuring outputs to date relative to total estimate… For companies involved in delivering complex and long-term projects, the impact of IFRS 15 or its US counterpart will be significant. However, it is expected that all companies should be determining the impacts through an internal transition project, so that this can be communicated externally, if required. This means the delivery of the committed … The new revenue standards, IFRS 15 and ASC 606, originally published in May 2014, are substantially converged. For example, this criterion is likely to be relevant to many contracts for the construction of highly customised assets. The US GAAP policy election simplifies the accounting and accelerates recognition of the revenue and costs relating to the shipping and handling activities in comparison to IFRS. Because the definition of a completed contract differs and US GAAP permits entities to apply the new standard either just to open contracts or to both open and completed contracts, the population of contracts to analyze may differ. A provision is recognized when the unavoidable costs of meeting the obligations under a contract exceed the economic benefits to be received. Â. Many offer CPE credit. The expected length of time between when the entity trans… 2. ASC 606 prescribes the method to recognize revenue from these ongoing relationships with customers: how to identify the obligations, determine the transaction price and allocate the transaction value to the performance obligations. The impact of the transition to IFRS 15 and ASC 606 depends on companies’ current accounting and the nature of their contracts. In making the assessment of whether a significant financing component exists, ASC 606-10-32-16 provides the following factors that must be considered: 1. Get compliant with the new ASC 606 & IFRS 15 standards. The IASB is issuing IFRS 15, which is essentially the same rule as ASC 606, giving this change global implications. In other words, the output method measures results achieved. The issues here are significant because the identification of more than one performance obligation in a contract means entities must: The timing of the recognition of revenue depends on the timing of the transfer of the promised good or service to a customer. In developing ASC 606, FASB and IASB wanted to provide a framework to drive consistency in financial reporting, improve comparative analysis and reporting, and simplify the … This is in addition to the differences that already existed in the original versions of the standards. The revenue recognition principle describes that revenue should be recognized on the income statement in the period when it is realized and earned, and not necessarily when money is received. Most companies who are therefore about to start their 2018 financial year will be in the same position and will need to account for their revenue under IFRS 15 for the first time. Find out what KPMG can do for your business. Noncash consideration is measured at contract inception. We have identified the 10 key differences between IFRS 15 and ASC 606 that we believe are the most significant. (and codified in ASC 606) by the FASB and as IFRS 15. when the consideration is received) are acceptable under IFRS 15, but are not permitted under US GAAP. Automate calculations, reduce your period-end close and gain a complete picture of your organization’s revenue - both recognized and deferred. APPLICABILITY OF ASC 606/IFRS 15. This selection is based on the potential impact on earnings that these differences may have (excluding certain industry-specific implications), as well as the complexity they may create to comply with both GAAPs. Revenue: Top 10 Differences Between IFRS 15 and ASC 606, Step 2: Distinct goods and services:  Shipping and handling activities – FASB policy election, Step 3: Transaction price:  Measurement date for noncash consideration, Step 3: Transaction price:  Sales taxes – FASB policy election, Contract costs:  Reversal of previously impaired contract acquisition and contract fulfillment costs, Sales outside ordinary activities:  Sales of in-substance nonfinancial assets. This may result in some taxes being presented on a net basis and others on a gross basis under IFRS, with a different presentation under US GAAP when the policy is elected. 4) and most other current revenue recognition guidance (including other industry-specific guidance). Only the costs that would not have been incurred if the contract had not been obtained (typically, a sales commission) shall be recognised as an asset, provided it is probable that they will be recovered. Policy election to present all sales and similar taxes on a net basis. All revenue and costs are then recognized upon transferring control of the goods to the customer. Non-cash consideration, such as shares or advertising, must be measured at fair value for inclusion in the transaction price. Under IFRS, an entity recognizes a reversal of an impairment loss that has previously been recognized when the impairment conditions cease to exist. Revenue Recognition (ASC 606 and IFRS 15) The Revenue Recognition Standard, effective 2018, was a joint project between the FASB and IASB with near-complete convergence. 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. ASC 606 Subscription & IFRS 15: How the new Revenue Standards will impact Subscription Companies. Connect with us via webcast, podcast, or in person at industry events. The revenue recognition principle describes that revenue should be recognized on the income statement in the period when it is realized and earned, and not necessarily when money is received. Although the first year of adoption is 2018, the judgements required in the transition approach and the disclosures required mean that finance teams who have not started contemplating the implications of the new Standard may find themselves under pressure in the forthcoming year. The rules have changed, and if your business relies on complex revenue models – such as subscriptions and leases – Sage Intacct helps you get and remain compliant by enabling … However, in 2016 the IASB and the FASB issued separate amendments to clarify their respective guidance and, in the case of the FASB, to provide some practical expedients to the requirements. 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