Paul Cooper looks at the background to the joint IASB/FASB project on revenue recognition, culminating – after several years of development – in IFRS 15.
The project by the International Accounting Standards Board (IASB) to update the financial reporting of revenue began in 2008, and came to fruition in May 2014, with the issue of International Financial Reporting Standard (IFRS) 15, entitled Revenue from Contracts with Customers. This will replace International Accounting Standard (IAS) 11 Construction Contracts, and IAS 18 Revenue, along with four related Interpretations. Certain contracts, principally those involving leases, insurance contracts or financial instruments, will remain subject to Standards other than IFRS 15.
The IASB undertook its work jointly with the Financial Accounting Standards Board (FASB) in the United States. The project’s chief aim is to establish common up-to-date practice across industries. Many contracts are straightforward, but for others, questions have arisen over the amount and timing of the revenue recognised. The uncertainties are due to factors such as the length of the contract, the number of separable components (distinct goods or services) in the contract, and the extent to which the contract product becomes tailored to the customer’s specific requirements over time. In addition, there is a need to reflect the risk of not receiving payment (‘credit risk’).
ACCA has been involved throughout in the part of the consultation process led by the IASB, developing views through our Global Forum for Corporate Reporting (and its predecessor, the ACCA Financial Reporting Committee).The project took place over several years, allowing three opportunities for the IASB to seek views from interested parties such as us.
Following the publication of a Discussion Paper in 2008, the IASB issued its first Exposure Draft (ED) of a revised Standard in June 2010. In November 2011, the IASB issued a second and final ED, before going on to issue IFRS 15.
The project’s path has been one of evolution, without any fundamental changes in direction, or any major retraction of the proposals. ACCA has mainly supported the proposals at the various stages, including the objective of a general set of principles for revenue recognition, and the central role given to the concept of control of revenue. We are pleased that the final Standard reflects a further number of practical changes and clarifications, in response to the comments on the second ED which were submitted to the IASB.
Overall then, IFRS 15 should represent further progress to greater convergence between jurisdictions, by tackling the areas of uncertainty which risked creating diversity in practice. To give preparers time for adoption, IFRS 15 will be effective for accounting periods starting on or after 1 January 2017. As is usual, earlier application of the Standard is permitted.
To assist the transition process, the IASB and the FASB have announced the formation of a Transition Resource Group, which will work with them to consider issues raised around the implementation of the Standard. Looking ahead, the IASB also now undertakes a Post-Implementation Review once each new or revised IFRS has been in operation for two years. This Review provides a further opportunity for interested parties such as ACCA to provide further comments based on our members’ experiences, so that the IASB can be made aware of how a Standard has been working in practice, and receive any suggestions for improvements.
The IASB’s IFRS 15 is converged with the equivalent new US Standard issued by the FASB. Going forward, this situation may well be the exception. The IASB and the FASB have abandoned the principle of seeking to produce converged Standards in all cases, and whilst they still do not disagree on many key accounting matters, their preparedness to ‘agree to differ’ is evident in other recent developments.