CPA Ireland Skillnet CPA Ireland Skillnet, is a training network that is funded by Skillnets, a state funded, enterprise led support body dedicated to the promotion and facilitation of training and up-skilling as key elements in sustaining Ireland s national competitiveness. The CPA Ireland Skillnet provides excellent value CPE (continual Professional Education) in accountancy, law, tax and strategic personal development to accountants working both in practice and in industry. However our attendees are not limited to the accountancy field as we welcome all interested parties to our events. The CPA Ireland Skillnet is funded by member companies and the Training Networks Programme, an initiative of Skillnets Ltd. funded from the Department of Education and Skills. www.skillnets.ie IFRS 15 and IFRS 16 Webinar September 2016 Dublin Presenter Robert J Kirk Professor of Financial Reporting
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS Background Joint project IASB and FASB Significant diversity in practice under IAS 18 USA had number of industry standards Boilerplate disclosure New standard concentrates on transfer of control rather than risks and rewards Introduces a 5 step approach to revenue recognition
Scope Exceptions Lease contracts under IAS 17 Insurance contracts under IFRS 4 Financial instruments under IFRS 9; and Group income under IFRS 10, 11 and IAS 27 and 28 Core Principle Recognise Revenue to depict transfer of promised goods or services to customers in an amount that reflects consideration to which entity expects to be entitled in exchange for those goods or services
Steps to achieve Core Principle Identify contract with a customer Identify separate performance obligations in contract Determine transaction price Allocate transaction price to separate performance obligations in contract Recognise revenue when entity satisfies a performance obligation Step 1: Identify Contract Contract: Agreement between two or more parties that creates enforceable rights & obligations Essentials of a Contract: - has commercial substance - has been approved by the parties (Written, Oral or Implied) & commitment to perform obligations - each party s right regarding goods/services can be identified - payment terms can be identified - Probable that consideration will be collected by vendor
Step 2: Identify separate performance obligations (contd.) Entity promises to transfer more than one good or service Check conditions for Non-Distinct: - goods/services are highly interrelated & transferring them to customer requires that entity also provide a significant service of integrating goods/services into combined item(s) for which customer has contracted and - bundle of goods/services is significantly modified or customised to fulfil contract Yes Combine with other promised goods/ services until a distinct bundle is identified No No Check conditions for Distinct: - sold separately on regular basis or - customer can benefit from good /service either on its own or together with other resources readily available to him Yes Account as separate performance obligation Example determining whether goods or services are distinct Construction contract goods and services are not distinct A building contractor (the vendor) enters into a contract to build a new office block for a customer. The vendor is responsible for the entire project, including procuring the construction materials, project management and associated services. The project involves site clearance, foundations, construction, piping and wiring, equipment installation and finishing. Solution Although the goods or services to be supplied are capable of being distinct (because the customer could, for example, benefit from them on their own by using, consuming or selling the goods or services, and could purchase them from other suppliers), they are not distinct in the context of the vendor s contract with its customer. This is because the vendor provides a significant service of integrating all of the inputs into the combined output (the new office block) which it has contracted to deliver to its customer.
Software scenario A A vendor enters into a contract with a customer to supply a licence for a standard off the shelf software package, install the software, and to provide unspecified software updates and technical support for a period of two years. The vendor sells the licence and technical support separately, and the installation service is routinely provided by a number of other unrelated vendors. The software will remain functional without the software updates and technical support. The software is delivered separately from the other goods or services, can be installed by a different third party vendor, and remains functional without the software updates and technical support. Therefore, it is concluded that the customer can benefit from each of the goods or services either on their own or together with other goods or services that are readily available. In addition, each of the promises to transfer goods or services is separately identifiable; because the installation services does not significantly modify or customise the software, the installation and software are separate outputs promised by the vendor, and not one overall combined output. Solution The following distinct goods or services are identified: Software licence Installation service Software updates and Technical support. Software scenario B The vendor s contract with its customer is the same as in scenario A, except that as part of the installation service the software is to be substantially customised in order to add significant new functionality to enable the software to interface with other software already being used by the customer. The customised installation service can be provided by a number of unrelated vendors. In this case, although the installation service could be provided by other entities, the analysis required by IFRS 15 indicates that within the context of its contract with the customer, the promise to transfer the licence is not separately identifiable from the customised installation service. In contrast and as before, the software updates and technical updates are separately identifiable. Solution The following distinct goods or services are identified: Software licence and customised installation service Software updates Technical support.
Software scenario C The vendor s contract with its customer is the same as in scenario B, except that: The vendor is the only supplier that is capable of carrying out the customised installation service The software updates and technical support are essential to ensure that the software continues to operate satisfactorily, and the customer s employees continue to be able to operate the related IT systems. No other entity is capable of providing the software updates or the technical support. In this case, the analysis required by IFRS 15 indicates that in the context of its contract with the customer, the promise is to transfer a combined service. Solution This combined service is identified as the single distinct good or service. Step 3: Determine Transaction Price Transaction price: Amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer excluding amounts collected on behalf of third parties IAS 18 -At FV Variable consideration: Use expected value or most likely amount whichever can be predicted better Time Value of Money: Adjust if contract has financing component that is significant to contract (Exception: 1 year or less)
Step 3: Determine Transaction Price (contd.) Non-cash consideration: At FV If FV can t be estimated reasonably, measure by reference to stand-alone selling price of goods /services Consideration payable to customer: - Entity pays or expects to pay consideration to customer or other parties that purchase goods/services from customer and customer can apply that amount against amount owed to entity Reduce from Transaction Price unless payment is in exchange for distinct good/service Ignore effects of customer credit risk Step 4: Allocate Transaction Price Allocate TP to each separate PO Determine stand-alone selling price at contract inception of good/service underlying each separate PO for allocation purpose If stand-alone selling price not observable: estimation Allocation of subsequent changes in TP: - Amount allocated to a satisfied PO: Recognise as Revenue or as Reduction of Revenue - in period of subsequent change
Step 5: Recognise Revenue Satisfy Performance Obligation by transferring a promised good or service Customer obtains control of good or service Recognise Revenue Step 5: Recognise Revenue (Contd.) Customer Obtains Control of Good or Service: Goods and services are assets, even if only momentarily, when they are received & used (as in case of many services) Control of an asset: - ability to direct use of & obtain substantially all of the remaining benefits from asset - ability to prevent other entities from directing use of and obtaining benefits from an asset - benefits are potential cash flows that can be obtained directly or indirectly in many ways
Step 5: Recognise Revenue (contd.) Determine whether each Separate PO is satisfied: Over Time If either of following conditions is met: (a) entity s performance creates or enhances an asset that customer controls as asset is created or enhanced or (b) entity s performance does not create asset with an alternative use to entity & at least one of following criteria is met: - customer simultaneously receives & consumes benefits of entity s performance as it performs - another entity would not need to substantially re-perform the work entity has completed to date if that other entity were to fulfil remaining obligation to customer or - entity has right to payment for performance completed to date & it expects to fulfil contract as promised Point in time Entity to consider following indicators of transfer of control (in addition to requirements for control) to determine point in time: - entity has a present right to payment for asset - customer has legal title to asset - entity has transferred physical possession of asset - customer has significant risks and rewards of ownership of asset - customer has accepted asset Disclosure Annual disclosure requirements Disclosure type Disaggregated revenue Required information Disaggregation of revenue into categories that show how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows Reconciliation of contract balances Opening and closing balances and revenue recognized during the period from changes in contract balances Qualitative and quantitative information about the significant changes in contract balances Performance obligations Descriptive information about an entity s performance obligations Information about the transaction price allocated to remaining performance obligations and when revenue will be recognized
Disclosure Annual disclosure requirements Disclosure type Required information Significant judgments Method used to recognize revenue for performance obligations satisfied over time and why the method is appropriate Significant judgments related to transfer of control for performance obligations satisfied at a point in time Information about the methods, inputs, and assumptions used to determine and allocate transaction price Costs to obtain or fulfil a contract Judgments made to determine costs to obtain or fulfill a contract, and method of amortization Closing balances of assets and amount of amortization/impairment Practical expedients Use of either of the following: The practical expedient regarding the existence of a significant financing component; The practical expedient for expensing certain costs of obtaining a contract; IFRS 16 Leases (January 2016)
IFRS 16 Leases (January 2016) The need for change All leases create assets and liabilities Investors and analysts frequently adjust a lessee s balance sheet Lack of comparability Lack of information
IFRS 16 Leases (January 2016) Scope IFRS 16 applies to all leases except: leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources; leases of biological assets within the scope of IAS 41, Agriculture, held by lessees; service concession arrangements within the scope of IFRIC 12, licences of intellectual property granted by a lessor within the scope of IFRS 15, Revenue from Contracts with Customers; and rights held by lessee under licensing agreements within the scope of IAS 38, Intangible Assets, for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights. IFRS 16 Leases (January 2016) The IASB lessee accounting model In essence for all leases, the IASB model requires a lessee to: (a) recognise lease assets and liabilities on the balance sheet, initially measured at the present value of unavoidable lease payments; (b) recognise amortisation of lease assets and interest on lease liabilities over the lease term; and (c) separate the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within either operating or financing activities).
IFRS 16 Leases Exemptions Leases with less than 12 months Low value leases e.g. PCs, office furniture elect on lease by lease basis IFRS 16
IFRS 16 Leases (January 2016) IFRS 16 Determining whether a contract contains a lease
IFRS 16 Leases (January 2016) IFRS 16 Leases (January 2016)
IFRS 16 Leases (January 2016) IFRS 16 Leases (January 2016)
Accounting by Lessees IFRS 16 Initial recognition right of use asset and lease liability Right of use asset amount of liability + initial direct costs + incentives, restoration obligations Lease liability PV discounted at implicit rate or incremental borrowing rate Presentation IFRS 16 SOFP Right-of-use asset can be presented either separately or in the same line item in which the underlying asset would be presented. Lease liability can be presented either as a separate line item or together with other financial liabilities. If the right-of-use asset and the lease liability are not presented as separate line items, must disclose in the notes the carrying amount of those items and the line item in which they are included. SOPLOCI Depreciation charge is presented in the same line item/items in which similar expenses (such as depreciation of property, plant and equipment) are shown. The interest expense on the lease liability is presented as part of finance costs. However, the amount of interest expense on lease liabilities has to be disclosed in the notes. SOCF Lease payments are classified consistently with payments on other financial liabilities: Principal portion of the lease liability - cash flow from financing activities. Interest portion of the lease liability - either as an operating cash flow or a cash flow resulting from financing activities (in accordance with the entity s accounting policy regarding the presentation of interest payments).
Major Disclosures IFRS 16 Right of use asset Depreciation charge (by class of underlying asset) Carrying amount (by class of underlying asset) Additions Lease liabilities Interest expense Maturity analysis in accordance with paragraph 39 and B11 of IFRS 7 Recognition and measurement exemptions Expense relating to short-term leases Expense relating to leases of low-value assets Other disclosures relating to income statement Expense relating to variable lease payments not included in lease liabilities Income from subleasing right-of-use assets Gains or losses arising from sale and leaseback transactions Disclosure IFRS 16 Total cash outflow for leases Future cash outflows from Variable lease payments (includes key variables on which payments depend and how they affect them) Extension options and termination options Residual value guarantees Leases not yet commenced to which the entity is committed Short-term lease commitments Qualitative disclosures Nature of the lessee s leasing activities Restrictions or covenants imposed by leases Sale and leaseback transactions
IFRS 16 Leases IFRS 16
END OF PRESENTATION Thank you for your kind attention Any questions?