Effective date

Entities will apply the revenue standard for annual reporting periods beginning on or after 1 January 2018. Early application is permitted.

Transition guidance

Entities can apply the one of two transition methods: retrospective or modified retrospective. Retrospective application requires applying the new guidance to each prior reporting period presented. However, entities can elect to apply certain practical expedients. The modified retrospective transition approach is intended to be simpler than full retrospective application; however, there are still challenges associated with that approach, including additional disclosure requirements in the year of adoption. Entities should consider the needs of investors and other users of the financial statements when deciding which transition method to follow.

A completed contract is a contract for which the entity has transferred all the goods or services identified in accordance with IAS 11, ‘Construction contracts’, IAS 18, ‘Revenue’, and related interpretations.

Early transition to IFRS 15 – example Entity A prepared its interim financial report in accordance with IAS 34 for the half-year ended 30 June 2017 based on IAS 18. At that time, it had not decided whether to adopt IFRS 15 in its annual financial statements for the period beginning 1 January 2017. At 30 September 2017, Entity A completes its IFRS 15 implementation project and decides to adopt IFRS 15 in advance of its effective date for the annual period beginning 1 January 2017. The fact that Entity A’s implementation project was only completed part-way through the year and that it published interim results under IAS 18 does not prevent it from adopting IFRS 15 in advance of its effective date.

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Disclosure in comparative periods upon application of the modified retrospective method of transition to IFRS 15 If an entity elects the modified retrospective method when IFRS 15 is first adopted, the cumulative effect of initially applying IFRS 15 is recognised as of the date of initial application, and comparative periods are not restated. Accordingly, an entity would not be required to provide the disclosures under IFRS 15 for the comparative periods presented. However, IFRS 15 specifies that, in the year of initial application of IFRS 15, entities electing to use the modified retrospective method are required to disclose the impact of changes to financial statement line items as a result of applying IFRS 15 (rather than previous IFRSs) and to include an explanation of the reasons for significant changes.

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Applying the transitional guidance to completed contracts with subsequent variable consideration Appendix C of IFRS 15 permits entities to choose one of two methods on transition to IFRS 15. Both methods include a practical expedient permitting an entity not to restate contracts that are completed contracts. For the purposes of the practical expedient, a contract must be completed: at the beginning of the earliest period presented, for an entity applying the fully retrospective transition approach (IFRS 15); or either at the beginning of the earliest period presented or at the date of initial application, for an entity applying the modified transition approach (IFRS 15). The choice under this method must be applied consistently to all contracts. Further, for entities applying the fully retrospective transition approach, an entity may choose not to apply IFRS 15 to completed contracts which begin and end in the same reporting period (IFRS 15). On transition to IFRS 15, an entity may have contracts that are considered completed contracts but for which there is still variable consideration to be received (e.g. royalties from the sale of a licence or contracts in which a rebate, discount or concession is expected to be issued in the future). This is confirmed in IFRS 15, which states that “a completed contract is a contract in which the entity has fully performed in accordance with revenue recognition requirements in effect before the date of initial application. Thus, a completed contract would include a contract for which the entity’s performance was complete but there was a change in the transaction price after the date of initial application”. In such cases, an entity should continue to account for the ongoing variable consideration element in accordance with the previous accounting policies that it has applied (which will be based on IAS 11 or IAS 18). In the Basis for Conclusions on IFRS 15, the Board noted that if an entity chooses not to apply IFRS 15 to completed contracts in accordance with IFRS 15, only contracts that are not completed contracts are included in the transition to IFRS 15. Therefore, an entity should continue to account for completed contracts in accordance with its accounting policies that are based on previous revenue Standards (IFRS 15).

1. Retrospective application and practical expedients

Entities are permitted to adopt the revenue standard by restating all prior periods (that is, full retrospective adoption) following IAS 8. Entities electing retrospective application are permitted to use any combination of the following practical expedients:

1. for completed contracts, an entity need not restate contracts that:
2. begin and end within the same annual reporting period; or
3. are completed contracts at the beginning of the earliest period presented.
4. for completed contracts that have variable consideration, an entity can use the transaction price at the date that the contract was completed, rather than estimating variable consideration amounts in the comparative reporting periods.
5. for contracts that were modified before the beginning of the earliest period presented, an entity need not retrospectively restate the contract for those contract modifications in accordance with the revenue standard. Instead, an entity should reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented when:
6. identifying the satisfied and unsatisfied performance obligations;
7. determining the transaction price; and
8. allocating the transaction price to the satisfied and unsatisfied performance obligations for all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognise that amount as revenue.

Contract modifications practical expedient Entity B enters into a contract with a customer in December 2011 to sell product A for C500,000 and a five-year service contract for C10,000 a year. In January 2012, the customer takes control of the product A and the service contract commences. In 2015, entity B and the customer extend the service contract by an additional five years (for C10,000 a year) and, at the same time, add an additional piece of equipment, product B, for C750,000. Product B will be delivered in 2020. Question Does entity B have to apply the modification guidance to this contract when it adopts the revenue standard in 2018? Answer Entity B can choose to apply the contract modifications practical expedient when it adopts the revenue standard. If entity B applies the practical expedient, it would allocate the total transaction price (C1,350,000) and allocate it to product A, product B, and the service contracts. Revenue allocated to product B and the remaining unperformed services would be recognised as they are transferred to the customer.

Any of the expedients used should be applied consistently to all contracts in all reporting periods presented. Entities that choose to use any practical expedients should disclose that they have used the expedients, and provide a qualitative assessment of the estimated effect of applying each expedient, to the extent reasonably possible. This also applies to entities adopting modified retrospective application and electing to use the practical expedients described.

Disclosure of the impact of adopting the standard

Entities should disclose the effect of adopting the revenue standard on each financial statement line item, and the effect on basic and diluted earnings per share (if applicable) for the immediately preceding reporting period (that is, the year prior to the date of initial application). Entities are not required, but are permitted, to present this information for the current or earlier comparative periods.

2. Modified retrospective application and practical expedients

Entities can elect to use a modified retrospective approach for transition. Entities electing this approach will recognise the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings (or other appropriate component of equity) in the period of initial application. Comparative prior year periods would not be adjusted. Calendar year-end entities, for example, would recognise the cumulative effect adjustment of applying the revenue standard in the opening balance of retained earnings as at 1 January 2018.

The modified retrospective transition approach allows an entity to avoid restating comparative years. Entities that choose to use this approach should provide the following additional disclosures in the reporting period that includes the date of initial application (that is, in the year of adoption):

• the amount by which each financial statement line item is affected in the current year as a result of applying the revenue standard (as compared to the previous revenue guidance); and
• a qualitative explanation of the significant changes between the reported results under the revenue standard and the previous revenue guidance

Effect of additional disclosures These additional disclosures effectively require an entity to apply both the new revenue standard and the previous revenue guidance in the year of initial application. Several financial statement line items might be affected by the change and therefore require disclosure. Line items that could be affected, beyond revenue, gross margin, operating profit and net income, include: assets for costs to obtain or fulfil a contract, to the extent that such costs were expensed under prior guidance, but should now be capitalised (or conversely, had been capitalised under previous guidance but would no longer meet the criteria to be capitalised under the revenue standard); employee compensation, including bonuses and share-based compensation, linked to revenue-related metrics, to the extent that the compensation charge determined in accordance with the relevant accounting standard and benefit plan terms would have been different if the previous revenue guidance had been applied; and current and deferred tax balances, depending on the tax law. Entities should explain the extent of the effects of the change in revenue on all line items that are affected.

Entities applying the modified retrospective approach can elect to apply the revenue standard only to contracts that are not completed as at the date of initial application (that is, they would ignore the effects of applying the revenue standard to contracts that were completed prior to the adoption date). Calendar year-end entities, for example, can elect to apply the new guidance only to contracts that are not completed as at 1 January 2018.

Entities applying the modified retrospective approach can also elect the practical expedient for contract modifications described.

Transition considerations for the Clarifications

Entities should apply the Clarifications retrospectively in accordance with IAS 8. That is, an entity should apply the Clarifications as if they had been included in IFRS 15 at the date of initial application. Since an entity could have adopted the standard early, before the Clarifications were issued, the revenue standard provides additional details on transition considerations.