In October 2019, the Financial Reporting Council (FRC) published the results of its Thematic Review of IFRS 15 disclosures in its first year of application: it follows up on its November 2018 Thematic Review on interim disclosures, in which it recommended areas for improvement for year-end accounts.
The Review was based on a review of 25 companies operating in industries where it was expected that IFRS 15 would have the greatest effect, and highlighted that the FRC considers improvements can still be made on accounting policies and judgements.
The Review also raised a number of other specific points relevant to the ongoing application of IFRS 15 and about the transitional disclosures provided by companies over the past year. It includes clear examples of good practice and also describes the characteristics of disclosures that were less helpful/non-compliant with the standard’s requirements. It is important to note the qualitative improvements highlighted by the FRC are relevant even where the quantitative effects of applying the standard, compared to the IAS 18/IAS 11 accounting, are immaterial.
These findings will undoubtedly form the base expectations for the FRC when reviewing annual reports in this second full year of the application of IFRS 15.
The FRC observed that accounting policies were generally better written than they were under the superseded standards. Good examples of policy wordings clearly linked to segmental disclosures and revenue streams highlighted in the strategic report.
Where revenue is recognised over time, the better policies made clear which criteria for this treatment had been met; this can sometimes involve significant judgement. Details of the input or output method used to measure progress should also be provided.
Where revenue is recognised at a point in time, the point at which revenue is recognised should be specified. The FRC highlighted one case where the company listed several possibilities for when this point would be, with no indication as to which is most often applied.
The FRC also called for greater clarity regarding the reasons for some treatments not being adopted. For example, if a company has determined there is no significant financing component to a contract, this should be explained if a reader might expect there to be one, based on the nature of the business or other disclosures in the accounts. The same point applies to warranties. Other accounting policy areas cited as offering scope for improvement include:
- Variable consideration
- Contract modifications
The FRC concluded that judgement disclosures were not always specific enough or that disclosures included unnecessary reference to judgements that did not have a significant effect. Examples of value-adding judgement disclosures might be methods to estimate standalone selling prices and why discounts are allocated to certain performance obligations and not proportionately across them all: both of these might significantly affect the timing of revenue recognised in multi-element contracts.
It is suggested that the total amount of revenue subject to significant judgement could be quantified, in order to illustrate its relative importance to the financial statements.
Other key findings
In addition, the FRC also looked at Revenue disaggregation, contract balances and contract costs.
On the disaggregation of revenue disclosure, the most common categories identified in the sample were:
- Type of market
- Type of good or service
- Timing of transfer to the customer.
Examples of good disclosures presented this analysis in a matrix format, with categories as rows and reportable segments as columns. The FRC did, however, observe that some companies split revenue only by reportable segment (ie under IFRS 8), and questioned whether this was really appropriate or whether it was an indication that the IFRS 15 disaggregation disclosure had been omitted.
Most companies in the FRC’s sample clearly disclosed opening and closing balances for contract balances, as required under IFRS 15. However, it was noted that there could be better explanations of the distinction between contract assets and receivables, and the impact of the relative timing of satisfying performance obligations and payment on contract balances.
Good disclosures for contract costs made it clear that they are first assessed for whether they are in the scope of other standards and, if not, are capitalised when the three criteria set out in IFRS 15 are met.
The Thematic Review also highlighted the following disclosures as frequently being weaker:
- Amortisation and impairment of contract assets
- Breakage (where it would be expected)
- Transaction prices allocated to unsatisfied or partially unsatisfied performance obligations and when they will be recognised
- Tax impacts.
The Review also includes analysis of the transitional disclosures provided in annual reports in which IFRS 15 had been applied for the first time. Whilst not of relevance to the ongoing application of IFRS 15, the FRC’s observations do provide a clear indication of the nature and quality of disclosure that might be expected on the adoption of IFRS 16 in the coming reporting season. In particular, the FRC highlighted the following aspects of good practice:
- Clear disclosure of the transition method adopted
- Quantification of any material transition adjustment posted to retained earnings disaggregated by categories of impact and by financial statement line item
- Explanation of the transition adjustment by category of impact, referenced to changes in the accounting policies or methods arising from implementing the new standard
- Where the modified retrospective method was adopted, disclosure of current year results under previous IFRSs, in addition to those presented under the new standard, providing users with useful trend information and clarity over the different accounting requirements that applied to the two periods presented
- Explanation of the transition ‘journey’ - specifically, any changes in the entity’s assessment of the impact of the new standard previously reported.
Read FRC's Thematic Review of IFRS 15 disclosures
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