2018 is now upon us and companies will be adopting IFRS 15: Revenue from Contracts with Customers which applies to periods beginning on or after 1 January 2018. Of course, it is not just the December 2018 annual financial statements that will be prepared using IFRS 15 but also the June 2018 interim statements.
IFRS 15 Transition approach
On transition to IFRS 15, there is a choice of two approaches and a number of practical expedients. The ‘date of initial application’ is the first day of the period in which the new standards are adopted (eg 1 January 2018 for a calendar year company not adopting IFRS 15 early). The two approaches are:
- Fully retrospective application, under which IFRS 15 is applied to each prior reporting period with these being restated, or
- A cumulative catch up approach under which IFRS 15 is applied on a retrospective basis but with the cumulative effect being recognised as an adjustment at the date of initial application with comparative information not being restated. Companies adopting this approach will need to record the current year’s revenue under both IAS 18/11 and IFRS 15 to be able to make the transitional disclosures (see below).
Four practical expedients are available if fully retrospective application is selected. If the cumulative catch up approach is adopted, only one of these is available. An entity can choose to use one or more of the practical expedients, however those taken will need to be applied consistently to all contracts within all reporting periods.
Although fully retrospective application is likely to require more work, it will give a clearer picture because current and comparative year information will be prepared in accordance with IFRS 15. In contrast, although the cumulative catch up method might appear attractive, amounts reported for the current and comparative year will not be comparable. In addition, as noted above, companies will still need to record the current year revenue under both IAS 18/11 and IFRS 15 for transitional disclosure purposes, and for entities that have contracts that span the date of initial application, some revenue may be double counted or may not be recorded at all, due to the different recognition requirements of existing IFRSs and IFRS 15.
Disclosures relating to IFRS 15 in 2018 interims
The FRC has announced it will be monitoring companies’ disclosures of the impact of the IFRS 15 in interim accounts issued in 2018 as one of its four 2018 thematic reviews (see Business Edge December 2017). IAS 34 requires a company to describe the nature and effect of a change of accounting policy. The FRC expects:
- Quantitative disclosure to be accompanied by informative and detailed explanation of the changes, tailored to the company’s specific circumstances and transactions
- Any key judgments made by management in applying the new concepts and methodologies that are introduced by IFRS 15 to be clearly explained
- An explanation of how the IFRS 15 transition has been implemented, after careful consideration of the transitional disclosure requirements under IFRS 15 and the requirements of IAS 8.
The FRC notes that some companies, such as those listed on the AIM market, are not required to comply with IAS 34. However, a discussion of the nature and effect of a change in accounting policy is necessary for all companies in order to provide meaningful information to readers of their interim accounts.
This is in addition to the detailed quantitative disclosure of the effect of IFRS 15 that the FRC expects to be given in the final accounts before implementation of the new requirements (eg in December 2017 year-end accounts).
Transitional disclosures in the first annual IFRS 15 financial statements
IFRS 15 includes specific transitional disclosures which generally supplement the change in accounting policy disclosure requirements of IAS 8. A company is required to provide an explanation about which practical expedients were used and, to the extent reasonably possible, a qualitative assessment of the estimated effect of applying those practical expedients.
If IFRS 15 is adopted fully retrospectively comparative information is restated. IAS 8 normally requires disclosure for the current period and each prior period presented, to the extent practicable, of the amount of the adjustment:
- For each financial statement line item affected, and
- For basic and diluted earnings per share.
However, the IFRS 15 transitional disclosures for the fully retrospective approach only require this information for the annual period immediately preceding the first annual period for which IFRS 15 is applied (ie for 2017 when IFRS 15 is adopted in 2018). An entity may also present this information for the current period or for earlier comparative periods, but is not required to do so.
Under the cumulative catch up transition method, the comparative information will not be restated. Consequently, when an entity uses this transition method, the entity is required to disclose the following information for reporting periods that include the date of initial application (ie for 2018 when IFRS 15 is adopted in 2018):
- The amount by which each financial statement line item is affected in the current year as a result of the entity applying IFRS 15 rather than previous revenue Standards in IFRS, and
- An explanation of the reasons for the significant changes in those financial statement line items.
So, under the cumulative catch-up method an entity will report results in 2018 under IFRS 15 but will also need to know what the 2018 results would have been under the old standards (IAS 18 and IAS 11).
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