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Bringing clarity to an IFRS world IFRS 15 – Revenue from contracts with customers

Please note – The audio for today’s presentation will be transmitted through your computer speakers October 21, 2015

© Deloitte LLP and affiliated entities. | Bringing clarity to an IFRS world – IFRS 15 – Revenue from contracts with customers 2

Speakers

Moderator

Jon Kligman Partner, Assurance and Advisory

Presenters

Maryse Vendette Partner, Assurance and Advisory

Cindy Veinot Partner, Assurance and Advisory

Please submit questions and comments by sending an email to [email protected]

mailto:[email protected]


Agenda

1 Background

2 Recent developments

3 Proposed amendments

4 Implementation considerations

5 Resources

6 Questions and answers


Important caveats

• This webcast does not provide official Deloitte interpretive accounting guidance.

• Check with your advisor before taking any action.

Please submit questions and comments by sending an email to [email protected]



Background Scope

What is In? What is Out? • Applies to contracts with customers • Assess contracts with collaborators or

partners • Transfer or sale of non-financial assets • Incremental costs of obtaining and costs

incurred to fulfil a contract

• Lease contracts • Insurance contracts • Financial instruments and other contractual

rights or obligations within the scope of other Standards

• Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers

Certain transactions may fall partially within the scope of IFRS 15 and partially within the scope of other standards

Background (cont’d)


Effective date and transition options

• Effective date NEW− Annual reporting periods beginning on or after January 1, 2018, including

interim reporting periods therein (FY 2018)

− Early application is permitted under IFRS and U.S. GAAP

• Transition options

1) Retrospective Approach

− Practical expedients available

2) Modified Retrospective Approach

Background (cont’d)


The revenue model

Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services

Recognition Para. 9–21


Measurement Para. 46–72

Measurement Para. 73–90


Identify the contract with a

customer (Step 1)

Identify the performance obligations in the contract

(Step 2)

Determine the transaction

price (Step 3)

Allocate the transaction

price to performance obligations

(Step 4)

Recognize revenue when

(or as) the entity satisfies a

performance obligation

(Step 5)

This revenue recognition model is based on a control approach which differs from the risks and rewards approach applied under existing IFRS.


Recent developments

• Joint Transition Resource Group for Revenue Recognition (TRG)

− Subsequent to release of the Standard, the IASB and the FASB implemented the TRG

− TRG solicits, analyzes and discusses stakeholder issues arising from implementation and will inform the IASB and the FASB of issues that may warrant further attention on the part of the Boards

− Composed of financial statement prepares, auditors and users that have significant knowledge and experience related to revenue recognition

− As at July 2015, 75 issues submitted (43 papers discussed)

− 36 issues with no further action at this time

− 15 issues submitted to Boards for further deliberations

− 8 issues are pending potential future discussions

− 3 issues may result in technical correction or minor improvement at a later date

− 13 issues pending minutes of July TRG meeting

− Next meeting scheduled for November 9, 2015

Recent developments (cont’d)


Timeline

May 2014

July 2014–January 2015

February–March 2015

July 22, 2015

TRG

StandardIssued

FASB deferral approved

IFRS exposure draft issued• Identifying performance obligations• Licences and royalties• Principal vs agent• Practical expedients – Contract

modifications and completed contractsComment period ends: October 28, 2015

IFRS deferral approved

TRG

TRG

TRG

TRG

FASB/IASB

FASB/IASBFASB proposed ASU issued• Gross vs. netComment period ended: October 15, 2015

July 13, 2015

May 2015

June 2015

FASB/IASB

August 12, 2015

July 29, 2015

FASB proposed ASU issued• Identifying

performance obligations• Licenses and royaltiesComment period ended: June 30, 2015

July 30, 2015

FASB

August 31, 2015

FASB

October 5, 2015

FASB proposed ASU issued• Narrow-Scope

Improvements• Practical ExpedientsComment period ends: November 16, 2015

September 30, 2015

FASB

September 22, 2015

IASB

Recent developments (cont’d)


Board discussions

Issue IFRS Proposed amendment*

FASB Proposed amendments*

Identifying performance obligations (i.e., identifying promised goods or services)

No amendment May 2015

Immaterial promised goods or services No amendment May 2015 Shipping and handling activities No amendment May 2015 Identifying when promises represent performance obligations July 2015 May 2015 Determining the nature of an entity’s promise in granting a licence July 2015 May 2015 Sales-based and usage-based royalties exception July 2015 May 2015 Principal vs agent [Gross vs. Net] July 2015 August 2015 Practical expedients – Contract modifications and completed contracts

July 2015 September 2015

Sales tax presentation – Gross versus net No amendment September 2015 Non-cash consideration No amendment September 2015 Collectability No amendment September 2015

*Note: Although some amendments cover the same topics, the amendments proposed by the Boards differ in some respects.


Proposed amendments Identifying performance obligations

Issue IASB Decision FASB Decision Determining whether promised goods and services are distinct in the context of the contract

No amendments to the guidance were proposed; however, additional illustrative examples will be included

The following decisions were made: • Define the term

“separately identifiable” • Reframe the separation criteria to

focus on a bundle of goods or services, and

• Add illustrative examples Shipping and handling services as a promised service or activity to fulfill other promises

No updates were proposed Clarified that shipping and handling that occurs before control transfers to the customer are fulfillment activities and allows entities to elect as a practical expedient to treat shipping and handling as fulfillment activities if they occur after control transfers

Identifying immaterial promised goods or services

No updates were proposed. Entities are not required to identify promised goods or services that are immaterial in the context of the contract

Refer to the FASB’s Proposed ASU issued on May 12, 2015 and the IASB’s Exposure Draft issued on July 30, 2015 for further information.

Step 5Step 4Step 3Step 2Step 1


Identifying performance obligations Example – Goods and services [FASB ASU 606, Ex. 11D] • Company ABC enters into a contract with a customer to provide equipment as well as

installation services.

• The equipment is functional without customization or modification.

• Installation can be performed by other service providers.

• The contract requires that Company ABC is used for installation.

Identify the performance obligation(s).

Identifying performance obligations (cont’d)


Example – Goods and services

• Evaluate the relationship between the goods and services in fulfilling the contract (level of integration, interrelation and interdependence)

Functional Goods and services are by their nature dependent upon the other to function

Transformative Goods and services are transformed into a promise that is greater than the sum of the underlying items

• The customer can benefit from:

− The equipment (on its own through use or resale), and

− The installation services (in conjunction with the equipment)

• The equipment is not modified or customized by:

− Installation, OR

− Contractual requirement to use Company ABC’s installation services


Identifying performance obligations (cont’d)Example – Shipping and handling services

• Entity A enters into a contract with Customer B for goods that are shipped on a Cost, Insurance and Freight (CIF) basis.

• Terms are such that title passes once the goods cross to the ship’s rail at which time Customer B is obliged also to pay for the goods.

• Entity A is responsible for freight as a principal.

Identify the performance obligation(s).

1. Sale of goods 2. Freight services


Identifying performance obligations (cont’d)

U.S. GAAP: Accounting Policy

Timing of shipping and handling services

When do shipping and handling activities occur?

BEFORE transfer of control

AFTER transfer of control

Fulfilment activity Separate performance obligation Fulfilment activity


Proposed amendments Licences of intellectual property

Issue IASB Decision FASB Decision Determining the nature of an entity’s promise in granting licence - right to access over time or right to use at a point in time

An entity should focus on whether an entity’s activities significantly affect the IP to determine the nature of a licence

Requires an entity to characterize the nature of a licence as either functional or symbolic. This determination is based on whether the underlying IP has significant standalone functionality

When to recognize revenue for sales-based and usage-based royalties

The following decisions were made: • An entity should not split a royalty when determining whether to

apply the constraint exception, and • An entity should apply the royalty constraint exception if the

licence is the predominant feature to which the royalty relates

Refer to the FASB’s Proposed ASU issued on May 12, 2015 and the IASB’s Exposure Draft issued on July 30, 2015 for further information.

Step 1 Step 2 Step 3 Step 4 Step 5


Licences of intellectual property Example – Sales-based royalties [IFRS 15,Ex. 60]

• An entity, a movie distribution company, enters into a contract to licence Movie XYZ to a customer, an operator of cinemas, for six weeks.

• The total consideration the entity will receive is a portion of the operator’s ticket sales for Movie XYZ.

• In addition, the entity has agreed to:

a) Provide memorabilia for display at the customer’s cinemas prior to the six week screening period, and

b) Sponsor radio advertisements for Movie XYZ on local radio stations throughout the six week screening period.

Does the royalty constraint apply? How is revenue recognized?


Licences of intellectual property (cont’d)Example – Sales-based royalties

• Yes, the sales-based royalty constraint applies since the licence to show Movie XYZ is the predominant item or performance obligation.

• Revenue is recognized only when (or as) the later of the following events occurs:

a) The subsequent sale or usage occurs [as tickets sold and movie shown], and

b) The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).


Licences of intellectual property (cont’d)Example – Right to use vs. right to access [IFRS 15,Ex. 58] • A creator of comic strips licences the use of the images and names of its comic strip characters for

a four-year term.

• There are main characters in the comic strips, whose images evolve over time and new characters are periodically introduced.

• The customer can use the entity’s characters in various ways but the contract requires the customer to use the latest images of the characters.

• In exchange for granting the licence, the creator receives a fixed payment of $1 million in each year of the four-year term.

What is the nature of the licence?


Example – Right to use vs. right to accessLicences of intellectual property (cont’d)

What is the nature of the entity’s promise in granting the licence?

Right to access IP throughout the

licence term

Right to use IP as it exists when

licence granted

Recognize over time

Recognize at a point in time

• The creator’s activities [evolving images] changes the form of the intellectual property to which the customer has rights.

• The rights granted by the licence directly expose the customer to any positive or negative effects of subsequent activities [contract requires the customer to use the latest characters].

• Even though the customer may benefit from those activities through the rights granted by the licence, they do not transfer a good or service to the customer as those activities occur.


Proposed amendments Non-cash consideration and sales tax presentation

Issue IASB decision FASB decision Determining the measurement date for non-cash consideration and application of the variable consideration constraint

No updates were proposed Standard clarifies that: • An entity should measure at fair

value non-cash consideration at contract inception, and

• The constraint should only apply to variability resulting from reasons other than the form of consideration

Simplifying the application of sales tax presentation

No updates were proposed. Permits entities, as an accounting policy election, to exclude amounts collected from customers for all sales taxes from the transaction price

Refer to the FASB’s Proposed ASU issued on September 30, 2015. No updates are currently being proposed by the IASB for these topics, however stakeholder input on the Clarifications to IFRS 15 ED may eventually influence the future agenda.

Step 1 Step 2 Step 3 Step 4 Step 5


Non-cash consideration Example [FASB ASU 606, Ex. 31]

• An entity enters into a contract with a customer to provide a weekly service for one year.

• The contract is signed on January 1, and work begins immediately.

• In exchange for the service, the customer promises 100 shares of its common stock per week of service (5,200 shares total).

• The contract requires that the shares are paid upon the successful completion of each week of service.

How should the non-cash consideration be measured?


ExampleNon-cash consideration (cont’d)

IFRS

• Measure consideration by reference to the FV of 100 shares received upon completion of each weekly service.

U.S. GAAP

• Measure consideration as at the contract inception date.

Revenue recognized =100 shares * week 1 market price



Revenue recognized = 5200 shares * market price


Proposed amendments Collectability

Issue IASB decision FASB decision Clarification of the collectability criterion and accounting for contracts that fail the collectability criteria.

No updates were proposed. Standard clarifies that: • Collectability would be assessed on

the basis of the amount to which the entity will be entitled, and

• A contract is terminated if the entity has the ability to stop transferring goods or services to the customer.

• Revenue is recognized when the entity has transferred control of the goods or services, the entity has stopped transferring additional goods or services and has no obligation to transfer additional goods or services, and the consideration received from the customer is nonrefundable.

Refer to the FASB’s Proposed ASU issued on September 30, 2015. No updates are currently being proposed by the IASB for these topics, however stakeholder input on the Clarifications to IFRS 15 ED may eventually influence the future agenda.

Step 1 Step 3Step 2 Step 4 Step 5


Collectability Example [FASB Memo March 12, 2015]

• An entity enters into a contract with a customer for the supply of a good [modem] and the provision of a subsequent service [internet] for 3 years. The contract price is $460, payable as follows:

− $100 at contract inception when the modem is transferred to the customer

− $10 payable at the end of each month for the next 3 years as the service is provided

− In the first month of the second year, the customer stops paying consideration when it is due.

How should revenue be recognized? What if the entity stops providing the service to the customer?


Proposed amendments Principal versus agent considerations

Issue IASB Decision FASB Decision Principal agent considerations Standard clarifies that:

• An entity should assess whether it obtains control of the distinct good or service before it is transferred to the customer to determine whether it is acting as a principal or agent

• The indicators in the standard are intended to assist an entity with determining whether it obtains control of a good or service, and are not intended to override the control principle, and

• Clarified that each indicator can have more or less significance than others

• In a contract with multiple goods or services, an entity could be a principal for some and an agent for others

Refer to the FASB’s Proposed ASU issued on August 31, 2015 and the IASB’s Exposure Draft issued on July 30, 2015 for further information.


Principal versus agent considerations Example [IFRS 15,Ex. 46A]

• An entity enters into a contract with a customer to provide office maintenance services.

− The customer is invoiced a fixed price on a monthly basis with 10-day payment terms.

• The entity then engages a third-party service provider to provide the office maintenance services.

− Payment terms are aligned with the customer’s terms, however, the entity must pay regardless.

Is the entity a principal or agent?


ExamplePrincipal versus agent considerations (cont’d)

• Assess when control is obtained:

− The entity is able to direct the third-party service provider to provide specified services on its behalf

− Thus obtains control of the services before they are provided to the customer

• Consider additional indicators/criteria, if necessary:

− The entity:

− Responsible for the acceptability of the services

− Has discretion in setting the price for the services to the customer

− Has credit risk for the amount receivable from the customer

− Does not have inventory is risk


Proposed amendments Practical expedients upon transition

• With respect to contract modifications occurring before adoption of the standard, an entity is permitted to use hindsight as of the contract modification adjustment date (“CMAD”) and perform a single analysis to determine the transaction price and allocate the transaction price to performance obligations

Topic IASB Decision FASB Decision Practical expedient upon transition to address contract modifications

The CMAD is defined as the beginning of the earliest period presented under both transition methods

The CMAD is defined as the beginning of the earliest year presented upon initial adoption of the standard under the full retrospective approach and the beginning of the current period under the modified approach

Refer to the FASB’s Proposed ASU issued on September 30, 2015 and the IASB’s Exposure Draft issued on July 30, 2015 for further information.


Contract begins in 2014, ends in 2020

Practical expedients upon transition Contract modifications

Full retrospective approach Modified retrospective approach

Do NOT separately evaluate the effect of each contract modification prior to January 1, 2017

Do NOT separately evaluate the effect of each contract modification prior to January 1, 2017

2014 2015 2016 2017 2018 2019 2020Date of initial application

Modification #1

Modification #2

Refer to the FASB’s Proposed ASU issued on September 30, 2015 and the IASB’s Exposure Draft issued on July 30, 2015 for further information.


Proposed amendments Practical expedients upon transition

Topic IASB Decision FASB Decision Practical expedients upon transition to address completed contracts.

With respect to completed contracts, entities are also permitted to exclude the evaluation of any contract completed at the beginning of the earliest period presented when applying the full retrospective transition approach.

Standard clarifies: • The definition of a ‘completed

contract’ • That entities are permitted

apply modified retrospective transition approach either to all contracts or only to contracts not completed as at date of initial application.


Practical expedients upon transition Completed contracts – Definition

IFRS 15 FASB’s Proposed ASU A completed contract is a contract for which the entity has transferred all of the goods or services identified in accordance with IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations.

A completed contract is a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue guidance that is in effect before the date of initial application.

• Example – A licence with future royalty stream. The entity has delivered the licence. Revenue is being recognized as the royalties are reported.

IFRS: Contract is completed – Licence has been delivered

U.S. GAAP: Contract is not complete


Transition method considerations

Full retrospective method Modified retrospective method • Advantages

- All contracts are restated leading to a more fulsome depiction of financial performance, greater comparability and consistency.

- Better trend information for stakeholders, facilitating more meaningful conclusions.

• Disadvantages- A larger population of contracts to be

obtained, analyzed and assessed.- Potential issue with obtaining historical

information supporting analysis and disclosures, increasing reliance on legacy systems and other departments

• Advantages- Smaller population of contracts and no

disclosures for comparative periods, reducing the volume of information required for transition.

• Disadvantages- Presentation may be ‘fragmented

providing limited comparability among periods and reducing trend information

- Although restatement of comparative period is not required, additional disclosures are still required.

- In year of transition, entities will need to retain two sets of records, and potentially require two sets of systems, controls, processes, etc., to have parallel accounting

34© Deloitte LLP and affiliated entities. | Bringing clarity to an IFRS world – IFRS 15 – Revenue from contracts with customers

Implementing IFRS 15

Accounting Changes – Timing, Presentation and Disclosure Processes

and Controls

Information Technology

TaxPeople

Stakeholders


Processes and controls considerations

Examples of implications

1 Combining contracts; Modifying contracts

2 Material rights

3 Tracking information for disclosure


Process and control considerations Contract combinations, contract modifications

Operational change/challenge Process and control considerations • Contracts negotiated with the same

counterparty (related entity) and meeting certain criteria need to be combined and evaluated as one contract

• Identification of contracts to be considered for combination – Time-line

– Criteria for combination • Modifications to contracts are accounted for

prospectively (separately or combined with outstanding obligations) or retrospectively

• Types of modifications permitted • Identifying and tracking modifications

• Analyzing modifications

Process and control considerations (cont’d)


Material rights

Operational change/challenge Process and control considerations • Material rights – May include:

– Loyalty programs

– Option to purchase goods or services

– Option to extend contract at a lower price – Non-refundable upfront fees

• Valuation of material right

• Accounting for material right

• Process to identify material rights – Flagging free/discounted goods or services

• Valuation process – Estimating the percentage of options that will be exercised

• Tracking exercise or expiration of option

Process and control considerations (cont’d)


Disclosures

Operational change/challenge Process and control considerations • Significant additional quantitative data

to disclose – Disaggregation of revenue

– Transaction price allocated to remaining performance obligations

– Revenue recognized that was included in contract liability

– Closing balance of costs to obtain or fulfill a contract by category

– Amortization of contract assets

• Processes for aggregating data • Contract database

• Reconciliation processes

• Linking amortization of contract assets to transfer or goods/services under contracts


Information Technology considerations Technology solutions to address changes related to the new standard

ERP Vendor Solutions (e.g., Oracle, SAP)

Specialty Solution/ Business Rules Engine Custom

• ERP vendors are well positioned to support solutions based on their deep expertise in financial processing and reporting

• Oracle – Advocates the Sub-Ledger Accounting (SLA) and Financial Accounting Hub (FAH) modules to address the business rules need within the Standard

• SAP – Leverages RM-CA to support revenue sub-ledger accounting and business rules

• NetSuite – Encourages their cloud-based ERP solution with integrated revenue management module

• Various accounting specific business rules and revenue management solutions have started to work on re-designing their solution to be compliant with the standard and work in conjunction with existing ERP implementations.

• Vendors include: Leeyo (RevPro), RevStream (RevStream), Microgen (Aptitude), Softtrax (Softtrax Revenue Manager)

• Existing data warehouse to support customized solution

• Possibilities might exists to address specific parts of an end-to-end solution with a custom built system (e.g., contract data storage)

• Typically longer life cycle and higher cost of ownership

Information technology considerations (cont’d)


Areas to explore in considering solutions for your specific requirements Areas to explore in considering solutions for your specific requirements

Incremental data/system requirements

What data or system changes will be critical to new accounting complexities?

Industry alignment Does the solution cater to or specialize in the client’s industry?

Automation opportunity Can the current process be readily scaled or automated to reduce overall process risk?

Integration of products What other systems will need to integrate with the solution? (e.g., CRM, CMS, Sales, Billing, ERP)

Hosting model Are you best served by a web-based (cloud) solution or one that is hosted on-site?

Information technology considerations (cont’d)


Needs and capabilities

Leverage learnings from others Accelerator tools External expertise

• Across multiple phases of the lifecycle – Impact assessments, scenario and business requirements development, IT solution design and program management support

• Deep experience within industries – Business-to-Consumer and Business-to-Business B2B”, Hosted Managed Services (“HMS”)

• Accounting positions • Issues/gaps template • Use case scenario inventory • Detailed calculation templates for

all scenarios • Solution architecture diagrams • Data dictionary • Pre-populated Business

Requirements Documents (“BRDs”)

• Across various industries within Europe and the Americas, with a heavy focus on technology, media, and telecommunications

• Cross-functional teams to provide a breadth of services – Technical accounting, IT consulting and tax

• Learnings from roundtables with technology, media and telecommunications industry representatives


Implementation considerations Near-term actions and important decisions

Near-term actions Important decisions • Scope the impact of the standard – what

revenue streams are in scope • Develop a short-term plan to assess the key

impacts and prepare an implementation plan by: – Reviewing sample of contracts – Analyzing effect of the changes on

financial statements – Identifying disclosures requiring new data

elements to be collected • Estimate the level of effort required to

implement the standard

• Accounting policy choices and significant judgments – Transition method

• Contract vs. portfolio approach • Systems approach


Resources

Deloitte resources

• IASPlus

− IFRS in Focus

− Accounting Roundup

− Heads Up

• Center for Corporate Governance

• The new revenue recognition standard webcast - June 26, 2014

Other resources

• IASB website

• TRG meetings and summaries

• AICPA task forces

• CPA Canada Reporting Alert: IFRS 15 Revenue from Contracts with Customers


Resources (cont’d)Contacts

Toronto

Sean Morrison Partner 416-601-6296 [email protected]

Cindy Veinot Partner 416-643-8752 [email protected]

Mark Wayland Partner 416-601-6074 [email protected]

Calgary/Edmonton/Winnipeg

Steve Aubin Partner 403-503-1328 [email protected]

Montreal

Nick Capanna Partner 514-393-5137 [email protected]

Vancouver

Joe Read Senior Manager 604-640-4930 [email protected]

National

Maryse Vendette Partner 514-393-5163 [email protected]









Questions and answers

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