introduction to new ifrs requirements on revenue ... · pdf filein finance costs the lease...

Introduction to new IFRS requirements on revenuerecognition (IFRS 15) and lease accounting (IFRS 16)SAPience – FIN Master ClassThomas Carlier – Partner – Head of Brussels IFRS Centre of Excellence

29 November 2016

• IFRS shall be applied by EU listedcompanies for the preparation oftheir consolidated financialstatements

• IFRS are constantly evolving sothat existing standards can beamended, revised or supersededby a new standard after acomprehensive due process

• In this context, the standard-setter(IASB) recently finalized IFRS 15 &IFRS 16

Context and objective

© 2016 Deloitte Belgium 2

• Objective is to introduce the new requirements of IFRS 15 and IFRS 16

− Intention is not to be exhaustive

− Presentation based on the latest interpretations that are still under development

− Views expressed are those of the presenter

Introduction to IFRS 16Leases

• Final standard issued in January2016

• Supersedes IAS 17 and relatedinterpretations

• Results from a convergence projectwith the US FASB

• Effective 2019 with retrospectiveapplication as a principle

• EU endorsement expected in 2017

IFRS 16 – Leases


• Lessee

‒ Single model under which a lessee is required torecognise:

• Assets and liabilities for all leases with a termexceeding 12 months, unless the underlying asset isof low value (5K USD)

• Depreciation of lease assets separately from intereston lease liabilities in the income statement

‒ Operational and implementation challenges,including:

• Impact on buy/lease decisions

• Impact on systems to capture and treat relevant datafor accounting and disclosures

• Impact on debt covenants

• Impact on ratios and performance indicators used tocommunicate to the market

• Lessor – IFRS 16 substantially carriesforward the requirements of IAS 17 based onthe distinction between operating leases andfinance leases

IFRS 16 – Overview of requirements


6© 2016 Deloitte Belgium

The contractdoes contain a

lease

Yes

Customer Supplier

No

Does the customer have the right to operate theasset throughout the period of use, without the

supplier having the right to change those operatinginstructions?

Did the customer design the asset in a way thatpredetermines how and for what purpose the asset

will be used throughout the period of use?

Neither (predetermined)

No

Yes

Does the customer, the supplier or neither partyhave the right to direct how and for what

purpose the asset is used throughout the period ofuse?

Yes

No

The contractdoes not

contain a lease

Yes

Does the customer have the right to obtainsubstantially all of the economic benefits from

use of the asset throughout the period of use?

NoIs there an identified asset?

What is a lease (vs. service contract)?

6

Multiple lease components

Contracts with multiple components

Lease and non-leasecomponents

+

• Identify the non-leasecomponents and accountfor these separately fromthe lease components

• A practical expedient isavailable

Contractsmay havemultiple

components

if• The lessee can benefit from

use of the underlying asseteither on its own or togetherwith other resources thatare readily available to thelessee, and

• The underlying asset isneither highly dependenton, nor highly interrelatedwith, the other underlyingassets in the contract.

+


Recognition exemptions

Text

Lease payments recognized as anexpense on:• A straight-line basis over the

lease term; or• Another systematic basis.

Short-termlease

Low-valueasset

Leaseexemptions

• Save time and effort;• Increase operating costs,

reduce finance costs andreduce EBITDA.

ENTITIES

ACC’GTREATMENT

• Lease by lease,absolute basis;

• Not highly dependentor interrelated withother assets or sub-leasing.

• Max 12 months;• By class of asset;• No purchase option;• Reassess on any

change to the leaseterm.


Practical expedient: Portfolio approach

An entity may apply IFRS 16 to a portfolio of leases with similar characteristics ifthe entity reasonably expects that the effects on the financial statements ofapplying this standard to the portfolio would not differ materially from applyingthis standard to the individual leases within that portfolio.

There are no rules determining how to allocate leases to aportfolio – this requires the use of judgment.

JUDGMENT


Initial measurement

How should the lease be measured at initial recognition?


Subsequent measurement

• Depreciation is measured underIAS 16.

• Impairment is assessed underIAS 36.

Will the lessee take possessionof the asset at the end of thelease?• Yes – depreciate till the end of

the asset’s useful life.• No – depreciate till the earlier of

the end of the asset’s useful lifeand the end of the lease term.

How should the lease be subsequently measured?

Right-to-useasset

Leaseliability

Depreciationcharge

Financecosts

Initialmeasurement At cost

PV ofoutstanding

lease paymentsN/A N/A

Subsequentmeasurement

Cost lessaccumulateddepreciation

and impairment

Recognized inoperating costs

Determine theperiod for

depreciation

Statement ofProfit or Loss

Statement ofFinancial Position


Subsequent measurement

Lease liability and interest costs

Right-to-useasset

Lease liability Depreciationcharge

Financecosts

Initialmeasurement At cost PV of outstanding

lease payments N/A N/A

Subsequentmeasurement

Cost lessaccumulateddepreciation

and impairment

Amortized cost

Recognized inoperating costs

Determine theperiod for

depreciation

Recognizedin finance

costs

The lease liability increases to reflectthe interest on the lease liability andis reduced by lease payments madeduring the period.

Statement ofProfit or Loss

Statement ofFinancial Position


Cash flows from operatingactivities

Cash flows from investingactivities

Cash flows from financingactivities

Cash repayments of the lease liability are classified between principal and interestportions. These are presented in the statement of cash flows as follows:

Classification of cash flows

Cash payments for theprincipal portion of the leaseliability.

• Short-term lease payments• Payments for leases of low-

value assets• Variable lease payments not

included in themeasurement of the leaseliability


Effective date and transition

An entity shall apply IFRS 16 retrospectively for annual periods beginning onor after January 1, 2019

Is earlier applicationpermitted?

Yes, if IFRS 15 is alreadyapplied (and EU endorsed)

Not necessarily - practicalexpedient is available

Do I need to reassesswhether a contract is, or containsa lease at the initial application

date?


Practical expedient

Classifying lease contracts at transition

At the date of initial application, an entity is not required to reassesswhether a contract is, or contains, a lease. The expedient must beapplied to all contracts.

Only for contracts that have previously beenassessed under IAS 17 and IFRIC 4 todetermine whether it includes a lease.

For contracts previouslyassessed under IAS 17 andIFRIC 4, did the contract

contain a lease?

Yes: apply IFRS 16 tothe contract.

No: do not applyIFRS 16 to the

contract.


Transition

A lessee shall apply IFRS 16 retrospectively constantly to all itsleases either:

Practical expedientRestate the comparatives

at the beginning of the comparative period

Recognize the cumulative effectas an adjustment to the opening balanceof retained earnings at initial application


Transition: Applying the two options

OPTION 1 Full retrospective approach (IAS 8)

Jan 1, 2018 Dec 31, 2018 / Jan 1, 2019 Dec 31, 2019

Restate openingretained earningsas if IFRS 16 hadbeen applied.

Preparecomparatives forFY19 accordingto IFRS 16.

All balances areprepared accordingto IFRS 16.

Restate openingretained earningsas if IFRS 16 hadbeen applied.

No impact onretainedearnings (stateaccording to IAS17).

Results for FY19 areprepared under IFRS16Comparatives areprepared under IAS17.

OPTION 2 Partially retrospective approach (practical expedient C5)


Rentalpmts

• At either:o Carrying amount as if IFRS

16 had applied; oro lease liability at initial

application, adjusted forprepaid or accrued leasepayments.

• Assess for impairment unlessapplying the practicalexpedient.

Right ofuse

asset

PV of remaining leasepayments using the lessee’sincremental borrowing rate.

Leaseliability

Transition

Accounting for leases previously classified as operating andfinance leases

Available practical expedients in IFRS16.C9-C10

Carrying amountimmediately beforeinitial application.

Carrying amountimmediately beforeinitial application.

Leaseliability

Right ofuse

asset

Finance leasesOperating leases


Introduction to IFRS 15Revenue from Contractswith Customers

• In May 2014, the IASB published IFRS15 – Revenue from Contracts withCustomers

• Specifies how and when to recogniserevenue by providing a single, principlesbased five-step model to be applied toall contracts with customers

• Original effective date on 1 January2017 deferred to 2018 (early applicationis permitted)

• EU endorsed in October 2016

• Clarifications to IFRS 15 issued in April2016 (not EU endorsed yet)

Revenue from Contracts with Customers


Overview – The Core Principle

Identifythe

contractwith a

customer(Step 1)

Identify theperformanceobligations inthe contract

(Step 2)

Determinethe

transactionprice

(Step 3)

Allocate thetransactionprice to the

performanceobligations

(Step 4)

Recognizerevenue when

eachperformanceobligation is

satisfied(Step 5)

Control approach(differs from the risks and rewards approach under IAS 18)

Recognize revenue to depict the transfer of goods or services to customers inan amount that reflects the consideration to which the entity expects to be

entitled in exchange for those goods or services

Five-step model to apply the core principle:


Applying the 5 Step Model – Example

Identify theperformanceobligations

(Step 2)

Identify thecontract(Step 1)

Determine thetransaction price

(Step 3)

Allocate thetransaction price

(Step 4)

Recognizerevenue(Step 5)

Contract withcustomerCU 110

Deliverequipment

Provide trainingservices

Provide supportservices

Provideextendedwarranty

CU 4

CU 1

Point in time

Over time

Over time

Over time

CU 100

CU 5


Step 1: Identifying the Contract

A legally enforceable contract (incl. oral or implied) must meet all of thefollowing requirements:

A contract is outside the scope if:

Commercial substance.

Contracts are approved and theparties are committed to perform. Each party’s rights can be identified

Payment terms can be identified

The contract is wholly unperformed Each party can unilaterally terminate thecontract without compensation

Step 1 Step 2 Step 3 Step 4 Step 5

It is probable that the entity willcollect the consideration towhich it will be entitled


Identify all (incl. implicit) promised goods/services in the contract

Step 2: Identifying Performance Obligations

Is the good/service distinct?

Can the customer benefitfrom the good or service

on its own or together withother readily available

resources?

Is the good or serviceseparately identifiable from

other promises in thecontract?

Account for as a separateperformance obligation

Combine two or morepromised goods or

services

YES NO

CAPABLE OF BEINGDISTINCT

DISTINCT IN CONTEXTOF CONTRACT


AND


Transactionprice

The transaction price wouldnot be reduced for theeffects of customer creditrisk.

Excluding credit risk

Variable considerationConsideration amount to which an entityexpects to be entitled in exchange fortransferring promised goods or services toa customer.

Definition

The amount is fixed and notcontingent on the outcome offuture events.

Fixed consideration

• Consideration in a form other thancash

• Shall be measured at FV

Non-cash considerationSignificant benefit of financing

• Estimated andpotentially constrained

• e.g., discounts, rebates,refunds, etc.

Step 3: Determining the Transaction Price Step 1 Step 2 Step 3 Step 4 Step 5

What is the transaction price? What does it include?

Consideration payableto customers

• If identified, leads to adjustment intransaction price

• Practical expedient available

Reduces transactionprice unless payment ismade for a distinctgood/service

25

Step 4: Allocating the Transaction Price Step 1 Step 2 Step 3 Step 4 Step 5

• Estimate the price if unobservable• Acceptable methods：> Adjusted market assessment approach> Expected cost plus a margin approach> Residual approach (only in limited circumstances)

Determinestandaloneselling price

• Allocate the transaction price to each performance obligation on arelative stand-alone selling price basis

• Allocate discounts proportionally to all performance obligationsunless certain criteria are met

• Allocate variable consideration and changes in transaction priceto all performance obligations unless two criteria are both met

• Do not reallocate changes in standalone selling price afterinception

Allocate thetransaction

price

Maximize theuse of

observableinputs and

applyconsistently


Step 5: Recognizing Revenue

The seller’sperformance createsor enhances an asset

controlled by thecustomer.

Performance satisfied over time = Revenue recognized over time

The seller does notcreate an asset that

has an alternative useto the seller and theseller has the right

to be paid forperformance to date.

OR

Revenue recognized at a point in time

The customersimultaneouslyreceives and

consumes the benefitof the seller’s

performance as theseller performs.

IF NOT


OR


Step 5: Recognizing Revenue Step 1 Step 2 Step 3 Step 4 Step 5

Indicators that control transfers include:

Present right to paymentPresent right to payment

Legal title of goods and servicesLegal title of goods and services

Transferred physical possessionTransferred physical possession

Significant risks and rewards of ownershipSignificant risks and rewards of ownership

The customer has accepted the assetThe customer has accepted the asset

Revenue recognized at a point in time


Transition

29

FullRetrospective

ModifiedRetrospective

Contracts restated andreported in accordancewith IFRS 15 (*)

Contracts reported inaccordance withexisting guidance

Contracts reported inaccordance with IFRS15

New and existingcontracts reported inaccordance with IFRS15Additional disclosure ofimpact new standard onall affected financialstatement line items

2017reportingin 2018 FS

2018 reportingin 2018 FS

CumulativeAdjustment toR/E recorded

Closing 2016 Closing 2017

(*) certain practical expedients permitted

© 2016 Deloitte Belgium

• Some statements / perceptions about IFRS 15

− “Bundles – That’s only affecting telecoms”

− “IFRS 15 – That’s an accounting project”

− “Desktop exercise is sufficient to meet the IFRS 15 requirements”

• Some accounting challenges encountered in practice (related impacts on data / process /systems and external communication)

− Impact beyond the top line – contract costs accounting

− Stand-alone selling prices – determining and keeping up to date

− Rebates accounting can be quite complex

− Handling and shipping costs – can be treated as a separate performance obligation

− Disclosures – amount of unsatisfied performance obligations

• Next steps

− Annual financial statements 2016 – Qualitative and quantitative information to discloseon the expected impacts of IFRS 15 (IAS 8.30) – See Public Statement ESMA dated 20July 2016 relayed by the FSMA

IFRS 15 – Some attention points


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© 2016 Deloitte Belgium

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