IFRS 15: Everything you need to know about the post-implementation review (PIR)

The post-implementation review of IFRS 15 took two years, with the IASB publishing the project summary and feedback statement on September 30, 2024. What insights has the IASB gained from the many discussions, comments, and literature research? Should IFRS accountants expect significant changes in revenue recognition?

With IFRS 15 “Revenue from Contracts with Customers,” which became mandatory from fiscal years starting on or after January 1, 2018, the IASB consolidated the rules for revenue from contracts with customers into a single standard, thus replacing several standards and interpretations. Revenue recognition in accordance with IFRS 15 is based on the following basic principle: Revenue from transferring contractually agreed goods and services to customers is recognized in the amount of the customer’s expected consideration. To achieve this, each customer contract needs to be reviewed in four or five steps:

Each level may contain a large number of detailed questions that depend, among other things, on the industry and the business model of the company preparing the financial statements. This includes, for instance, the issue of whether a company provides the service directly or acts only as an intermediary (principal-agent problem).

 

The post-implementation review (PIR)

The IASB must conduct a general review to assess whether the application of new IFRSs or substantial changes to existing IFRSs has fulfilled their intended objectives. Such a post-implementation review should start after an application period of two years, which according to the Due Process Handbook is normally 30-36 months after the initial application date. In September 2022, the IASB launched the first phase of the PIR of IFRS 15, in which discussions were held with all stakeholder groups to identify aspects of IFRS 15 application that should be examined as part of the PIR. Based on this, a request for information (RFI) was published on June 29, 2023 asking the public to comment on certain issues in connection with the application of IFRS 15 by October 27, 2023. In the subsequent second phase, the IASB evaluated the comments, held further meetings with stakeholders, analyzed academic literature, and held a meeting with the U.S. FASB. On September 30, 2024, the IASB published its project report, which provides the following answers to the questions posed.

 

IFRS 15 has achieved its overall objective

The application of IFRS 15 is intended to ensure that financial statements provide useful information about the nature, amount, timing, and uncertainty of revenue and cash flows that a company generates from contracts with customers. This is to be achieved by the company recognizing revenue from the sale of its goods and services in the amount of the consideration that it expects to receive from its customers. According to the project report, almost all stakeholders are of the opinion that the application of IFRS 15 will achieve the set objective and that the five-step plan forms a solid basis for this.

 

No further regulations on the identification of separate performance obligations

Many stakeholders consider the existing regulations for identifying separate performance obligations to be suitable, but also report particular challenges in practice, especially with regard to the sale of bundles of goods such as software in conjunction with other services (updates, customizing, cloud services, etc.). However, the IASB does not consider further explanatory examples and/or application notes to be necessary. The IASB will also not include additional regulations for special and particularly complex transactions in the standard. The IASB does not foresee any further application guidance that could significantly simplify the assessment of complex issues. In these cases, the special circumstances must always be carefully considered on a case-by-case basis. By declining to establish detailed rules for specific transactions, the IASB reaffirms its intention of a principle-based regulation of revenue recognition that covers different business models.

 

Determining the transaction price: Several application problems, but only one requires further consideration

Several possible components of the transaction price cause problems for reporting entities and users of financial statements:

The IASB sees no need for amendments to IFRS 15 with regard to transaction price determination. Only the item “consideration payable to a customer” is to be included in the next agenda consultation so that it can be included in the work plan if necessary.

 

No change to the rules on the timing of revenue recognition

In the context of revenue recognition over time, some stakeholders see difficulties in applying the requirement in IFRS 15.35(c) that the supplier cannot otherwise use the asset and has an enforceable right to payment for the (partial) performance already completed. Both the right to payment and the identification of an alternative use pose a challenge in individual cases. A few stakeholders see a problem in selecting the appropriate method for measuring progress. The IASB also clarifies that, in these cases, within the framework of principle-based revenue recognition rules, some degree of judgment from those preparing financial statements is necessary and inherent to the system. An expansion of the concept of transfer of control, proposed by some stakeholders to achieve more appropriate outcomes in specific cases, was considered but ultimately rejected by the IASB. This would have been a fundamental change to the principles set out in IFRS 15, which in turn would have resulted in upheavals in accounting for other companies. As the overall feedback on IFRS 15 was that the principles broadly lead to the desired objective, such a fundamental change would not be justified.

 

Principal or agent: Uncertainties, especially for services and intangible assets

Depending on the distribution channel, the question may arise as to whether a company provides the service for the end customer or merely acts as an intermediary. In the first scenario, the company operates as a “principal” and records revenue equal to the full amount received from the end customer; in the second scenario, it functions as an “agent,” with revenue limited to the brokerage commission. The decisive factor in determining whether a company acts as a principal or an agent is whether the company has control over the goods. IFRS 15.B37 lists indicators that a company exercises control over the goods before control is transferred to the end customer. Many stakeholders have expressed in the PIR that it can be difficult to determine which party has control over the service provided to the end customer, especially in service industries. If, for example, company X commissions another company Y to carry out a repair at customer C’s premises, the revenue recognition for this repair depends not only on who determines the price for the repair and who receives the consideration from customer C, but also on who is responsible to C for the success of the repair. Similar problems apply to the supply of intangible assets. The IASB notes that the difficulties arise primarily in business models that have arisen due to market developments since the introduction of IFRS 15 and often have specific characteristics and business conditions. As part of the next agenda consultation, the IASB will consider whether the issue of assessing control over services and intangible assets should be included in the work plan.

 

Companies must make discretionary decisions concerning the recognition of license revenue

With regard to the recognition of license revenue, identifying separate performance obligations (see above) in complex licensing agreements seems to present a significant challenge. Less frequently, stakeholders report uncertainties regarding: determining the timing of revenue recognition for license renewals; deciding whether a right of access to the license or a right of use exists; applying the general provisions of IFRS 15 versus the specific application guidelines for licenses; and accounting for sales-based or usage-based license revenues. From the IASB’s perspective, the provisions on license revenue, including application guidance and illustrative examples, are adequate and should be applied on a discretionary basis in the case of complex circumstances.

 

The required disclosures in the notes are useful, more precise regulation is unnecessary

Some stakeholders have doubts about the balanced cost-benefit ratio for certain disclosures, and some see differences in the quality of the information published in practice. The IASB concludes from feedback from users of financial statements that the benefits justify the costs of providing the information. The IASB attributes differences in quality not to the rules of IFRS 15 themselves, but rather to inappropriate interpretation regarding the intended purpose of disclosed information.

 

The application of IFRS 15 in conjunction with other standards leads to new and old issues

Challenges in the application of IFRS 15 in conjunction with IFRS 3 Business Combinations, IFRS 9 Financial Instruments, and IFRS 16 Leases were specifically queried in the PIR. The measurement of contract assets and liabilities at fair value, e.g. as part of the initial consolidation of subsidiaries, means that the financial statements of companies that grow organically and companies that grow through the acquisition of other companies are not comparable. However, the issue of fair value measurement in connection with business combinations has already been considered as part of the PIR of IFRS 3 and in the project “Business Combinations – Disclosures, Goodwill and Impairment” and the IASB does not currently see any need for action in this regard.

The IASB considers that the standards address the issues raised in relation to IFRS 9, particularly regarding the classification of price discounts as revenue reductions or credit losses, as well as the accounting for certain liabilities arising from the application of IFRS 15 (e.g. obligations from gift cards).

Stakeholders ask for further illustrative examples or application guidance on contracts that contain both leasing and non-leasing transactions. There are uncertainties here as to which transaction determines the contract length and which standard is to be used as the basis for the valuation of variable contract components. The IASB sees no need for action in this regard. The IASB will include the issue of whether the transfer of an asset in a sale-and-leaseback transaction should be accounted for in accordance with IFRS 15 in the PIR of IFRS 16.

The comment letters on the RIF contain unsolicited remarks on the application of IFRS 15 in conjunction with IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, and IFRIC 12 Service Concession Arrangements. The question of whether the sale of an entity interest in a single-asset entity that's a subsidiary (“corporate wrapper”) should be accounted for using IFRS 15 or IFRS 10 was not discussed by the IASB as part of the PIR. Instead, the next agenda consultation will address the entire “corporate wrapper” issue, which has previously been discussed by the IFRS Interpretations Committee as part of the PIR of IFRS 10, IFRS 11, and IFRS 12 (Disclosure of Interests in Other Entities), as well as in an earlier agenda consultation. It is possible that this issue will now (finally?) be included in the IASB’s work plan.

The questions raised regarding the application of IFRS 15 in conjunction with IFRS 11 will also form part of the next agenda consultation. This includes determining whether a joint arrangement falls within the scope of IFRS 15 or IFRS 11 (and/or another standard?) and how to account for an arrangement that includes both a supplier-customer relationship and elements of joint control (e.g. over a tangible asset).

Some stakeholders have suggested that IFRIC 12 be comprehensively reviewed and aligned with the provisions of IFRS 9, IFRS 15, and IFRS 17 (Insurance Contracts). In the PIR of IFRS 15, the comments focused primarily on the accounting for contractual obligations to maintain or restore service concession infrastructure. As part of the next agenda consultation, the IASB will discuss whether stakeholders should be consulted on the scope of a potential project related to IFRIC 12.

 

Consistency between IFRS 15 and Topic 606 is important

The IASB developed IFRS 15 in close consultation with the FASB in its preparation of ASC Topic 606. In the meantime, the FASB has made some amendments to Topic 606. This also applies to the issues commented on by stakeholders in the PIR regarding sales-based taxes, and the timing of revenue recognition for license extensions. Almost all stakeholders are in favor of at least maintaining the current level of consistency, with some suggesting that the IASB integrate interim amendments to Topic 606 into IFRS 15. Consistency between the two standards increases the comparability of financial statements prepared in accordance with IFRS and US GAAP and reduces the costs for companies that have to prepare financial statements in accordance with both accounting standards. In the meeting with the FASB as part of the PIR (see above), the two boards agreed that they do not expect any (further) amendments to the respective standard that would significantly change the consistency between IFRS 15 and Topic 606.

According to stakeholders who provided feedback during the PIR, the close alignment between IFRS 15 and Topic 606 has played a significant role in enhancing the accounting for revenue from customer contracts under IFRS 15. Only a few indicated that the convergence of the two standards was not a high priority for them.

 

The allocation of the transaction price to separate performance obligations represents a significant problem for application

Stakeholder comments on topics not explicitly surveyed indicate that allocating the transaction price across multiple distinct performance obligations within a single contract presents a major challenge in implementing IFRS 15. In particular, determining the stand-alone selling price of services without an observable market price, e.g. highly customized software, can be a challenge. The IASB will not take any action on the basis of the further comments as there is nothing to suggest that the requirements in IFRS 15 are not clear and appropriate, or that the benefits are lower and the costs higher than expected.

 

Conclusion

• The PIR of IFRS 15 has demonstrated that the standard generally fulfills the expectations set for it.
• Many of the application problems described by stakeholders result from the fact that the principles contained in IFRS 15 lead to discretionary leeway in practice, within which justifiable decisions must be made.
• The IASB does not plan to adopt the FASB’s amendments to Topic 606 for IFRS 15.
• Some of the issues identified by stakeholders may be integrated into the IASB’s work plan as part of the next agenda consultation.
• The IASB is therefore not planning to provide users of IFRS 15 with specific guidance on practical implementation problems in the foreseeable future.