In May 2014, the accounting standards setting authorities released IFRS 15 Revenue from Contracts with Customers (IFRS 15) – a new standard on revenue recognition which is effective for periods beginning on or after 1 January 2018. IFRS 15 brings together in one standard the core principles for revenue recognition across all sectors. Publishing a new standard on revenue recognition is a major achievement for the standard setters, but for companies, especially those in the property sector, the real work is just beginning.
The new requirements will affect companies in different ways and those engaged in major projects in South Africa – such as telecoms, public utilities, engineering, construction and real estate industries – could see significant changes to the timing of revenue. Although earlier concerns that revenue may be delayed until practical completion of a contract or that a single contract may be broken down into many small accounting units have been largely addressed, the devil is nevertheless in the detail. The new standard introduces many new concepts for revenue and cost recognition with companies required to carefully examine the key areas of potential change by considering the life cycle of a typical construction contract.
The most notable change for construction contracts is that progressive profit recognition will only be permitted where the enforceable contractual rights and obligations satisfy certain criteria. There is no longer an automatic right to recognize revenue on a progressive basis for construction contracts. In addition, the standard does not prescribe how to account for foreseeable contract losses and this could have an impact on how loss-making projects are recognized and measured.
Most importantly, while the effective date of IFRS 15, 1 January 2018, may seem a long way off but one key decision needs to be made early – how to transition to the new standard. It is critical to make your decisions early in order to develop an effective and efficient implementation plan. However, making those decisions may not be so straight forward and there is no “one-size-fits-all” solution. The standard offers a range of transition options and senior management needs to carefully consider the possible significant effects on revenue and cost trends in the financial statements. In addition, to identify the optimal approach, management must consider broader business issues – from IT implementation plans and taxation to communication with stakeholders.
The best approach to these complex issues is for senior management to consider a set of core issues that will be relevant to their business, to take early decisions and implement efficient transition plans. This will ensure that one of the most important financial reporting metrics – revenue – remains a robust and reliable reflection of the company’s performance.