Last year, the International Accounting Standards Board (IASB) finalised a new International Financial Reporting Standards (IFRS) requirement that covers recognising revenue. Called IFRS 15, it applies to a number of areas, including subscription-based revenue. It states that revenue should be recognised at the point when goods or services are delivered, rather than altogether in one at the beginning of a contract or at one point during the subscription period.
IFRS 15 applies to all industries and affects every business that reports under IFRS for annual accounting periods that begin on or after 1st January 2018.
Recognising revenue
Revenue recognition is the accounting principle that governs when revenue should be recorded. Revenues are recognised when they have been realised. That is, when they have been earned – typically when the goods have been delivered or the services have been transferred. Revenues are not recorded when the payment is received, which may be before or after this.
IFRS 15 outlines procedural guidance for accounting revenue from customer contracts specifically where a contractual obligation is delivered in stages, for example, with subscription-based models.
IFRS 15 also governs the sale of some assets that are not part of a business’s usual activities, for example the sale of property, equipment and plant.
There is a new, five-step model under IFRS 15 for recognising revenue:
- Identify the contract with a customer;
- Identify the performance obligations in the contract;
- Determine the transaction price;
- Allocate the transaction price to the contract’s performance obligations; and
- Recognise revenue when or as you satisfy a performance obligation.
How does IFRS 15 affect distribution, manufacturing and ecommerce businesses?
Our customers operate in three main areas: distribution, manufacturing and ecommerce. While IFRS 15 will affect all businesses, here’s how we see it affecting our own customers.
How IFRS 15 affects distribution
If a distributor runs customer loyalty and other incentive programmes, such as rebate schemes, then these could potentially need consideration under the new standard. Goods or services may be delivered throughout the year, but only at the end of the year might the payment become due, according to how much has been purchased. Throughout the year, the distributor will not yet know the pricing that needs to be applied. Yet under IFRS 15, this will have to be accounted for as the goods and services are realised.
How IFRS 15 affects manufacturing
If a manufacturer currently accounts for revenue when products are delivered, under IFRS 15, they may meet one of the criteria for recognition over time.
Depending on the contract terms, revenue may need to be recognised earlier than when the goods are delivered, perhaps while the goods are being manufactured.
How IFRS 15 affects ecommerce
As for distributors, ecommerce companies need to be aware of how loyalty schemes and incentive programmes might affect how they recognise revenue.
Also, businesses that ship goods “FOB shipping point” effectively hand over title to the goods once they leave the supplier and are in transit. These companies may be able to recognise revenue at point of despatch rather than at point of delivery.
Another consideration is whether the recognition of revenue is on payment or dispatch. Payment is often taken at point of sale, via PayPal or credit card, but revenue should not really be recognised until the goods are dispatched.
Critical accounting system capabilities
NetSuite has been preparing for the new requirements for some time. It has developed an Advanced Revenue Management module that addresses revenue recognition and allows its users to comply with the new standards.
NetSuite’s revenue management capabilities are flexible and support different business models for both products and services. It has flexible calculation capabilities that address complex revenue recognition and billing.
NetSuite has detailed reporting capabilities that will help with the increase in disclosures. It also provides actionable data that informs the management decision-making processes that come with complicated revenue recognition models.
Flexible reporting is also vital as it helps ease the burden that businesses will face while they work with their auditors and accountants during the transition period.
Finally, NetSuite can recognise revenue simultaneously under both the current and the new standards. So you can implement it now and use it during the transition period, running two accounting methods in parallel.
Where next?
IFRS 15 represents a significant change in revenue recognition accounting. But adopting the standards also give you an opportunity to revamp and revitalise your revenue processes.
If you want to comply with these new revenue recognition requirements, we’d be happy to show you how NetSuite approaches them. Please call us for more information on 020 8819 9071 or contact us using the website form.
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