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Accounting for revenue under MFRS 15 Achieving a head start
Accounting for revenue under MFRS 15 Achieving a head start
Accounting for revenue under MFRS 15 | Achieving a head start
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BackgroundMFRS 15 Revenue from contracts with customers is intended to bring revenue accounting principles centrally into one standard and will replace several existing standards and interpretations, such as MFRS 111 Construction Contracts, MFRS 118 Revenue and IC Int. 15 Agreements for the Construction of Real Estate. New concepts are introduced which may impact the amount and/or timing of revenue recognition.
MFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. It is also to be applied retrospectively, with some available options and expedients.
Key executives should be concerned as the impact goes beyond just accounting.
Accounting for revenue under MFRS 15 | Achieving a head start
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As a key executive, why should you be concerned about MFRS 15?Getting your organisation ready for any new accounting requirements enables directors to fulfil their duties and ensure quality financial reporting.
However, MFRS 15 readiness is not only a matter of accounting compliance. For numerous organisations, the amount and/or timing of revenue recognition would change. Your stakeholders (both internal and external) need to be informed early on the potential change in future results. Your future business plans and budgets would need to take into account any potential changes in revenue accounting, and the associated implications on, inter-alia, key metrics, distributable profits, investments in new systems and processes and employee compensation plans. Income tax implications, from both cash flow and accounting perspectives, would need to be addressed as taxable income could potentially be accelerated or deferred under the new standard. In addition, if system and process changes are needed, due to the complexity of certain requirements of MFRS 15, it may take more than a year to for those systems and processes to be fully implemented.
While MFRS 15 is a very comprehensive standard, there are numerous areas that are subject to judgement and interpretation. You will need professionals with good understanding of its requirements and the interpretation issues, in order to help you identify the other significant implications on your business that go beyond just compliance.
Tax cashflows may change
Systems may need to change, especially for high volume revenue
transactions
Industry KPIs may change
Key metrics and distributable profits
may change
Accounting for revenue under MFRS 15 | Achieving a head start
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What are the expected key changes on accounting?Currently, there is limited guidance to address the increasing types of arrangements with customers, leading to possible diversity in practice in revenue accounting. MFRS 15 introduces a single comprehensive model (a five-step approach) for revenue accounting across different industries, and includes more prescriptive guidance to achieve consistency.
This new approach to revenue recognition is to be applied on an individual contract basis. For companies withnumerous transactions, each contract will have to be first assessed on whether it falls into the scope of thestandard. As a practical expedient, the portfolio approach may be applied when certain criteria are met.
The extent of impact depends on the nature of your arrangements with your customers. We highlight below somekey drivers in revenue arrangements that could increase the extent of the accounting impact. Each of the key drivers below entails specific accounting requirements in MFRS 15, which can be very complex and subject to judgement and interpretation.
5Allocatethe transactionprice
12
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Identifythe contract(s) with the customer
Identifythe separateperformanceobligations
Determine the transactionprice
Recogniserevenue when (or as) a performance obligation is satisfied
Examples of key drivers of
impact
Upfront/deferred payment schemes
Variable revenue due to
customer credits, contract incentives, contract penalties
etc
Long term contracts,
voluminous transactions
Multi-jurisdictional
sales operations
Frequent contract
modifications e.g. change orders,
claims
Existence of multiple
intermediaries e.g. distributors
Bundled sales, including
freebies or discounted goods/
services
Grantingof customer
incentives e.g. for contract renewals
Accounting for revenue under MFRS 15 | Achieving a head start
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Summary of a possible approach that organisations could consider in addressing the requirements of MFRS 15
There are various practical measures available within the new standard, including the transitional relief on initial application, which companies can consider applying to facilitate their transition in implementing the new requirements.
How Deloitte can helpGlobally and within Southeast Asia, Deloitte is at the forefront in successfully executing MFRS 15 implementation projects. With our integrated “As One” network of professionals in Malaysia and Southeast Asia, Deloitte has all the capabilities to provide your organisation with an “End-to-End” solution for MFRS readiness.
Our MFRS-Implementation teams comprise of cross functional professionals from accounting advisory, systems consulting, accounting analytics and corporate tax advisory practices, We have also taken the lead in facilitating industry based forums to discuss and resolve issues on MFRS 15 implementation.
Our proven approach is scalable and we can tailor the solution components to align with your requirements and fit within your budget.
Our team offers organisations assistance with the following on MFRS 15 readiness: • Performing gap assessment on accounting, systems and processes
• Using Deloitte Analytics to perform simulations of proforma revenue numbers.
• Performing design and implementation of systems and processes
• Drawing up accounting policy documentation
• Providing technical subject matter expertise and support on:√ Training√ Project and business change
management√ Technical research and documentation√ Corporate tax advisory
Key activities
• Evaluate significant revenue streams • Identify, evaluate and summarise key contracts • Capture and define key accounting issues and new policy requirements
• Identify key data gaps, process requirements • Assess opportunities to automate key accounting steps • Assess other potential system impacts • Analyse / determine additional disclosure needs • Determine long-term training requirements
Key issues
• Definition of contract and performance obligation
• Bundled offers/services
• Variable pricing • Allocation and measurement of performance
• Contract modifications
• Onerous contracts • Disclosures/ presentation
Deliverables
• Evaluation of contract types and summary of issues
• Data gap identification
• Accounting and tax issue summary
• Operational issues and process changes
• Implementation roadmap and workplan
Revenue streams/ Areas of business focus
• Bundled sales arrangements • Long-term sales contracts • Customer incentives • Frequent contract modifications
Accounting for revenue under MFRS 15 | Achieving a head start
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Consulting
Chee Wei [email protected] +60 3 7610 9078
Accounting Advisory
Izzad ShamsudinPartner [email protected]+60 3 7610 8989
Taxation Advisory
Chee Pei PeiExecutive [email protected]+60 3 7610 8862
Contacts
General enquiries at [email protected].
Northern Region
Muhammad Fairoz Abd BahrinSenior Manager+60 4 218 [email protected]
Mohamad Faisal [email protected] +60 3 7610 8081
Foo Mei YinSenior [email protected]+60 3 7610 8783
Tan Eng YewExecutive [email protected] +60 3 7610 8870
Lim Chin EeSenior [email protected] +60 3 7610 9128
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