www.pwc.com/ifrs IFRS news – May 2016 1 IFRS 15: final amendments to the new revenue standard issued The IASB has amended IFRS 15 to clarify the guidance on identifying performance obligations, licences of IP and principal versus agent. The amendments also provide additional practical expedients on transition. These amendments differ from those being made by the FASB. Sallie Deysel looks into the details for us. The IASB issued its clarifications to IFRS 15 on 12 April 2016. These address areas of guidance that were identified by the Transition Resource Group as being at risk of inconsistent interpretation. The IASB has tried to minimise uncertainty that could disrupt implementation processes, and introduced a high hurdle when deciding what, if anything, should be changed. The Board has been clear that further changes to the standard are unlikely before the post-implementation- review. The FASB decided to make more wide- ranging changes to a greater number of topics. What has changed? The amendments clarify the guidance on identifying performance obligations, accounting for licences of intellectual property and the principal versus agent assessment (gross versus net revenue presentation). New and amended illustrative examples have been added for each of these areas of guidance. The IASB has also included additional practical expedients for transition. The amendments are effective for annual reporting periods beginning on or after 1 January 2018, with early application permitted. Identifying performance obligations The amendments clarify the guidance for determining when the promises in a contract are ‘distinct’ goods or services that should be accounted for separately. Identifying performance obligations is fundamental to the application of IFRS 15 and the IASB decided to make the same changes as the FASB in order to retain convergence in this important area. Licences of intellectual property The amendments to the licensing guidance clarify when revenue from a licence of intellectual property (IP) should be recognised ‘over time’ and when it should be recognised at a ‘point in time’. The FASB decided to develop a different model, which categorises licences as either ‘functional’ or ‘symbolic’ to determine the accounting treatment. The FASB also provided guidance on the impact of restrictions in licences, accounting for renewals of licences and the pattern of revenue recognition for performance obligations that include a licence. IFRS news In this issue: 1 Final changes to IFRS 15 An overview 3 Regulator focus What can we learn from the ESMA report? 5 IFRS 8 Segment Reporting Key things to look out for 7 Leases lab How to implement the new guidance? 8 Cannon Street Press Insurance and IFRS 9 Conceptual Framework Disclosure Initiative 9 IC rejections IAS 18 12 Cryptic word-seek: Solution 13 The bit at the back... For further information or to subscribe, contact us at [email protected]or register online.
Transcript
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IFRS news – May 2016 1
IFRS 15: final amendments to thenew revenue standard issuedThe IASB has amended IFRS 15 to clarify the guidance on identifying performanceobligations, licences of IP and principal versus agent. The amendments also provideadditional practical expedients on transition. These amendments differ from thosebeing made by the FASB. Sallie Deysel looks into the details for us.
The IASB issued its clarifications to IFRS15 on 12 April 2016. These address areas ofguidance that were identified by theTransition Resource Group as being at riskof inconsistent interpretation.
The IASB has tried to minimise uncertaintythat could disrupt implementationprocesses, and introduced a high hurdlewhen deciding what, if anything, should bechanged. The Board has been clear thatfurther changes to the standard areunlikely before the post-implementation-review.
The FASB decided to make more wide-ranging changes to a greater number oftopics.
What has changed?
The amendments clarify the guidance onidentifying performance obligations,accounting for licences of intellectualproperty and the principal versus agentassessment (gross versus net revenuepresentation). New and amendedillustrative examples have been added foreach of these areas of guidance.
The IASB has also included additionalpractical expedients for transition. Theamendments are effective for annualreporting periods beginning on or after 1
January 2018, with early applicationpermitted.
Identifying performance obligations
The amendments clarify the guidance fordetermining when the promises in acontract are ‘distinct’ goods or services thatshould be accounted for separately.Identifying performance obligations isfundamental to the application of IFRS 15and the IASB decided to make the samechanges as the FASB in order to retainconvergence in this important area.
Licences of intellectual property
The amendments to the licensing guidanceclarify when revenue from a licence ofintellectual property (IP) should berecognised ‘over time’ and when it shouldbe recognised at a ‘point in time’.
The FASB decided to develop a differentmodel, which categorises licences as either‘functional’ or ‘symbolic’ to determine theaccounting treatment. The FASB alsoprovided guidance on the impact ofrestrictions in licences, accounting forrenewals of licences and the pattern ofrevenue recognition for performanceobligations that include a licence.
IFRS news
In this issue:
1 Final changes to IFRS 15
An overview
3 Regulator focus
What can we learn from the
ESMA report?
5 IFRS 8 Segment
Reporting
Key things to look out for
7 Leases lab
How to implement the new
guidance?
8 Cannon Street Press
Insurance and IFRS 9
Conceptual Framework
Disclosure Initiative
9 IC rejections
IAS 18
12 Cryptic word-seek:
Solution
13 The bit at the back...
For further information or tosubscribe, contact us [email protected] register online.
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IFRS news – May 2016 2
These differences mean that revenuereported by IFRS reporters might bedifferent to revenue reported bycompetitors under US GAAP. This couldaffect companies that that licence IP suchas in the media, biotech and softwareindustries. However, it is too soon to knowhow widespread any differences will be inpractice.
The amendments also clarify when to applythe guidance on recognising revenue forlicences of intellectual property with fees inthe form of a sales- or usage-based royalty.These changes are converged.
Principal versus agent guidance
The IASB has clarified that the principal inan arrangement controls a good or servicebefore it is transferred to a customer. It hasalso revised the structure of the indicatorsso that they indicate when the entity is theprincipal rather than indicate when it is anagent, and eliminated two of the indicators(‘the entity’s consideration is in the form ofa commission’ and ‘the entity is notexposed to credit risk’). These changes areconverged.
Practical expedients on transition
The amendments introduce two newpractical expedients to simplify transition.
One expedient allows entities to usehindsight when assessing contractmodifications that exist at transition.
The second expedient allows entitiesapplying the full retrospective method toelect not to restate contracts that arecompleted at the beginning of the earliestperiod presented. This expedient will notbe available to US GAAP reporters.
What’s the impact?
The amendments do not change the coreprinciples of IFRS 15. However, they clarifysome of the more complex aspects of the
standard. The amendments could berelevant to a broad range of entities andshould be considered as managementevaluates the impact of IFRS 15.
The amendments to IFRS 15 are not in allinstances the same as those that the FASBis making to the US standard. In additionto the differences noted above, the FASBhas provided an exception for accountingfor shipping and handling activities and isfurther expected to make narrow-scopeamendments to the guidance on assessingcollectability, presentation of sales-taxesand measuring non-cash consideration.
IFRS 15 will not include any additionalguidance on these topics. The IASB has inmost cases indicated in the Basis forConclusions where it expects that thedifferences in wording between thestandards will or could result in differentconclusions under IFRS and US GAAP.
Entities with reporting requirements bothin- and outside the US (for example, USentities with IFRS reporting subsidiaries,or IFRS reporters who are also FPIs) willneed to consider in their transition processwhether their conclusions will beacceptable under both frameworks. Entitieswith significant competitors reportingunder US GAAP might need to explain anydifferences in application to investors.
What’s next?
The IASB does not currently plan to makefurther amendments to IFRS 15. The FASBexpects to issue its final narrow-scopeimprovements as well as an exposure draftcontaining various technical corrections.
The FASB continues to convene the TRGwith US participants only. The first US onlyTRG meeting took place in April 2016 andfurther meetings are scheduled for July andNovember. It is currently unclear if, orhow, the IASB will respond to thediscussions at those meetings.
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IFRS news – May 2016 3
Regulator focus: What can we learnfrom the ESMA report?Enforcement in the area of IFRS reporting is a further addition to the list of thingsthat management should consider when preparing financial statements. MadhuriRavi Srinivasan of Accounting Consulting Services examines the key highlights fromthe recently released ESMA Report.
ESMA (the European Securities andMarkets Authority) has recently issued itsReport on Enforcement and Regulatoryactivities of accounting enforcers in 2015.This report discusses the findings of theEuropean accounting enforcers withrespect to the enforcement priorities for2014.
The review covered 1200 issuers, which isclose to 20% of all IFRS issuers in Europewith securities listed on regulated markets.As a result of the performed reviews, theenforcers took action against 25% of theissuers.
What were the areas of focus?
ESMA had set out the following three areasof focus for the year:
(a) Presentation of consolidated financialstatements and related disclosures;
(b) Financial reporting by parties to a jointarrangement and related disclosures;
(c) Recognition and measurement ofdeferred tax assets and uncertain taxpositions
What were the main findings?
Consolidated financial statements
For users of IFRS as adopted by the EU,2014 was the first year for application ofIFRS 10 Consolidated financial statementsand IFRS 12 Disclosure of interests inother entities. Whilst the majority ofissuers analysed the existence of control inentities where they had less than themajority of voting rights, the relateddisclosures were often missing in thefinancial statements, particularly aspectssuch as:
how an entity justifies it has powerover the investee,
the exposure to variable returns fromtheir involvement with the investeeand
the ability to use their power over aninvestee to affect the amount of theinvestor’s return.
Some issuers that did not consolidate aninvestment in which they held more than50% of the voting rights, did not disclosethe justification for doing so (for example,the existence of a contractual agreementbetween shareholders establishing jointcontrol or providing control to the othershareholders).
Disclosures related to structured entitiesseem to be better, with 90% of such issuershaving disclosed information that enabledusers to understand and evaluate thenature, extent and risks associated with theinterests in the unconsolidated structuredentities.
Key takeaway
It appears that the notion of control isapplied appropriately in almost all cases.The shortcoming is related to the extentof disclosures, which need to be entity-specific and provided with sufficientdetail to enable the users to appreciate thejustification for the conclusions reached.
Joint arrangements
Again, the main issue observed was theextent of disclosures. While most jointoperations were structured through aseparate legal vehicle, many issuers did notdisclose specific information enabling usersto assess whether the parties had directrights to the assets or direct obligations forthe liabilities relating to the jointarrangement. Similarly, very few issuersdisclosed sufficient information about the
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IFRS news – May 2016 4
Have you seen the latest PwC IFRS blogs
Guillaume Debout and Anna Schweizer argue about recognition andsubsequent measurement of goodwill
Saad Siddique and Anna Schweizer discuss prudence and neutrality
factors considered when assessing whetherthe arrangement was a joint operation or ajoint venture.
It is not surprising however, that almost allissuers got the disclosures right regardingthe basic information about the investee(for example, nature of relationship, placeof business).
The first time application of IFRS 11 led tosome changes in classification from jointlycontrolled operation or jointly controlledasset to joint venture, or from a jointventure to a jointly controlled operation.However, many of these issuers did notadequately disclose the changes made,particularly the relevant factors that wereconsidered in the assessment.
Key takeaway
As with consolidation, there were nomaterial issues concerning theconclusions reached on classification.Rather, the emphasis is on providingsufficient details for users to understandthe rationale behind the classification.
Deferred tax assets and uncertain taxpositions
Not being a new requirement, it issurprising (or perhaps not) that thedisclosures relating to deferred tax assetsarising from unused tax losses were notadequate in almost a third of the examinedissuers. In most cases, the nature ofevidence supporting the recognition ofdeferred tax assets was not provided.Others did not disclose the keyassumptions.
Another aspect of interest is that in a largenumber of cases, the deferred tax assetswere expected to be recovered in a periodexceeding 5 years. This strongly indicatesthat there should have been convincingevidence to support the recognition ofdeferred tax assets.
Almost half of issuers did not disclose theaccounting policy used for uncertain taxpositions and almost three quarters did notdisclose the measurement basis.
Key takeaway
The adequacy of disclosure of theevidence that supports the recognition ofdeferred tax assets appears to be anongoing issue.
For uncertain tax positions, the lack ofspecific guidance seems to have led todiversity in practice. An interpretation onthis topic clarifying the guidance isexpected soon. IAS 12 Income taxes willcontinue to be a focus area in 2016.
Next steps
ESMA and the European enforcers haveacknowledged the high standard ofapplication of IFRS in 2014; however, theyalso believe there is room for improvement.
Higher awareness of the enforcementpriorities for 2015 combined with theexpected guidance in the DisclosureInitiative and other pronouncements fromIASB is likely to help issuers in thisendeavour.
The common priorities for the 2015financial statements encompass thefollowing topics:
Impact of the financial marketsconditions on the financial statements;
Statement of cash flows and relateddisclosures; and
Fair value measurement and relateddisclosures.
The guidance on Alternative PerformanceMeasures will be applicable for allannouncements after 3 July 2016.
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IFRS news – May 2016 5
Key things to look out for withOperating SegmentsTatiana Geykhman from Accounting Consulting Services explains how segmentreporting is not a pure compliance exercise.
What is the purpose of presentingsegment information?
Segment disclosures provide insight intohow the entity’s business is viewed bymanagement.
Segment disclosures help to tie themanagement’s view of the business aspresented in the managementcommentaries (for example, managementdiscussion and analysis, MD&A) toconsolidated financial information. Thisinformation enables investors to assesswith more accuracy the entity’s future cashflows.
What is an operating segment?
An operating segment is defined as acomponent of an entity:
that engages in business activitiesfrom which it can earn revenues andincur expenses;
whose operating results are regularlyreviewed by the entity’s chief operatingdecision maker (CODM) to assessperformance and allocate resources;and
for which discrete financialinformation is available.
Operating segments represent the lowestlevel at which the management monitorsbusiness activities and makes decisions.
How to identify an operating segment?
The starting point would be to identify theCODM. This could be an individual or agoverning body, depending on the entity’sstructure. The term itself implies thisindividual or this body makes strategicdecisions about the entities segments.Common examples of CODM are the CEOor the board of directors.
The next step is identifying businessactivities. These activities must be capableof earning revenues and/or incurringexpenses. A division could still be a
separate operating segment if it is a costcentre.
Discrete financial information is notdefined in the standard. The CODM musthave sufficient information to assessperformance and allocate resources to thebusiness activities. A full set of financialstatements is not required, while revenueonly information would most likely beinsufficient.
The discrete information should beregularly reviewed by the CODM.
Not all operating segments need to beseparately disclosed in the financialstatements. The standard includesquantitative thresholds for segmentrevenue, profit or loss and assets. If anyone of these is met, the segment isreportable.
If the CODM reviews only non-GAAP profitmeasures, the quantitative threshold inrespect of profit or loss should be assessedusing this profit measure.
The external revenue of all reportedsegments should represent 75% or more ofthe entity’s external revenue. Theremaining segments could be combinedwithin ‘All other segments’.
Aggregation
Aggregating operating segments fordisclosure purposes is permitted, but notrequired. Aggregation is allowed if all of theaggregation criteria are met as follows:
aggregation results in providinginformation that enables users toevaluate the entity’s business activitiesand the economic environment;
the segments have similar economiccharacteristics;
the segments are similar in each of thefollowing aspects:
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IFRS news – May 2016 6
o the nature of products and services,o the nature of production processes,o the type or class of customers,o the methods to distribute the
products or provide the services,and
o the nature of regulatoryenvironment (where applicable).
This assessment requires significantjudgment. Management should disclosewhich operating segments were aggregatedand the economic indicators assessed.
Information to be disclosed
Segment disclosures should provideinvestors with information about thenature of business activities and theirfinancial results as viewed by management,and about the economic environment inwhich the entity operates.
Entity-wide segment disclosures highlight,among other things, key product lines orservices, the geographical layout of keyoperations, and customer concentration.
For each reportable segment, theinformation required is segment profit orloss, assets and liabilities (if reviewed byCODM) and the basis of measurement. Thepresumption is that the CODM reviewsinformation for a reason, and as such thisinformation is important enough todisclose.
What if the CODM reviews multiplemeasures of profits, assets and liabilities?
The metrics that are most relied on orregularly reviewed are disclosed. Whenseveral measures are equally relied upon orreviewed on an equally regular basis, themeasure that is most consistent with thefinancial statements information isdisclosed.
What if information reviewed by theCODM is non-GAAP?
Information is disclosed on the same basisthat is provided to the CODM. The non-GAAP information is reconciled to thefinancial statements.
What if the information about operatingsegments is commercially sensitive?
There is no ‘competitive harm’ exemptionin the standard. Disclosures presenting theinformation reviewed by the CODM aremandatory. Non-disclosure of segmentinformation constitutes a departure fromIFRS.
Which entities should disclosesegment information?
Segment disclosures are required forentities whose debt or equity instrumentsare publicly traded on a regulated marketor who are in the process of issuing publicinstruments. All other entities can disclosesegment information on a voluntary basis.
The regulatory bodies review and monitorfinancial statements published by theissuers of publicly traded instruments on aregular basis. Regulators frequentlychallenge aggregation of operatingsegments, situations of only a singlereportable segment, or instances when theinformation provided in the MD&A is notconsistent with segment disclosures.
What’s next?
An exposure draft on narrow-scopeamendments to IFRS 8 is expected towardsthe end of 2016. These narrow-scopeamendments will clarify IFRS 8 Operatingsegments with respect to issues identifiedin the post-implementation review.Expected amendments include:
Emphasis that the application of IFRS8 facilitates consistency acrosspresentation to investors, MD&A, andsegment disclosures, therebyincreasing the value of information ineach form of reporting.
Clarification that CODM is a functionmaking operating decisions and thatCODM could be an individual or acommittee. Disclosure of the nature ofCODM will be required.
Clarified guidance about the types ofinformation most useful to investors(for example non-cash expenses, non-recurring items, other items affectingfuture cash flows).
Further guidance is available on Inform: InDepth: A fresh look at IFRS 8, ‘Operatingsegments’.
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IFRS news – May 2016 7
The leases labAfter the great success of his first experiment, Professor Lee Singh embarks on hissecond experiment, this time in the real estate industry with the help of his assistantAvni Mashru.
Hypothesis
IFRS 16 will have no impact on the realestate industry.
Testing and analysis
The new leasing standard leaves lessoraccounting substantially unchanged. Giventhat the vast majority of entities in the realestate industry are lessors in leasingtransactions, you might think they havelittle to worry about.
In fact, the standard has quite the oppositeimpact when it comes to the industry’scustomer base – its tenants (lessees). Forexample, the retail industry is likely to beone of the most affected by the newstandard, given the significant use of rentedpremises for their stores.
The PwC Global Lease Capitalisation studypublished in February 2016 indicated thatthere would be a median debt increase of98% for retailers (due to the recognition oflease liabilities), and 41% median increasein EBITDA. This is because contractspreviously classified as operating leases willno longer have an ‘operating lease charge’ toprofit or loss; an entity will insteadrecognise an interest expense on the leaseliability and depreciation on the ‘right ofuse’ asset).
In a wider context, both retail andcommercial property leases can contain anumber of common features such asrenewal options and variable rentalpayments. Historically, tenants haveaccounted for such leases as operatingleases recognising rental payments as anoperating expense on a straight-line basisand with no significant balance sheetimpact. The accounting impact of theseunder the new standard will mean tenantsare likely to pay much closer attention tothese features.
Conclusion
Although lessor accounting is substantiallyunchanged by the new standard, IFRS 16might actually have a significant commercialimpact on real estate entities when it comesto lease negotiations with tenants.
Practical application
The new standard will not only impacttenants’ balance sheets but also operatingcosts, with a split of lease expense betweenoperating and finance costs.
From a lessor perspective an awareness ofthese impacts for tenants will be critical asthey may influence market behaviourtowards a preference for shorter term ormore flexible leases. Tenants might seekmore types of contingent payment terms tominimise the amount they are required torecognise as lease liabilities.
See more of the Professor’s analysis of theimpact of IFRS 16 Leases on the real estateindustry can in our Spotlight.
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IFRS news – May 2016 8
Cannon Street PressInsurance and IFRS 9
The IASB tentatively decided to confirmthe ED proposals relating to the overlayapproach and that an entity should bepermitted to apply the temporaryexemption only if:
The entity has not previously appliedIFRS 9,
The entity’s activities arepredominantly ‘related to insurance’,where such activities comprise:o Issuing contracts within the scope of
IFRS 4 which give rise to liabilities
whose carrying amount issignificant, and
o Issuing investment contracts thatare measured at FVPL.
The Board tentatively decided on thedefinition of the ‘predominance ratio’ andthe disclosure requirements for entitiesusing the exemption.
The remaining technical issues will bediscussed in the May meeting. The Boardaims to issue the amendments to IFRS 4 inSeptember 2016.
Conceptual Framework
The IASB tentatively decided to confirmthe ED’s proposed purpose of theConceptual Framework (CF). The Boarddecided that it would redeliberate thetopics that have proved controversial orthose for which new information hasbecome available. The staff was asked to:
Perform a more extensive analysis ofthe effects that the proposeddefinitions of assets and liabilitieswould have on current projects,
Analyse additional inconsistenciesbetween the revised CF and standardsthat have been claimed to exist byrespondents, and
Perform a more detailed analysis of theeffects of the revised CF for preparers.
The IASB tentatively decided not todevelop concepts to address challenges thatarise in classifying financial instrumentswith characteristics of both liabilities andequity as part of this project. These willcontinue to be addressed as part of theFinancial instruments with characteristicsof equity project, which might lead tofurther amendments to the revised CF.
At the May meeting the IASB will discusspossible amendments to Chapter 1 Theobjective of general purpose financialreporting and Chapter 2 Qualitativecharacteristics of useful financialinformation.
Disclosure Initiative: changes in accounting policies and accounting estimates
The IASB tentatively decided to amend thedefinitions in order to:
Clarify how accounting policies andestimates relate to each other,
Add guidance about whether changesin valuation and estimation techniquesare changes in accounting estimates,and
Update examples of estimatesprovided in IAS 8.
The Board further tentatively decided tonot amend the requirement to disclose thenature and amount of a change in anaccounting estimate.
The Board will discuss transition for theproposed amendments at a future meeting.
Further discussions
The Board discussed the following topicswithout making any decisions:
disclosure of restrictions on cash andabout liquidity
Financial instruments withcharacteristics of equity
Business combinations under commoncontrol
Goodwill and Impairment.
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IFRS news – May 2016 9
IFRIC Rejections in short - IAS 18Michel Vique of Accounting Consulting Services examines the practical implicationsof IC rejections related to IAS 18.
Looking for an answer? Maybe it was already addressed by the experts.
The Interpretations Committee (IC) regularly considers anywhere up to 20 issues at its periodicmeetings. A very small percentage of the issues discussed result in an interpretation. Many issuesare rejected; some go on to become an improvement or a narrow scope amendment. The issuesthat are not taken on to the agenda end up as ‘IFRIC rejections’, known in the accounting trade as‘not an IFRIC’ or NIFRICs. The NIFRICs are codified (since 2002) and included in the ‘greenbook’ of standards published by the IASB although they technically have no standing in theauthoritative literature. This series covers what you need to know about issues that have been‘rejected’ by the IC. We go standard by standard and continue with IAS 18 as per below.
IAS 18, Revenue deals with revenue arisingfrom sales of goods, rendering of services,interest, royalties and dividends. It is one ofthe standards that requires the highestdegree of judgement. Thus it is not surprisingthat many matters have been raised with theIC over the last 13 years.
Most of the issues have not been added to theIC agenda, emphasizing the need for anoverhaul of the revenue recognition standardgiven the lack of specific guidance in IAS 18.However, some decisions provided someuseful clarifications that were incorporated inthe new revenue standard, IFRS 15 Revenuefrom contracts with customers.
Extended payment terms and promptsettlement discounts (July 2004)
Entities may agree either to provideextended payment terms to customers, suchas six-month’s interest-free credit, or offercustomers discounts for prompt settlementof the invoiced amount (settlementdiscounts). Payment terms could have animpact on timing of revenue recognition andon the geography of the income recognitionwithin the income statement. In July 2004,the IC clarified the following:
When an entity provides extended paymentterms to a customer, this might indicate thatthe arrangement effectively constitutes botha sale and a financing transaction. In thatcase, the time value of money (for the periodbetween delivery and payment) must beaccounted for separately. Therefore, theamount of revenue recognised at the time ofthe sale is reduced and interest income isrecognised over the funding period.
When an entity offers a prompt settlementdiscount, the principle in IAS 18 requiresthe amount of revenue recognised under thetransaction to be reduced by the amount ofthe discount at the time of sale. The entityshould neither recognise revenue up to thenominal amount of the invoice, nor aninterest expense for the discount.
IFRS 15 makes it clear that an entity shouldrecognise revenue at an amount thatreflects the price that a customer wouldhave paid for the goods or services if thecustomer had paid cash for those goods orservices when they transfer to the customer(that is, the cash selling price).
The amount net of discount due by acustomer if the customer accepts to pay ondelivery should reflect the cash sellingprice. Therefore, no change is expectedregarding the accounting treatment ofprompt settlement discount (i.e. contrarevenue at the time of sale). IFRS 15 alsorequires recognition of less revenue thancash received for payments that arereceived in arrears of performance,because a portion of the considerationreceived will be recorded as interestincome.
However, IFRS 15 requires that revenuerecognised will exceed the cash received forpayments that are received in advance ofperformance, because interest expense willbe recorded in such cases.
Subscriber Acquisition Costs in theTelecommunications Industry
The IFRIC considered how a provider oftelecommunications services should accountfor telephone handsets it provides free of
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IFRS news – May 2016 10
charge or at a reduced price to customerswho subscribe to service contracts. Thequestion was whether:
the contracts should be treated ascomprising two separately identifiablecomponents, that is, the sale of atelephone and the rendering oftelecommunication services. Revenuewould be attributed to each component;or
the telephones should be treated as acost of acquiring the new customer, withno revenue being attributed to them.
The IFRIC acknowledged that the questionis of widespread relevance and concernsmany industries. IAS 18 does not giveguidance on what it means by ‘separatelyidentifiable components’ and practicesdiverge.
In March 2006, the IFRIC decided not totake the topic onto its agenda as itconsidered that no consensus could bereached on a timely basis. The IFRIC alsonoted that relevant guidance on this mattershould be principles-based and the IASBwas developing principles for identifyingseparable components within revenuecontracts.
In May 2105, the IASB issued a newstandard on revenue recognition. IFRS 15provides more guidance on how to identifythe distinct goods and services in bundlecontracts. IFRS 15 clarifies that a good orservice is distinct;
a) if the customer can benefit from thegood or service either on its own ortogether with other resources that arereadily available to the customer (forexample, because the entity regularlysells the good or service separately),and
b) the good or service is separatelyidentifiable from other goods orservices in the contract (for example,the good or service does notsignificantly modify another good orservice promised in the contract).
New rules on how to allocate thetransaction price to each component havealso been implemented.
The new guidance provided by IFRS 15 willsignificantly impact the telecommunicationsindustry but also each business withmultiple element arrangements givenadditional revenue may need to be allocatedto discounted or “free” products provided atthe beginning of a service period.
Summary of IAS 18 rejections
Topic Summary conclusion
Extended paymentterms (July 2004)
IAS 39 applies to the receivable. The effect of the time value of money should bereflected when material. However, the IC noted that the wording of IAS 18lacked clarity and needed to be improved.
Prompt settlementdiscounts (July2004)
Discounts arising from prompt settlement of outstanding receivables should beestimated at the time of sale and presented as a reduction in revenues.
The IC was asked how a provider of telecommunications services should accountfor telephone handsets it provides free of charge or at a reduced price tocustomers who subscribe to service contracts.
IAS 18 does not give guidance on what is meant by ‘separately identifiablecomponents’ and practices diverge. However, the IC did not add this issue to itsagenda because it concerns many other industries and the IASB was developingprinciples for identifying separable components within revenue contracts.
Sale of assets in arental business(March 2007)
The question was raised whether the sale of an asset sold after being rented tothird parties should be presented gross (revenue and costs of sales) or net (gain orloss) in the income statement.
Even if IAS 16 states that gains arising from derecognition of an item of PPE shallnot be classified as revenue, the IC believed that, in some limited circumstances,reporting gross revenue in the income statement would be appropriate and
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IFRS news – May 2016 11
consistent with the Framework and IAS 18. The issue was drawn to the attentionof the Board.
When a gaming institution takes a position against a customer, the resultingunsettled wager is a financial instrument that meets the definition of a derivativefinancial instrument under IAS 39.
In other situations, a gaming institution provides services to manage theorganisation of games between two or more gaming parties and earns acommission for such services regardless of the outcome of the wager. Such acommission is likely to meet the definition of revenue according to IAS 18. Theissue was not taken to the IC agenda given there was no widespread divergence inpractice in this area.
Agencyrelationships(September 2007)
The IC received a request for an interpretation for situations in which an entityemploys another entity to meet the requirements of a customer under a salescontract.
IAS 18 specifies that ‘in an agency relationship, the gross inflows of economicbenefits include amounts collected on behalf of the principal and which do notresult in increases in equity for the entity. The amounts collected on behalf of theprincipal are not revenue. Instead, revenue is the amount of commission.’
The IFRIC acknowledged that no detailed guidance was given, however, it notedthat determining whether an entity is acting as a principal or as an agent dependson facts and circumstances and that judgement is required.
Accounting fortrailingcommissions(July2008)
The IC was asked for guidance on how an entity should account for on-goingcommission arrangements where the contractual obligation for the payment of thecommission is not linked to the performance of any future service. The IC notedthat the issue concerns many industries and practice in this area is diverse. Giventhe complexity of the issues and the fact that the Board was considering theseissues in its projects on revenue recognition, it decided not to add this issue to itsagenda.
Receipt of adividend of equityinstruments(January 2010)
The IC received a request for guidance on the recognition as revenue of adividend in the financial statements of an investor when the dividend is in theform of the investee's own equity instruments.
When all ordinary shareholders are issued a dividend of an investee's own equityinstruments on a pro-rata basis, there is no change in the financial position oreconomic interest of any of the investors. In this situation, the dividend is notrecognised as revenue because it is not probable that there is an economic benefitassociated with the transaction that will flow to the investor.
Regulatory assetsand liabilities(November 2012)
The IC received a request seeking clarification on whether a regulatory asset orregulatory liability should be recognised in a particular situation in which aregulated entity is permitted to recover costs, or required to refund some amounts,independently of the delivery of future services. The IC observed that this issue istoo broad to address within the confines of existing IFRSs and the ConceptualFramework. Consequently, and because the IASB resumed a comprehensiveproject on rate regulated activities, the IC decided not to add this issue to itsagenda.
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IFRS news – May 2016 12
Horizontal:
Probability criterion (9,7)
A lot of boilerplate language
Until the bitter end (IAS 39)
Temporary topic (4, 10)
An APM
Return
Adjust for this retrospectively ifmaterial
Not until the bitter end (IAS 39)
Inherent profitability measure
Is it an asset?
Detachment of produce (IAS 41)
Charge
Accounting family
With hindsight
Cashflows for future profits
Vertical:
Probability criterion (7,8)
Likelihood of being exercised(12,5)
Probability criterion
Topic of the month(… accounting)
Profit before unfortunatedebits
Hiding the tree in the woodof words
I might sell? (3,6)
Accounting kid
Accounting companion
Can't be done
Piecemeal consumption
Definitely not an asset
Shareholders' reduced profitshare
Repetitive counterparty
Accounting debate club
Basis for future profits
Cryptic IFRS word seek - Solution
www.pwc.com/ifrs
IFRS news – May 2016 13
The bit at the back.....
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