The forecast is that IFRS 15 will improve quality depending on how an entity will interpret and apply it.Announced on May 28 2014 and effective 1 Jan 2017 for recognizing revenue from contract with customers, a lot more analysis is still going on and a lot will come out on implementation. Because earnings quality is based more on disclosure and transparency, one can forecast quality will improve because IFRS 15.1 states that the converged standard will report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenues and cash flows and these are the tenets of transparency. Paragraph 110 requires qualitative and quantitative disclosures. IFRS 15 addressed inconsistencies in the current standards, provided a better framework, improved comparability of revenue recognition and simplified the preparation of financial statement thus making it one of the few successful convergence projects. It provides detailed application guidance even though more judgments will be applied in part because of the extensive use of estimates. Obviously the outcomes will be significant for certain industries but almost all will experience change upon implementation.
1.There are lots of implications for IFRS 15 ahead of 1 Jan 2017 effective date. The need to restate comparatives upon adoption, imply that entities need to start working on the comparisons early and worse still for the US where 2 year comparisons are required. Consultations with tax experts, auditors, IT consultants and even legal experts need to be ongoing to cover various issues, needless to say the cost implications of the transition which may require some budget.
2.Unlike the old standards, revenue will be recognized when control of the promised goods or services is transferred to the customer and not when risks and rewards pass. And a lot of arguments go into when does control actually takes place. Splitting of the multiple elements when total consideration is taken into account may also change for many entities and again lots of judgements go in to this. The standard has implications to timing and recognition of revenue as well as volumes of disclosures required in the financial statements. Plan on how to collect information for disclosures and their legalities will have to be taken into account. These may require new systems together with the associated internal controls. Where employee compensation is based on performance, these changes may affect such contracts as the values for revenues will obviously be different hence the need to review employ contracts with associated implications.
3.Changes to revenue will obviously change net earnings and by extension, the taxes. So current tax and possibly deferred tax will be affected. It therefore becomes necessary to think of how this information will be communicated to investors and other stakeholders who need to understand the performance of an entity.
4. Some industries ma be affected more such as construction, entertainment and others without a clear billable discreet product. Generally we expect the improvements to increase earnings quality when they are appropriately implemented and enforced.