The Impact of IFRS 15 on Contract Management: Navigating New Requirements and Enhanced Reporting

In July 2015, the International Accounting Standards Board (IASB) confirmed a one-year deferral of the effective date of the Revenue Standard IFRS 15 (Revenue from Contracts with Customers) to January 1, 2018. Companies had the option to apply the Standard earlier if they wished to do so. As of January 1, 2018, IFRS 15 came into force, addressing revenue from contracts with customers. This new standard is in line with initiatives from the IASB and FASB and is relevant for almost all customer contracts.

Overview of IFRS 15 and Its Adoption

IFRS 15 replaces multiple standards including IAS11, IAS18, IFRIC15, IFRIC13, and IFRIC18, as well as Selective Interpretations (SIC) 31. It does not replace IAS39 (Financial Instruments: Recognition and Measurement) or FRS9 (Financial Instruments: Recognition and Measurement). IAS17 (Leases) remains outside the scope of IFR15.

Revenue Recognition Model

The revenue recognition model upon which IFRS 15 is based comprises five key steps:

Implementing this new standard will introduce additional complexity, which may place enterprise process and IT system demands beyond the scope of existing contract visibility. An enterprise will be obliged to address processes, compensation plans, tax implications, key performance indicators, and additional employee training. Enterprises may also discover that additional roles within the organization require visibility into contract data. These roles may include shareholders, investors, audit committee members, Board of Directors, and others.

Contract Life Cycle and Transition Mechanisms

Decisions must be taken to create and allocate transition mechanisms for contracts at different stages in their life. This includes contracts initiated and completed prior to January 1, 2018, contracts running across January 1, 2018, and new contracts starting only after January 1, 2018.

Key Implications of IFRS 15

The fundamental concepts of IFRS 15 drive the need for increased disclosure with respect to revenue recognition, allowing for a precise link between that disclosure and contract data.

The implications of IFRS 15 extend well beyond the management of individual contracts to cases where there are multiple contracts with single suppliers and where there are complex contract hierarchies. Even within a single contract, multiple performance obligations may be required to be unbundled, requiring fine granularity visibility into contract data.

Risk Management and Financial Reporting

The timeline for revenue recognition becomes increasingly critical. The main concept of revenue recognition is in line with the actual delivery of products or services. However, there is a growing emphasis on the time value of money, which means that the revenue value for reporting purposes can be significantly impacted by when an entity fulfills its delivery requirements, performance obligations, and customer payments, as well as any relevant interest rates at that moment in time.

Conclusion

In summary, IFRS 15 elevates contract management from a merely commercially beneficial activity to a governance obligation for well-run enterprises. This new obligation demands that both internal processes and contract management IT platforms be sufficiently capable and reliable to provide accurate, repeatable, and auditable reporting data. The successful implementation of IFRS 15 requires a comprehensive approach involving legal, financial, and managerial expertise to ensure full compliance and efficient reporting.

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