The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm

CNBC TV18
Network18

IND-AS: New Revenue Standard At Crossroads!

Published on Thu, Aug 20,2015 | 08:13, Updated at Thu, Aug 20 at 08:13Source : Moneycontrol.com 

IND-AS: NEW REVENUE STANDARD AT CROSSROADS!
By: Pankaj Chadha, Partner,  EY India

On August 5, 2015, The National Advisory Committee on Accounting Standards ( NACAS) evaluating as to whether effective date of Ind-AS 115 - Revenue from Contracts with Customers,  decided to go to three industry bodies i.e. FICCI, Assocham & CII, seeking their views, that represent the industry views, on deferral of the effective date of implementation of this Accounting Standard. As per the current MCA notified Ind-AS implementation road map, this standard is slated to implemented from April 1, 2016 with comparative information for April 1, 2015 to March 2016 in case of entities that covered in first phase of the road map. For entities covered in the second phase of the road map, this standard is to be implemented from April 1, 2017 with comparative information for April 1, 2016 to March 2017.

Ind-AS 115 is a standard that consolidates all the revenue guidance available at one place and is a converged standard based on IFRS 15 Revenue from Contracts with Customers, for which, the International Accounting Standards Board (IASB) has decided to defer by one year the effective date. As a result, IFRS 15 will be effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

Also, the US Financial Accounting Standards Board (FASB), which developed its new revenue standard jointly with the IASB, has agreed to a one-year deferral, which keeps the new standards’ effective dates converged between IFRS and US GAAP. As a result,  the US standard will be effective for public entities with annual reporting periods beginning after 15 December 2017 (2018 for calendar-year public entities) and interim periods therein. Non-public entities applying US GAAP will be required to adopt the FASB’s standard for annual reporting periods beginning after 15 December 2018, and interim periods within annual reporting periods beginning after 15 December 2019.

In making its decision to defer the effective date, the IASB considered feedback from stakeholders, the impact of amendments it expects to propose, and the FASB’s decision to defer its effective date by one year.

On 30 July 2015, the International Accounting Standards Board (IASB) issued an exposure draft (ED) proposing several amendments to its new revenue standard, IFRS 15 Revenue from Contracts with Customers. The amendments are intended to address implementation questions that were discussed by the Joint Transition Resource Group for Revenue Recognition on licences of intellectual property (IP), identifying performance obligations, principal versus agent application guidance and transition. The amendments are also intended to reduce diversity in practice when entities adopt the new revenue standard and decrease the cost and complexity of applying it.

The ED proposes amendments to:
Clarify when an entity’s activities significantly affect the IP to which the customer has rights, which is a factor in determining whether the entity recognises revenue over time or at a point in time- The IASB has proposed limited amendments to clarify when an entity’s activities that do not otherwise transfer a good or service to the customer significantly affect the IP to which the customer has rights. This is one of the three criteria that must be met to recognise revenue for a licence of IP over time. The IASB has proposed clarifying that activities to be performed by the licensor significantly affect the IP if they (a) change the form or functionality of the IP to which the customer has rights, or (b) affect the ability of the customer to obtain benefit from the IP. If the IP has significant stand-alone functionality (i.e., the licensor’s activities will not significantly affect the functionality of the IP), revenue would be recognised at a point in time.

Clarify how entities would apply the exception for sales- and usage-based royalties related to licences of IP and recognise revenue when the related licences are not separate performance obligations- The IASB has proposed amendments to clarify that the sales- or usage-based royalty exception would be applied to the overall royalty stream when the predominant item within the arrangement is the licence of IP. Furthermore, the proposed amendments would clarify that a sales- or usage-based royalty in these types of arrangements would not be partially in the scope of the sales- or usage based royalty exception and partially in the scope of the general variable consideration constraint requirements.

Clarify when a promised good or service is distinct within the context of the contract by amending related illustrative examples to IFRS 15- The IASB has proposed to amend some of the existing illustrative examples that accompany IFRS 15, to clarify how an entity would determine when a promised good or service is ’separately identifiable’ from other promises in the contract (i.e. distinct within the context of the contract). In evaluating whether a promise to transfer a good or service is separately identifiable from other promises in the contract, an entity considers the level of integration, interrelation or interdependence among promises to transfer goods or services. In the Basis for Conclusions, the IASB noted that an entity would not merely evaluate whether one item, by its nature, depends on the other (i.e., whether two items have a functional relationship) but would assess whether there is a transformative relationship (i.e., one that transforms the items into something that is different from the individual items) between the two items in the process of fulfilling the contract.

Reframe the principal versus agent indicators, clarify how to apply the control principle to services provided by another party, amend related illustrative examples, and add two examples to clarify how to apply the principal versus agent application guidance- Under IFRS 15, when another party is involved in providing a good or service to a customer, the entity must determine whether its performance obligation is to provide the good or service itself (i.e., the entity is a principal) or to arrange for another party to provide the good or service (i.e., the entity is an agent). An entity makes this determination by evaluating the nature of its promise to the customer. An entity is a principal (and, therefore, records revenue on a gross basis) if it controls the promised good or service before transferring it to the customer. An entity is an agent (and records as revenue the net amount that it retains as a commission) if its only role is to arrange for another entity to provide the good or service. IFRS 15 currently provides a non-exhaustive list of indicators of when an entity is an agent. The IASB has proposed amendments that:
• Reframe the indicators to when an entity is a principal, rather than when an entity is an agent. The proposed reframed indicators support the control assessment and are intended to help an entity assess whether it controls a good or service before transfer to a customer in situations in which the assessment of control may be difficult. They do not override the assessment of control and  are not intended to be considered in isolation or viewed as a checklist.
• Clarify that the unit of account for the principal versus agent evaluation would be at the level of a specified good or service, which is a distinct good or service (or a distinct bundle of goods or services). Depending on the circumstances, a specified good or service may be a right to an underlying good or service to be provided by another party.
• Clarify that the determining factor in the analysis would be whether the entity controls the specified good or service before transfer to the customer. If the entity obtains control before transfer, it is the principal, not an agent.
• Clarify and explain the application of the control principle in relation to services (i.e., what would be controlled if an entity is the principal providing a service).
• Add two examples and amend some of the existing illustrative examples that accompany IFRS 15 to align them with the amendments discussed above.

Add two practical expedients to the transition requirements of IFRS 15 for: (a) completed contracts under the full retrospective transition approach; and (b) contract modifications at transition- The IASB has proposed adding two practical expedients to IFRS 15 to alleviate the transition burden of accounting for completed contracts and contracts that were modified prior to adoption. Without the practical expedients, the assessment of contracts could be onerous for entities that have completed contracts for which revenue has not been fully recognised or multi-year contracts that have been modified many times prior to adoption of IFRS 15.
Completed contracts
The proposed practical expedient would allow an entity that uses the full retrospective approach to only apply the new standard to contracts that are not completed as at the beginning of the earliest period presented. A contract would be considered completed if the entity has transferred all of the goods and services identified under existing revenue standards and interpretations before the date of initial application.
Contract modifications
The IASB has also proposed a practical expedient that would allow an entity to determine the aggregate effect of all of the modifications that occurred between contract inception and the earliest date presented, rather than accounting for the effects of each modification separately. An entity would be permitted to use hindsight to identify the satisfied and unsatisfied performance obligations and to determine the transaction price to allocate to those performance obligations.
The beginning of the earliest period presented may vary for IFRS preparers depending on the number of years they present in their financial statements. If an entity applies this practical expedient, it would be required to apply it to all contracts with similar characteristics.

The US Financial Accounting Standards Board (FASB) previously proposed amendments to its new revenue standard on accounting for licences of IP and identifying performance obligations. The FASB also plans to issue two more exposure drafts – one proposing amendments on transition, non-cash consideration, presentation of sales taxes and collectability; and the other proposing changes to the principal versus agent application guidance. The FASB plans to issue additional exposure drafts later in the third quarter of 2015 to propose: narrow scope amendments and certain practical expedients relating to topics that the IASB does not plan to address; and changes to the principal versus agent application guidance. The FASB is also expected to finalise its proposed changes to accounting for licences of IP and identifying performance obligations in 2015.

In view of above, evaluation by NACAS of deferring the effective date of IND AS 115 through consideration to properly review the views from industry bodies seems very appropriate. Ind-AS 115 would impact accounting of revenue, more particularly for some sectors like Telecommunications, Pharma, Automotive, Technology and Real Estate, where the impact could be fairly significantly. Additionally, implementation of this standard would require changes in processes, controls and underlying IT systems. The one-year deferral will help entities that need extra time to implement the standard appropriately. However, it is important for entities to continue making progress with implementation plans to ensure an orderly transition to the new standard. Monitoring developments will also be important for entities.

Entities should also consider how they will communicate the changes with investors and other stakeholders, including their plan for disclosures about the effects of Ind-AS 115 required by Ind-AS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Entities’ disclosures should evolve in each reporting period as more information becomes available.

 
Twitter


 
Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.