REVENUE RECOGNITION
IFRS 15
Agenda
IFRS 15: “Revenue from Contracts with Customers”
•
LO4.1: Understand the importance of revenue recognition
•
LO4.2: Understand and apply the 5-step revenue recognition
process
•
LO4.3: Describe presentation and disclosure of revenues
LO4.1: Importance of revenue recognition
HOW DO WE RECOGNISE REVENUES??
LO4.1: Importance of revenue recognition
 Accounting fraud used revenue recognition manipulation
 Enron (2001): Fake transactions with subsidiaries
 WorldCom (2002): Fake transactions to book more revenues
 General Electric (2009): Revenue recognition before sales were effective
 Mobility (2013): Revenue recognition before sales were effected
 Tesco (2014): Boost revenues 263M by recognizing “conditional” sales
 Toshiba (2015): Revenue recognition before sales were effective  POC
LO4.1: Importance of revenue recognition
- Handsets (sometimes at a discount or for free!)
- Monthly billing plan (annual contracts binding)
- Free TV if more than “x” GB contracted
- … and so on
Question is….
What and when do you recognize a sale?
6
LO4.1: Importance of revenue recognition
 Recognized Revenues  Net income  Cash flow  Stock price
/Ratios /Compensation
 Agency problem  incentive to manipulate revenues upwards
(aka real earnings management)
Roychowdhury, S. (2006). Earnings management through real
activities manipulation. Journal of Accounting & Economics,
vol 42(3), 335-370.
LO4.1: Importance of revenue recognition
 Recognized Revenues  Net income  Cash flow  Stock price
/Ratios /Compensation
 Agency problem  incentive to manipulate revenues upwards
(aka real earnings management)
 Replaces previous standards as of Jan 1, 2018
 IAS 18 Revenue
 IAS 11 Contracts
 Joint project IASB & FASB
IFRS 15 – Objective & Scope
Key Objective
 Recognize revenue to depict the transfer of goods or services to
customers
Scope
 All contracts to deliver goods or services (G/S) to a Customer
Goods/Services
Entity
Considerations
Customer
 A customer is a party who has contracted an entity to obtain G/S
that are output of the entity’s ordinary activity
IFRS 15 – Objective & Scope
Scope: How to identify contracts?
Company A is in the business of selling commercial properties.
On Apr 4 it signs a contract to sell a snack bar located in
Markthal to Customer X.
YES
Company A is in business of selling traditional Dutch snacks. On
Apr 4 it signs a contract to sell a snack bar located in Markthal to
Customer X.
NO
 Notes
 If other IFRS specify how to separate/ measure at recognition at least one
contract component  apply the standard, otherwise apply IFRS 15
 IFRS 15 regulates an individual contract but portfolio of contracts are
allowed if the entity reasonably expects that the effects of applying IFRS 15
to individual contracts won’t be materially different