Monday, 1 August 2016

Revenue Recognition - Preparing for IFRS 15

Less than one and a half years from today, on 1 January 2018, the new IFRS 15 Revenue from Contracts with Customers will come into effect in both Malaysia and Singapore as MFRS 15 and FRS 115 respectively. It may seem quite far away, yet the stark reality is that all companies will need to begin implementation work now.  By starting early, companies will have a higher chance of avoiding costly errors and delays caused by haphazard last-minute implementation.

For most entities, IFRS 15 will impact the measurement, recognition and disclosure of revenue — one of the most important financial performance indicators used by investors and analysts. It is imperative that an entity can transition successfully and as smoothly as possible to the new standard. Early communication to stakeholders and advanced planning will be critical to avoid uncertainty.
In order to do so, a competent project management team must be set up to coordinate the roles of the various business functions and to keep the processes operating well and on schedule. It will need to review the entity's existing product and service portfolios to determine the significant revenue streams.

The team should then apply IFRS 15 to a sample of representative contracts within each revenue stream, allowing for consideration of the related effects on its existing systems and processes. It's important to recognise that an entity's implementation efforts need to include functions more than just the finance department — every aspect from IT, legal, sales, marketing, human resources, and investor relations needs to be considered. Comfortable workflows will be disrupted.

The project management team will be a critical part of the process, as they will be the ones to tie everything nicely together and bring sense for each change that takes place. Potential changes to policies, procedures, internal controls and systems must all be identified to ensure that revenue transactions are appropriately recorded. The new revenue model is very principle-based, requiring an entity to make key estimates and judgments in the preliminary stages.

In addition, disclosure requirements have also significantly increased and entities electing a full retrospective approach must also restate their financial results for comparative periods.

In short, implementation will require extensive effort. Early planning and preparation are critical to a successful and seamless transition to IFRS 15. 1 January 2018 is closer than it looks. Entities cannot afford to wait anymore.

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