I’ve been attending
a few seminars recently in Malaysia on various current issues, such as the new Companies Act 2016,
the Finance Act 2017 as well as transfer pricing developments. I was able to touch base with
a few fellow delegates and we talked in general about the challenges facing their
companies in this day and age. One topic that somehow kept being brought up was
the implementation of MFRS 15 Revenue
from Contracts with Customers.
I was
rather astonished that most of their respective companies had not even started planning
for it, despite the fact that we are now only nine months away. If you
remember, MFRS 15 was originally slated to come into effect on 1 January 2017
before it got pushed back to 1 January 2018. Why was it pushed back? The International Accounting Standards Board acknowledged the complexity of the revenue standard and to allow
more time for companies to properly implement it. Yet here we are, at the end of the first quarter of 2017, and many have still not started.
No doubt
MFRS 9 Financial Instruments, also
coming into effect on 1 January 2018, is by far the more complex standard of
the two in terms of its technical aspects. However, companies cannot underestimate the impact of MFRS 15 and the effort required to implement it. It requires careful change management across the organisation. It's not just a financial reporting issue.
For instance,
one of the key areas that will impact revenue recognition is the collectability
criterion. To apply MFRS 15, the company
needs to assess whether it is probable that the company will collect the
consideration to which it will be entitled. It needs to apply considerable judgment based on
its understanding of the client’s industry, the client’s history and background,
what their plans are. In short a credit risk assessment is needed to determine
whether the contract is valid, i.e. whether it’s probable that the
consideration to which the entity is entitled in exchange for the goods or
services will be collected.
If there is significant doubt of the collectability,
the revenue cannot be recognised and any consideration received must then be recorded as a liability, i.e. unearned
revenue until circumstances change. Previously, it was a case of booking the revenue based on the
contract, and what the company is entitled to, but no longer. The risks and rewards model has been thrown
out the window in favour of a transfer of control approach.
Such judgment calls will be required on many areas, not just on collectability. The more complicated your contracts, and by extension, your operations, are, the more time you’ll need to invest to sort everything out.
Will there
be additional costs if you start work early on implementing IFRS 15?
Yes, that
is inevitable not just in terms of money but time as well. And it won't be easy.
But these
costs will pale in comparison to the costs you end up incurring if you only
start work when MFRS 15 comes into effect. Renegotiation of contracts. Restructuring
of processes. Rectification work. Loss of customers. A lot of professional judgment
is required to address each revenue stream you have, and if you end up doing it
in a rush, errors and mistakes will pile up faster than you think. The
disruption to your business will be incredible if you don’t start early.
There are
plenty of articles and advice out there on the need to prepare early for MFRS
15, and it’s worrying to hear that companies here are still a long way away
from working on its implementation. As a result, the typical pattern we might
see for many Malaysian companies in 2018 is an abnormal increase in costs to
deal with, what is, ironically, a revenue standard.
Do not be
part of that pattern. Prepare now.
Azmin Mohd Khalib
Senior Editor
Wolters Kluwer Malaysia
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