International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

by International GAAP 2019 (pdf)

  has been applied.

  Financial statements for subsequent periods need not repeat these disclosures.’ [IAS 8.28].

  An entity must make the above disclosures in the period in which a new standard is applied

  for the first time. Financial statements in subsequent periods need not repeat the required

  disclosures. The IASB provided some additional relief from disclosures (through optional

  practical expedients) for an entity that elects to apply IFRS 15 on a fully retrospective basis.

  Although permitted to do so, an entity need not present the quantitative information required

  1994 Chapter 28

  by (f) above for periods other than the annual period immediately preceding the first annual

  period for which IFRS 15 is applied (the ‘immediately preceding period’). [IFRS 15.C4].

  2.3.3.A

  Does an entity have to apply elected practical expedients to all periods

  and to all contracts?

  Entities may elect to apply none, some, or all of these practical expedients. However, if

  an entity elects to use a practical expedient, it must apply it consistently to all contracts

  within all periods presented under IFRS 15. It would not be appropriate to apply the

  selected practical expedient to some, but not all, of the periods presented under IFRS 15.

  Entities that choose to use some, or all, of the practical expedients are required to

  provide additional qualitative disclosures (i.e. the types of practical expedients the

  entity has applied and the likely effect of the application). [IFRS 15.C6].

  2.3.3.B

  Consequences of applying transition practical expedients: accounting for

  completed contracts excluded from transition

  Depending on the way in which an entity adopts IFRS 15, it may be able to exclude

  contracts that meet the definition of a completed contract from the population of

  contracts to be transitioned to the new standard (i.e. it would not need to restate those

  contracts). This is illustrated in Example 28.1 at 2.3.2.B, Example 28.2 at 2.3.2.E,

  Example 28.3 at 2.3.2.F and Example 28.4 at 2.3.2.G above.

  IFRS 15 clarifies that ‘if an entity chooses not to apply IFRS 15 to completed contracts

  in accordance with paragraph C5(a)(ii) or paragraph C7, only contracts that are not

  completed contracts are included in the transition to IFRS 15. The entity would continue

  to account for the completed contracts in accordance with its accounting policies based

  on legacy IFRS.’

  For example, an entity might elect to apply the standard retrospectively using the full

  retrospective method and use the practical expedient in paragraph C5(a)(ii) of IFRS 15

  not to restate contracts that meet the definition of a completed contract at the beginning

  of the earliest period presented (i.e. 1 January 2017 for an entity with a December year-

  end that presents one comparative period only). Therefore, the entity also would not

  record an asset for incremental costs to obtain contracts under IFRS 15 (see 10.3.1

  below) that meet the definition of a completed contract as at the beginning of the earliest

  period presented. Furthermore, any assets or liabilities related to completed contracts

  that are on the balance sheet prior to the date of the earliest period presented would

  continue to be accounted for under legacy IFRS after the adoption of IFRS 15. Note that

  a similar optional practical expedient is available under the modified retrospective

  method (see 2.3.4 below).

  2.3.4 Modified

  retrospective

  adoption

  Entities that elect the modified retrospective method applies the standard retrospectively

  to only the most current period presented in the financial statements (i.e. the initial period

  of application). To do so, the entity has to recognise the cumulative effect of initially

  applying IFRS 15 as an adjustment to the opening balance of retained earnings (or other

  appropriate components of equity) at the date of initial application. [IFRS 15.C7].

  Revenue

  1995

  When an entity applies the modified retrospective method, there is no effect on the

  statement of financial position as at the beginning of the preceding period (third statement

  of financial position according to paragraph 40A of IAS 1). Furthermore, IFRS 15 does not

  require an entity to provide restated comparative information in its financial statements

  or in the notes to the financial statements (e.g. disaggregated revenue disclosures in the

  comparative period) under this method. Therefore, we believe the inclusion of a third

  statement of financial position as at that date is not required.

  Under this method, IFRS 15 is applied either to all contracts at the date of initial

  application (e.g. 1 January 2018 for an entity with a December year-end, see 2.2 above)

  or only to contracts that are not completed at this date. [IFRS 15.C7]. Depending on how

  an entity elects to apply the modified retrospective method, it has to evaluate either all

  contracts or only those that are not completed before the date of initial application as if

  the entity had applied the standard to them since inception. An entity is required to

  disclose how it has applied the modified retrospective method (i.e. either to all contracts

  or only to contracts that are not completed at the date of initial application).

  An entity may choose to apply the modified retrospective method to all contracts as at

  the date of initial application (rather than only to contracts that are not completed) in

  order to apply the same accounting to similar contracts after the date of adoption.

  Consider the example discussed at 2.3 above, a sale by a retailer on 31 December 2017,

  the contract in that example is considered a completed contract as at the date of initial

  application (i.e. 1 January 2018 in that example). If the retailer adopts the standard only

  for contracts that are not completed, it would not restate revenue for this contract and

  would continue to account for the remaining revenue to be recognised under legacy

  IFRS (i.e. IAS 18) after adoption of IFRS 15. However, any similar sales on or after the

  date of initial application (i.e. 1 January 2018 in that example) would be subject to the

  requirements of IFRS 15. Accordingly, if the retailer prefers to account for similar

  transactions under the same accounting model, it could choose to adopt the standard

  for all contracts, rather than only to those that are not completed under the standard.

  Entities that use the modified retrospective method need to make this election at the

  entity-wide level. That is, they need to carefully consider whether to apply the standard

  to all contracts or only to contracts that are not completed as at the date of initial

  application, considering the totality of all of the entity’s revenue streams and the

  potential disparity in accounting treatment for the same or similar types of transactions

  after they adopt the standard.

  Under the modified retrospective method, an entity: [IFRS 15.C7-C8]

  • presents comparative periods in accordance with legacy revenue standards

  (e.g. IAS 11, IAS 18, etc.);

  • applies IFRS 15 to new and existing contracts (either all existing contracts or only

  contracts that are not completed contracts) from the effective date onwards; and

  • recognises a cumulative catch-up adjustment to the opening bal
ance of retained

  earnings at the effective date either for all contracts or only for existing contracts

  that still require performance by the entity in the year of adoption, discloses the

  amount by which each financial statement line item was affected as a result of

  applying IFRS 15 and an explanation of significant changes.

  1996 Chapter 28

  An entity that chooses the modified retrospective method can use only one of the five

  practical expedients available to entities that apply the full retrospective method,

  relating to contract modifications. However, under the modified retrospective method,

  entities can choose whether to apply the expedient to all contract modifications that

  occur before either: (a) the beginning of the earliest period presented (e.g. before

  1 January 2017 if an entity with a December year-end presents only one comparative

  period); or (b) the date of initial application (e.g. 1 January 2018 for an entity with a

  December year-end). Under the expedient, an entity can reflect the aggregate effect of

  all modifications that occur before either of these dates under IFRS 15 when identifying

  the satisfied and unsatisfied performance obligations, determining the transaction price

  and allocating the transaction price to the satisfied and unsatisfied performance

  obligations for the modified contract at transition. [IFRS 15.C7A].

  An entity that uses this expedient has to identify all contract modifications from the

  inception of the contract until either: (a) the beginning of the earliest period presented

  under IFRS 15; or (b) the date of initial application. It then has to determine how each

  modification affected the identification of performance obligations as at the modification

  date. However, the entity would not need to determine or allocate the transaction price

  as at the date of each modification. Instead, at the beginning of the earliest period

  presented under the standard or the date of initial application of the standard, the entity

  would determine the transaction price for all satisfied and unsatisfied performance

  obligations identified in the contract from contract inception. The entity would then

  perform a single allocation of the transaction price to those performance obligations,

  based on their relative stand-alone selling prices. See Example 28.5 at 2.3.3 above.

  If an entity electing the modified retrospective method uses the practical expedient for

  contract modifications, it is required to provide additional qualitative disclosures

  (i.e. the type of practical expedient the entity applied and the likely effects of that

  application). [IFRS 15.C7A]. As discussed at 2.3.3.A above, an entity that applies this

  practical expedient needs to apply it consistently to all contracts and in all periods

  presented under IFRS 15.

  While this practical expedient provides some relief, an entity still needs to use

  judgement and make estimates. For example, an entity needs to use judgement in

  estimating stand-alone selling prices when there has been a wide range of selling prices

  and when allocating the transaction price to satisfied and unsatisfied performance

  obligations if there have been several performance obligations or contract modifications

  over an extended period. Furthermore, depending on how the entity elects to adopt the

  practical expedient, it is required to apply the standard’s contract modification

  requirements (see 4.4 below) to either: (a) modifications made after the beginning of the

  earliest period presented under the standard (e.g. modifications made after

  1 January 2017 for an entity with a December year-end that presents one comparative

  period only); or (b) modifications made after the date of initial application (e.g.

  modifications made after 1 January 2018 for an entity with a December year-end that

  presents one comparative period only).

  The FASB’s standard includes a similar practical expedient for contract modifications

  at transition. However, ASC 606 only permits an entity to apply the practical expedient

  under the modified retrospective method to contract modifications that occur before

  Revenue

  1997

  the beginning of the earliest period presented under the standard in the financial

  statements (e.g. 1 January 2018 for an entity with a December year-end).

  The following example illustrates the potential effects of the modified retrospective method:

  Example 28.6: Cumulative effect of adoption under the modified retrospective

  method

  A software vendor with a 31 December year-end adopts IFRS 15 on 1 January 2018. The vendor adopts the standard

  using the modified retrospective method and elects to apply IFRS 15 only to contracts that are not completed.

  The vendor frequently enters into contracts to provide a software licence, professional services and post-delivery

  service support. It previously accounted for its contracts in accordance with IAS 18, particularly paragraph IE19

  of IAS 18. As a result, it recognised fees from the development of its software by reference to the stage of

  completion of the development, which included the completion of post-delivery service support services. In effect,

  the software vendor treated the development of software and post-delivery service support as a single deliverable.

  IFRS 15 provides more detailed requirements for determining whether promised goods or services are

  performance obligations (discussed further at 5.2 below) than IAS 18 provided regarding the number of

  deliverables to identify.

  As a result, the vendor’s analysis of contracts in progress as at 1 January 2018 may result in the identification

  of different performance obligations from those it previously used for revenue recognition. As part of this

  assessment, the entity needs to allocate the estimated transaction price, based on the relative stand-alone

  selling price method (see 7.2 below), to the newly identified performance obligations.

  The vendor compares the revenue recognised for each contract, from contract inception through to

  31 December 2017, to the amount that would have been recognised if the entity had applied IFRS 15 since

  contract inception. The difference between those two amounts would be accounted for as a cumulative catch-

  up adjustment and recognised as at 1 January 2018 in opening retained earnings. From 1 January 2018

  onwards, revenue recognised would be based on IFRS 15.

  An entity that elects to apply the modified retrospective method is required to make

  certain disclosures in the year of initial application. Specifically, the entity must disclose

  the amount by which each financial statement line item is affected as a result of applying

  IFRS 15. Furthermore, an entity must disclose an explanation of the reasons for any

  significant changes between the reported results under IFRS 15 and under IAS 11, IAS 18

  and related Interpretations.

  Depending on an entity’s prior accounting policies, applying the modified retrospective

  method may be more difficult than an entity would anticipate. Situations that may make

  application under this method more complex include the following:

  • the performance obligations identified under IFRS 15 are different from the

  elements/deliverables identified under legacy requirements;

  • the relative stand-alone selling price allocation required by IFRS 15 results in

  different amounts of the con
sideration being allocated to performance obligations

  than had been allocated in the past; or

  • the contract contains variable consideration and the amount of variable

  consideration that can be included in the allocable consideration differs from the

  amount under legacy requirements.

  In addition, the modified retrospective method effectively requires an entity to keep

  two sets of accounting records in the year of adoption in order to comply with the

  requirement to disclose all affected financial statement line items as if they were

  prepared under legacy IFRS.

  1998 Chapter 28

  2.3.4.A

  Entity-wide election of modified retrospective method: all contracts or

  contracts that are not completed

  An entity applying the modified retrospective method either applies it to all contracts

  at the date of initial application or only to contracts that are not completed at this date.

  Reporting entities that use the modified retrospective method will need to make this

  election at the entity-wide level. They will need to carefully consider whether to apply

  the standard to all contracts or only to contracts that are not completed as at the date of

  initial application, considering the totality of all of the reporting entity’s revenue streams

  and the potential disparity in accounting treatment for the same or similar types of

  transactions after they adopt the standard.

  If an entity elects to apply the modified retrospective method to contracts that are not

  completed at the date of initial application, it continues to apply legacy IFRS to those

  completed contracts. This is discussed further at 2.3.3.B above.

  2.3.5

  Transition disclosures in interim financial statements in the year of

  adoption

  IAS 34 – Interim Financial Reporting – requires an entity to disclose changes in

  accounting policies, including the effect on prior years that are included in the

  condensed interim financial statements. Furthermore, it requires that, in the event of a

  change in accounting policy, an entity discloses ‘a description of the nature and effect

  of the change’. [IAS 34.16A(a)]. In light of these requirements, higher-level transition

  disclosures than those required for annual financial statements in accordance with IAS 8