20 November 2019
Companies reporting under IFRS 15 are encouraged to consider the findings in the Financial Reporting Council’s (FRC) thematic review, aimed at identifying disclosure improvements and showcasing better practice. The review also highlights the areas of focus that the FRC will monitor as the standard continues to be embedded.
The FRC considers there is still considerable scope for improving disclosures to meet the disclosure objective in IFRS 15 by:
- improving the descriptions of accounting policies;
- focussing disclosures on those judgements significantly affecting the amount and timing of revenue;
- making clear the link between policies and information in the segmental reporting note and strategic report; and
- covering contract balances and costs.
Although accounting policies are generally better described under IFRS 15 than they were under legacy GAAP, the FRC considers that there is still considerable scope for improvement by being more specific and relating revenue policies to each different business segment.
The review provides examples of good disclosure and highlights the attributes of good revenue policies. It also discusses specific policy considerations such as contract variations and claims, variable consideration and licences, which may be pertinent to certain sectors.
Specific judgements affecting the amount and timing of revenue recognition should be clearly explained, company specific, and importantly, limited to those which are significant.
Good examples quantify the amount of revenue subject to significant judgement, and for those judgements involving estimation uncertainty, provide quantitative disclosure such as sensitivities or ranges of potential outcomes. They also disclose the judgements applied in determining:
- The number of performance obligations, explaining when and why a promise is not distinct.
- How to allocate a transaction price between more than one performance obligation recognised at different times, and why that method.
- How the assessment of whether estimates of variable consideration should be constrained is applied and when the variable constraint threshold is met.
As well as disaggregating revenue into categories, good disclosures also disaggregate the revenue for each of the reportable segments (eg in a matrix), enabling users to clearly understand the relationship between the two types of data, a requirement of IFRS 15.
Disaggregated revenue disclosures should also be consistent with the revenue accounting policies and with information provided outside of the accounts, including information in the strategic report.
Contract balances and costs
The most informative disclosures reconciling the opening and closing balances for receivables, contract assets and contract liabilities, tended to be in a table. Where significant changes are not explained and there is no explanation in the strategic report, this may cast doubt over whether the report, taken as a whole, is fair, balanced and comprehensive.
In addition to enhancing accounting policies, the review also noted that some disclosures about contract costs were sometimes missing.
Other considerations highlighted include:
- Is the amount of the transaction price allocated to remaining performance obligations (sometimes referred to as ‘backlog’) material – if so, is it clear whether that amount been impacted by the variable consideration constraint, and has an indication of when that revenue is expected to be recognised been given?
- Do the disclosures clarify whether or not any practical expedients have been taken?
- Is it clear from the disclosures that contract assets, not just trade receivables, have been assessed for impairment in accordance with IFRS 9 ‘Financial Instruments’?
- The findings in relation to accounting policies and significant judgements also suggest the need to stand back and consider whether accounting policies have been included for areas which might be expected to apply because of the nature of the company’s operations eg warranties for a construction company, or breakage for customer loyalty schemes; and similarly, whether all significant judgements have been disclosed eg in estimating variable consideration where this is common; or about why the input or output method chosen to recognise revenue provides the best depiction of progress where performance obligations are satisfied over time.
The FRC will continue to monitor IFRS 15 reporting and so companies are encouraged to consider the review findings. It is writing follow-up letters to six companies included in its sample for the review, and has written to audit committee chairs and finance directors of listed companies, drawing attention to areas for improvement.
The following will be areas of focus:
- Descriptions of the nature of performance obligations in the accounting policies and linkage to information elsewhere in the accounts.
- Detail on exactly when revenue is recognised (ie when does the customer obtain control) and the factors considered in determining whether this is over time or at a point in time.
- Details of significant judgements made in determining the amount or timing of revenue such as: evaluating whether performance obligations are distinct; determining when control is transferred; estimating variable consideration; and determining stand-alone selling prices.
- Quantification of estimation uncertainties relating to revenue and whether sensitivities or range of outcomes have been provided.
- Explanations of significant movements in contract assets and liabilities.
If you would like to discuss how your IFRS 15 disclosures might be improved, please contact Paul Merris.