Companies in the consumer and industrial product sector have a number of areas which are significantly impacted by IFRS 15 (new revenue standard). We have enumerated a few of the areas to look out for:
Unbundling of multiple contracts within a single contract: Often a number of companies provide multiple product or services in one contract, For example, a number of different component parts, finished goods and servicing contracts may be integrated into one contract. Under the new Standard, an entity will be required to assess whether the deliverables it has promised to the customer give rise to separate performance obligations. When the entity has identified its performance obligations, it will have to allocate the transaction price to the various performance obligations.
The impact of shipping terms: Providers of industrial products and services may ship products under various terms to customers. The point at which risks and rewards pass, based on an assessment of shipping terms, may be different to the point at which control passes to the customer. For example, some goods may be shipped on the basis that title passes to the customer at the point of shipment, but customers are still compensated for any loss or damage during shipping.
Previously revenue may have been recognised at the point of final delivery on the basis that some risks and rewards are retained during shipping.
Under IFRS 15, entities need to assess whether control passes to the customer at the point of shipment or at the point of final delivery. If revenue is recognised at the point of shipment, then a distinct shipping and coverage service may also be identified.
The impact on Warranties: IFRS 15 distinguishes between a warranty providing assurance that a product meets agreed-upon specifications (accounted for a cost provision) and a warranty providing an additional service (for which revenue will be deferred). If a customer can choose whether or not to purchase a warranty as an optional extra that warranty will always be treated as a separate service. Where a warranty is determined to include both elements (assurance and service) the transaction price is allocated to the product and the service in a reasonable manner.
The impact areas highlighted above only focuses on a few out of the numerous areas that will impact companies operations, strategy and systems. Hence, Companies need to perform a robust assessment of all revenue generating activities in order to ensure systems, processes and people can support the new revenue model.