From January 2018, the new revenue recognition requirements come into effect. The new revenue requirements may require additional investment to ensure compliance.
The new revenue financial reporting standard (IFRS 15 – Revenue from Contracts with Customers) establishes a single comprehensive framework for determining when and how much revenue a company should recognise in the financial statements.
The new standard will impact the revenue profile of a myriad of companies in South Africa including those operating in the telecommunications industry, retail industry, transport industry, and the construction industry.
The new standard removes inconsistencies and weaknesses in the previous revenue requirements.
Comparability amongst revenue recognition practices across companies, industries, jurisdictions and capital markets is improved and the preparation of financial statements is simplified by reducing the number of requirements to which companies refer to.
The core principle of this new standard is that a company should recognise revenue to depict the transfer of promised goods or services to the customer.
This must be in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
With the new requirements, some companies may recognise revenue earlier than before and in some instances the revenue may be deferred or recognised over a period of time.
Treatment of additional costs
The standard also permits a company to capitalise incremental costs incurred to acquire a contract, for example sales commissions, and costs incurred to fulfil a contract.
Moreover, companies have been provided with guidance on how to account for contract modifications, warranties, royalties, rebates, discounts and loyalty programmes.
Contracts should therefore be reviewed as the existing terms and conditions may have a significant impact on a company’s reported figures, key leverage ratios, debt covenants, and IT systems, amongst others.
These new requirements are applicable to companies which are required to prepare financial statements in terms of International Financial Reporting Standards (IFRS) including companies listed on the JSE and those required in terms of the Companies Act 71 of 2008 or any other legislation to comply with IFRS and others who have opted to apply IFRS.
Companies should also consider what disclosures to provide in the financial statements prior to 2018 in respect of this standard which is not yet effective as per the requirements in IFRS (IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors).