24 October 2017

CFA Institute: Revenue recognition changes

Revenue is arguably the most important financial statement line item as it impacts the depicted profitability during any reporting period as well as informs investors on the potential for value creation of reporting entities. This white paper is the third in a series of investor-oriented publications issued since 2016 that highlight the analytical implications of key changes resulting from the forthcoming adoption of the revised revenue recognition requirements. The IFRS and US GAAP revised revenue recognition requirements (IFRS 15 and Accounting Standards Codification [ASC] Topic 606) become effective at the beginning of 2018.

This paper provides a high-level review of the state of adoption (e.g., level of early adoption) and companies’ disclosures of anticipated impacts and transition reporting choices. It also reviews the likely effects of key judgments related to uncertain revenue and contract definition.

This paper reviews companies’ management-required judgment on the appropriate customer contract boundaries (e.g., whether to combine or modify by separating, terminating, and creating new contracts), which also will have implications for the amount and timing of reported revenue. For example, the British Engine manufacturer Rolls-Royce, in highlighting the impact of IFRS 15 on reporting of revenue, communicated that with the revised requirements, it will no longer be able to combine contracts from framers and airline operators, as it has done in the past through its linked total-care contracts. Correspondingly, this will limit Rolls-Royce’s ability to bundle original equipment sales and after-market services as a single performance obligation and will affect the reported revenue patterns. This paper also highlights clauses within the contract that have an impact on the effective contract term applied during revenue recognition.

Full paper

© CFA Institute