New Revenue Recognition Standard Ind AS 115 deferred?
The corresponding standard of Ind AS 115 is IFRS 15 Revenue from Contracts with Customers. Let us first understand why there was need to issue new standard IFRS 15 by IASB in 2014. There was a joint project between IASB and US National Standard Setter FASB, where in both agreed to streamline the revenue recognition standards and formed Transition Resource Group (TRG). The new standard outlines a single comprehensive model of accounting of revenue arising from contracts with customers and supersedes total 6 standards and interpretations issued by IASB for accounting of revenue:
- IAS 18 Revenue recognition, issued in 1993
- IAS 11 Construction Contracts, issued in 1993
- SIC 31 Revenue – barter transactions involving advertising services, issued in 2001
- IFRIC 13 Customer Loyalty programmes, issued in 2007
- IFRIC 15 Agreements for the Construction of Real Estate, issued in 2008
- IFRIC 18 Transfer of Assets from Customers, issued in 2009
Lot of standards and interpretations have created confusion and there was need to have comprehensive standard on revenue recognition which can be applied consistently across transactions, industries and capital markets. While overall principles sound familiar, IFRS 15 includes a significant amount of guidance on many issues arise in determining the appropriate timing and measurement of revenue.
Ind AS 115 (or IFRS 15) provides 5 step revenue recognition model:
New standard streamline the process of recognition of revenue and ensures the consistent approach of recognition across industries. Consequently, the requirement in Ind AS 115 will result in changes in the accounting for only some revenue transactions for some companies having long term service contracts and multiple element arrangements.
Differences between IFRS 15 (Ind AS 115) and existing standards:
1. Multiple element arrangements: IFRS 15 specifically requires to identify the performance obligation at each contract inception based on distinct goods or service. The transaction price is to be allocated to each performance obligation within the contract based on standalone selling price of each element. However, IAS 18 recognises the concept of multiple elements in a transaction only in certain circumstances. Para 13 of IAS 18 states that ‘the recognition criteria in this standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.’
2. Timing of revenue recognition: IFRS 15 requires the revenue is to be recognised when the performance obligation is satisfied on transfer of control. IAS 18 specifies conditions for recognition of revenue with specific focus on significant risk and rewards.
3. Estimate of variable consideration: The variable consideration may be deferred under IAS 18 until the uncertainty is removed or when the payment is received. IFRS 15 provides specific guidance for estimation and recognition of variable consideration.
4. More detailed Guidance: IFRS 15 provides detailed guidance on significant financing components, contract modifications, separating elements, allocation of transaction price, licences, options, repurchase agreements etc.
Now, let us understand why IFRS 15 was deferred?
The standard was issued on 28th May 2014 and made applicable to the financial statements for period beginning on or after 1st January 2017. Later in July 2015, the effective date was deferred to 1st January 2018 with option of early adoption. In August 2015, FASB also deferred effective date of new revenue recognition standard (comparable to IFRS 15) by one year. European Financial Reporting Advisory Group (EFRAG) also endorsed to European commission that recommended IFRS 15 be adopted with the effective date set by IASB. Hence, effectively IFRS 15 deferred for the companies preparing financials as per EU adopted IFRS.
The main reason for deferral of IFRS 15 is that IASB was planning to issue an exposure draft of targeted amendments to the standards that will include clarifying some of its requirements and adding illustrative examples to aid implementation. On July 30, 2015, IASB has issued exposure draft ‘Clarifications to IFRS 15’ to provide clarifications with respect to identifying performance obligations, principal verses agent considerations and licensing.
Whether Ind AS 115 should be deferred?
There are two schools of thoughts.
- In favour of Deferment
- There is uncertainty regarding the changes to be brought in IFRS 15. TRG is in the process of issuing clarifications and amendments to IFRS 15. Once the clarifications and more illustrations are finalised, than it would be prudent to implement the same for the companies in India.
- Certain industries like telecom, real estate, Information Technology having long term projects and/or multiple arrangements have not still assessed the impact of the application of Ind AS 115 and would require more time to assess the impact.
2. Against Deferment
- India is applying IFRS for the first time and there is a complete changeover from one GAAP (IGAAP) to another GAAP (Ind AS). If all new/proposed standards are considered at the time of first time adoption itself, than it will provide stability for atleast for near future and no duplication of efforts required.
- Ind AS 109 is early adopted which is also being applicable from the period beginning on or after 1st January 2018. Both standards Ind AS 115 and Ind AS 109 are related in certain aspects and Ind AS carve outs made earlier from application of old revenue recognition standards are also not required if Ind AS 115 is adopted.
- The notification of Ministry of Corporate Affairs (MCA) was issued in February 2015 that provides voluntary adoption for Financial Year 2015-16 and Mandatory adoption for certain class of companies starting from the Financial Year 2016-17. Ind AS requires comparative financials and the companies who have voluntary adopted has already applied Ind AS 115 as they require opening balancesheet as on 1st April 2014 with comparatives for the year 2014-15. Even the companies which are mandatory required to adopt Ind AS, they have already started the convergence process, as opening balancesheet is required to be prepared as on 1st April 2015 with comparatives for FY 2015-16. Since issue of MCA notification, it is now more than 5 months and significant implementation process is already in progress by considering Ind AS 115.
Is Ind AS 115 deferred?
At the National Advisory Committee on Accounting Standards (NACAS) meeting dated 5th August, it was decided to take view from all 3 apex industry chambers – FICCI, CII and Assocham on whether Ind AS 115 needs to be deferred or not. All 3 industry chambers have provided their view for deferment of Ind AS 115. During the next meeting of NACAS on 3rd September, it was decided to push back the implementation of new standard Ind AS 115 from its original timeline of 1st April 2016. NACAS is likely to make recommendation to the Ministry of Corporate Affairs for deferment of Ind AS 115. However it is not clear whether it will be deferred for one/two years and whether option of early application will be provided.