In the previous video, I mentioned a challenge associated with accounting for products or services that are delivered over an extended period of time: at what point should the revenue be recognised in the accounts?
In the past, organisations had some leeway to decide on how they would account for a sale but this meant that:
As a result, an International Financial Reporting Standard was introduced, IFRS 15. This sets out a set of principles for recognising revenue. Here is the five-step framework that is used:
A good illustration is the change in the way mobile operators account for a handset that is provided, along with voice and data services, as part of a contract. In the past, the operator would claim the entire cost of the handset as an expense when the customer received it. But they would only recognise the monthly payments by the customer as revenues.
Thus, although, the customer received the value of, say, an $500 handset immediately, the operator was spreading the value received over several years.
Under IFRS 15, the value of the handset is recognised immediately.
In essence, the key question to ask is: what has the customer received at this point?
And in this case, there is a very tangible phone in the customer’s hand; it is hard to argue that value has not passed and so the revenue should be recognised immediately, even though the customer has not yet paid for it in full.
Here is how the accounting differs under IFRS 15.
IFRS: “Our mission is to develop IFRS® Standards that bring transparency, accountability and efficiency to financial markets around the world.”
International Financial Reporting Standards, usually called IFRS, are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are being adopted, at different rates, by countries around the world.