Accounting for revenues
Revenues arising from non-exchange transactions, such as the receipt of donations by not-for-profit entities, do not fall within the scope of Section 23, and continue to be dealt with in Section 34 Specialist Activities. Revenues arising from leasing contracts also fall outside the scope of Section 23 and will be dealt with under the revised Section 20 Leases.
Revenue recognition is now modelled around a 5-step model, similar to IFRS 15. The objective of this model is to ensure the entity recognises its revenue using a method that depicts the transfer of goods or services in direct correlation to the consideration to which the entity expects to be entitled in exchange for those goods or services.
The new model bases the recognition of revenue on the fulfilment, by the supplier, of their performance obligation(s) within the contract, rather than on the risks and regards of ownership of goods, which was the basis for the previous Section. The five steps are:
Identify the contract(s) with a customer
A contract exists when all parties to the contract have approved the contract, are committed to carrying out their respective obligations and each party’s rights can be clearly identified. Payment terms must be clearly presented, the contract must have commercial substance, and the entity must expect to receive payment when it falls due. More than one contract, using this definition, may exist in any agreement with a customer.
Identify the performance obligation(s) in the contract
An entity must identify the goods and services that have been promised in the contract. There may be multiple performance obligations in any contract, and, where these are sufficiently similar, it may be possible to aggregate these into one overall performance obligation.
Determine the transaction price
Through a review of the terms and conditions within the contract, the entity shall determine the overall transaction price, excluding any amounts to be collected on behalf of third parties, such as some sales taxes.
Allocate the transaction price to the performance obligation(s)
Where there is only one performance obligation, or all performance obligations are satisfied at the same time, the entire transaction price is allocated at that stage. Where multiple performance obligations have been identified, the overall transaction price must be allocated in proportion to the stand-alone selling prices, as if each performance obligation was provided separately. If stand-alone selling prices cannot be clearly determined, they should be estimated by management.
Recognise revenue when/as the entity satisfies a performance obligation
Revenue is recognised as each performance obligation is satisfied by the entity. This is determined by the transfer of a promised good or service to a customer, and the customer obtains control of that good or service.
The new section also provides guidance around the use of contract liabilities and contract assets. Where an entity receives consideration from a customer in advance of performing their obligations, a contract liability is recognised. The liability continues to be held until the entity transfers the goods or services to the customer, at which stage it is derecognised.
Where goods or services are transferred to a customer in advance of payment becoming due, a contract asset is recognised. Both the contract asset and contract liability meet the definition of a financial instrument, and are accounted for in accordance with Sections 11 and 12 relating to financial instruments.
Initial application of the new section
There are two methods for an entity to apply the new accounting requirements.
An entity may use a fully retrospective approach, where the new accounting requirements are applied to prior period information to the earliest date for which it is practicable, as if the new requirements had always been applied.
Alternatively, an entity may use a modified retrospective approach, where the cumulative effect of initially applying the revised policies is added to opening reserves in the current year. Only incomplete contracts are considered when determining this adjustment to opening reserves. No prior period information is restated when availing of this method.
Disclosure requirements
The new section includes more disclosures than are required under the previous version of FRS 102.
In the year of transition only, disclosures are required to explain the impact of adopting the new section, regardless of the method of initial application used. These will include the impact on both the current year revenue figure and P&L reserves of adopting the new section, as well the impact on the most recent prior period presented (where applicable).
In addition to the disclosures required by the previous section, an entity must disclose detailed information regarding debtors, contract assets and contract liabilities, including any impairments on the debtors and contract assets. A description of the performance obligations that exist in the entity’s contracts must be included, including significant payment terms, the nature of goods or services provided and obligations for returns or warranties.
Where performance obligations are satisfied over a period of time, the entity shall disclose the methods it uses to recognise revenue over those periods, including any judgements that have been made.
Impact on other accounting standards
FRS 101, Reduced Disclosure Framework, is based on the accounting principles contained within International Financial Reporting Standards, as adopted by the relevant jurisdiction. Therefore, IFRS 15 has applied to entities reporting under FRS 101 since 2018.
FRS 105, The Financial Reporting Standard applicable to the Micro-entities Regime, has also been updated for these revenue recognition changes, with some additional simplifications. Unlike under FRS 102, the new requirements are applied prospectively within FRS 105, applying only to contracts that begin after the date of transition to the new Standard. There are no disclosure requirements relating to revenue arising from contracts with customers included in FRS 105.
For further information, and to find out how Grant Thornton can assist you in navigating these changes, please contact Louise Kelly, Partner.
