ESMA Statement Highlights Key Areas Of IFRS 15

In its October 2017 statement on enforcement priorities, the European Securities and Markets Authority (ESMA) drew attention to the potentially significant impacts that IFRS 15 may have on timing and revenue recognition. IFRS 15 is set to replace IAS 18 Revenue and IAS 11 Construction Contracts. Most companies will be affected by it, with the industries of telecom, engineering, real estate, construction, and software perhaps facing the biggest change. In the statement, ESMA singles out certain areas that are important depending on the company's business model and current practice. Read on for further info on these areas.

Non-refundable upfront fees

The regulator emphasises that, under the new IFRS 15 requirements, the identification of performance obligations (see paragraphs IFRS 15.22-30) could lead to differences from current practices, particularly regarding non-refundable upfront fees. ESMA stresses the use of paragraphs B48-B51 to assess if the non-refundable upfront fees are related to a transfer of goods or services.

Measurement method

ESMA requests that paragraph B15 be respected when determining the measurement method. This is to ensure that any work-in-progress or finished good controlled by the customer is included in the measurement of the output at the reporting date.

Agent/principal distinction

IFRS 15 marks a shift in the underlying concepts of principal and agent, moving the distinction from a "risks and rewards" to a "control" concept. Here, ESMA emphasises that a party's being classified as an agent or a principal could mean variations in the amount and timing of revenue recognition.

Determining the transaction price

The regulator notes that certain variables in a customer contract could, in an IFRS 15 context, affect companies greatly—depending on their current practices. ESMA particularly highlights paragraphs 50, 53, 56, and 57, which offer some guidance.

Significant financing component

IFRS 15 requires that companies assess whether contracts include a significant financing component when determining the transaction price. The criteria for whether a financing...