2 minutes read
If your company reports under U.S. GAAP or International Financial Reporting Standards (IFRS), there is a new revenue recognition standard effective in January 2018 that could have time-consuming and costly compliance ramifications.
The IFRS 15 standard, which governs contractual relationships, is one of many developed by the International Accounting Standardization Board (IASB) and has been created due to misinterpretations of previous guidelines. While it will not take effect until 2018, companies must start preparing now, as it will dramatically change the process of revenue recognition. Essentially, companies must shift from a model that is focused on vendor-specific objective evidence (VSOE) to a single model for revenue recognition using a standalone selling price.
How will it affect your company?
IFRS 15 compliance poses a challenge to many industries, but those with bundle goods and services – such as telecommunications – will be impacted to a greater extent.
Because telcos typically bundle services and handsets or equipment, and have a variety of systems that hold customer information, it is often difficult to obtain a holistic view of the customer. In addition, data may be ‘over aggregated’ to get a converged invoice, with no visibility or traceability back to the originating source for the invoice.
To comply with IFRS 15, telcos will now need to account for multiple performance obligations, or when there is an uncertain or variable consideration in determining transaction prices.
For instance, under IFRS 15, telcos will need to allocate revenue based on the relative standalone selling price of a handset and the monthly service plan. In many cases, this would result in the company allocating some of the revenue that is currently associated with the service to the handset. In addition, IFRS 15 compliance could result in different revenue amounts being allocated to the same or similar monthly service plans.
To achieve this will require the integration of enormous amounts of data from diverse sources that most likely are not aligned or integrated today.
The new compliance process is complex – and time consuming
Although it doesn’t go into effect for a while, telcos should start preparing for IFRS 15 now to avoid incorrect reporting and non-compliance.
For instance, traditional billing data will not suffice, as there will be a need for additional integration points to retrieve data for revenue recognition, such as contract management, commissions, and accounts receivable. Data quality might also be a concern, as poor quality would impede the adoption of the IFRS 15 standard. And with additional integration points, there will also be a need to increase auditing and reconciliation activities.
The compliance to IFRS 15 may require a lot of manual work, especially in companies that have a large volume of contracts, unless an automated process is implemented. Therefore, for many companies, complying with IFRS 15 standards may require significant investments into new systems. The good news is that this compliance presents an ideal opportunity to improve systems and processes that were already outdated. It’s also an opportune time to employ better business analytics for such things as profitability per contract, fraud, churn analysis, and next best offer.
Start soon – and start smart
To learn more about IFRS 15 and how your company can more easily comply before the 2018 deadline, visit [link to press release,], SAP Revenue Accounting and Reporting application, or SAP hybris Billing solution.