Implications on the Industries:

a. Retail, wholesale and distribution sector

The profile of revenue and profit recognition will change for some entities as the new
standard is more detailed and more prescriptive than the existing guidance and
introduces new complexities. In particular, retail, wholesale and distribution
companies will need to consider:
- the type of warranty coverage offered to customers;
- the accounting for customer loyalty schemes and similar arrangements;
- how shipping terms will impact the timing of recognition of revenue;
- the impact of the new guidance where pricing mechanisms include variable
amounts;
- the appropriate accounting for customer options to acquire additional goods and
services at a discount;
- how the new standard will impact presentation of payments made to customers
(slotting fees); and
- whether revenue must be adjusted for the effects of the time value of money.

IFRS 15 is more prescriptive in many areas relevant to the retail, wholesale and distribution
sector. Applying these new rules may result in significant changes to the profile of revenue and,
in some cases, cost recognition. This is not merely a financial reporting issue. As well as
preparing the market and educating analysts on the impact of the new standard, entities will
need to consider wider implications. Amongst others, these might include:
- changes to key performance indicators and other key metrics;
- changes to the profile of tax cash payments;
- availability of profits for distribution;
- for compensation and bonus plans, impact on the timing of targets being achieved and the
likelihood of targets being met; and
- potential non-compliance with loan covenants

The complexity of applying a more conceptual approach and of producing the detailed
disclosures required by the new standard in the retail, wholesale and distribution sector may
require modifications to existing accounting systems and, in some cases, entities may conclude
that they should develop new system processes. Entities should ensure they allow sufficient time
to develop and implement any required modifications to processes.

How should warranties be accounted for?

The new standard distinguishes between a warranty providing assurance that a product meets
agreed-upon specifications and a warranty providing an additional service. Consideration of
factors such as whether the warranty is required by law, the length of the warranty coverage
period, and the nature of the tasks the entity promises to perform will be necessary to
determine which type of warranty exists. If a customer can choose whether or not to purchase a
warranty as an ‘optional extra’, that warranty will always be treated as a separate service. Where
a warranty is determined to include both elements (assurance and service), the transaction price
is allocated to the product and the service in a reasonable manner (if this is not possible, the
whole warranty is treated as a service). In the retail, wholesale and distribution sector, it is
common for warranties to include both elements.

How should breakage be recognized (customer loyalty schemes)?

Many retailers offer customers future goods or services in exchange for a non-refundable
upfront payment (gift cards, gift certificates, layaway sales deposits). The customers do not
always exercise all their contractual rights in these scenarios. Such unexercised rights are often
referred to as ‘breakage’. IFRS 15 includes specific guidance on breakage, which is applicable to
all revenue transactions with customers. If an entity expects to benefit from breakage, it should
recognize the expected breakage amount as revenue in proportion to the pattern of the rights
exercised by the customer (by comparing the goods and services delivered to date with those
expected to be delivered overall). Otherwise, the entity should recognize any breakage amount
as revenue when the likelihood of the customer exercising its remaining rights becomes remote.
Entities will need to consider whether their current accounting needs to be amended in order to
meet the requirements of IFRS 15.

How will the shipping terms impact the timing of revenue recognition?

IFRS 15 focuses on when control of those goods has transferred to the customer. This approach
may result in a change of timing for revenue recognition for some entities. Some entities may
supply goods on the basis that title passes to the customer at the point of shipment but, as a
matter of business practice, may compensate customers for loss or damage during shipping
(either through credit or replacement). Under IFRS 15, entities will need to assess whether
control passes to the customer at the point of shipment or at the point of delivery. This may
result in revenue being recognized at the point of shipment, it may be necessary to allocate part
of the transaction price to a distinct “shipping and risk coverage” service, with that element of
revenue recognized when the service is provided.

When should variable or uncertain revenues be recognized?

There are new specific requirements in respect of variable consideration such that it is only
included in the transaction price if it is highly probable that the amount of revenue recognized
would not be subject to significant future reversals as a result of subsequent re-estimation. The
approach related in IFRSs and, in certain scenarios, will require a significant degree of judgment
to estimate the amount of consideration that should be taken into account. The profile of
revenue recognition may change for some entities as a result.

Should revenue be allocated to customer options to acquire additional goods or services at a

discount?

Some contracts in the retail, wholesale and distribution sector include a material right for the
customer to purchase additional goods or services at a discount. An entity must allocate a
portion of the transaction price to the option and recognize revenue when control of the goods
or services underlying the option is transferred to the customer, or when the option expires.
How will the new standard impact the presentation of payments made to customers (slotting
fees)?

In this sector, suppliers often make payments to retailers of their products in order to have their
products prominently displayed, or for co-operative advertising (advertising by the retailer of the
supplier’s product). Under the new standard, there is explicit guidance that addresses how to
account for payments made to a customer. Suppliers will need to consider whether the payment
is made for a separate good or service or should alternatively be treated as a deduction from
revenue.

Should revenue be adjusted for the effects of the time value of money?

Financing arrangements such as buy now and pay later are commonplace in the retail, wholesale
and distribution sector. Under the new standard, the financing component, if it is significant, is
accounted for separately from revenue. This applies to payments in advance as well as in arrears,
but subject to an exemption where the period between payment and transfer of goods or
services will be less than one year.
b. Mining Sector
The profile of revenue and profit recognition may change for certain mining companies as the
new revenue standard is more detailed and more prescriptive than the existing guidance and
introduces new complexities. In particular, mining companies will need to consider:
- whether the new ‘control’ model will change the timing of revenue recognition. It is
expected that FOB and CIF sales will continue to be recognized when the goods pass over
the ship’s rail, but consideration will need to be given as to whether revenue recognition
under certain smelting/refining arrangements, involving sale of ore and repurchase of
metal, will change in light of the new guidance on sale and repurchase agreements;
- whether freight revenue will need to be accounted for separately if control of goods
passes before final delivery;
- the impact of new guidance where pricing mechanisms include variable consideration. It
is not yet clear whether this may change for accounting provisionally priced sales;
- the extent to which arrangements with collaborators or partners, which might include
royalty funding arrangements, fall within the scope of the new standard;
- whether revenue must be adjusted for the effects of the time value of money; and
- the appropriate accounting for exchanges of inventory
 The new standard requires significantly more disclosures relating to revenue and entities
will need to ensure that appropriate processes are in place to gather the information.

Will the new control model impact the timing of revenue recognition?

IFRS 15 focuses on when the control of those goods has transferred to the customer. This
approach may result in a change of timing for revenue recognition for some entities. Entities will
need to consider whether this could change the treatment of any consignment stocks, and also
whether any shipping arrangements may be affected.

Sales contract in the mining sector commonly refer to the INCO terms, with FOB (free on board)
and CIF (carriage, insurance and freight) being two of the most common types. Under FOB sales,
legal title transfers when the goods pass over the ship’s rail and the customer is responsible for
the insurance and freight. Similarly, under CIF sales, legal title transfers when the goods pass
over the ship’s rail but the seller will arrange the freight and insurance on behalf of the customer
although the customer is the named counter-party and would be the entity to seek redress in
the event of the claim.

Where an entity has concluded that it is appropriate for the revenue from sale of goods to be
recognized at the point those goods are loaded onto the ship in a CIF contract, it will need to
consider whether, if the amounts are material, it may be necessary to allocate the part of the
transaction price to a distinct “shipping and insurance” service, with that element of revenue
recognized potentially later when or as that service is provided.
At the time of writing, the FASB have tentatively decided to amend the US standard to allow
shipping services to be accounted for as a fulfillment cost (providing for costs instead of
deferring revenue), but the IASB is not proposing a similar expedient.

When should variable or uncertain revenues be recognized and how might this affect
provisionally priced sales?

There are new specific requirements in respect of variable consideration such that it is only
included in the transaction price if it is highly probable that the amount of revenue recognized
would not be subject to significant future reversals when the uncertainty is resolved. At this
stage, the intended interaction between these new requirements and the requirements of the
IFRSs dealing with financial instruments is unclear.

At present, provisional pricing features are typically accounted for as ‘embedded derivatives’ in
accordance with applicable guidance on accounting for financial instruments (IAS 39), such that
the open contracts are fair valued, typically using the forward curve for that commodity.

Revenue is currently recognized at an unrestricted amount at the point of shipment, even

though there is a reasonable possibility that the amount ultimately invoiced may be lower. This
methodology is understood by mining companies and generally where the provisionally priced
fair value gain/loss is significant, detailed disclosure is given in the financial statements.

The IASB has recently issued new financial instruments guidance (IFRS 9), which changes the
approach taken to embedded derivatives in certain respects.

From a mining company’s perspective, given the risk that post sales commodity price swings
could reverse revenue recognized under the current accounting guidance, application of the new
variable consideration guidance would require an estimate of how much of the consideration
would be highly probable not to reverse. Moreover, many mining companies will have economic
hedges in place that will naturally offset subsequent price movements; if application of the
variable consideration guidance is required, such companies will need to formally designate
hedges in order to avoid reflecting price volatility that is not economically present.

When does control transfer and revenue recognition take place under tolling arrangements?

Tolling arrangements take many forms and can be complex in their structure. For example:
- The substance of the commercial terms can be that the transfer of the goods to the toll
refiner/smelter is a sale by the miner.
- In some cases, the miner retains title to the goods during the toll processing, for which a fee
is paid, and the mining entity only recognizes a sale when the finished goods are transferred
to a final customer.
- In other cases, the toll refiner/smelter automatically purchases the product once processed
and revenue is often recognized at that point.

IFRS 15 includes new guidance on accounting for repurchase agreements, including scenarios
when those goods will or may be repurchased as part of another asset and when goods that are
substantially the same as those supplied will or may be repurchased.
IFRS 15 also includes guidance on how to account for non-cash consideration. The toll refiner will
typically make an economic return by charging a unit cost but it will also usually retain any metal
recoveries above a contractual threshold and may also retain certain by-products for no
consideration. Under IFRS 15, a value may need to be assigned to the sales and costs for such
non-cash consideration, noting that in many cases the true value will not be known until after
the processing is complete.

Are collaborative arrangements, including royalty and offtake funding, in the scope of the new
standard?

It is not uncommon in the mining sector for two separate entities to combine their resources and
collaborate in the operation of a mine. Where these collaborations are in the form of a joint
venture or joint operation, they will continue to be governed by IFRS 11 Joint Arrangements.

A mining entity will have to assess whether the royalty recipient/investor/buyer in the streaming
arrangement is its customer in order to establish whether transactions with that entity are
within the scope of the new standard. The new standard introduces new specific guidance on
this topic, and this may result in some arrangements that have not been previously regarded as
revenue transactions nevertheless falling within the scope of the new standard. It may also
result in some arrangements which have previously been treated as revenue transactions being
outside of the scope of the new standard and entities will need to consider in these cases
whether it is still appropriate to apply the new standard by analogy.

At present, the royalty or streaming arrangement may be accounted for as a prepayment for
goods to be supplied in the future (deferred revenue), a partial disposal of an existing asset
(reduction in property, plant and equipment or intangibles) or a financial liability to be
accounted for under IFRS 9 (or IAS 39). Following the introduction of IFRS 15, entities will need
to evaluate whether any changes are required to the current approach. The treatment adopted
may have a significant impact on the recognition of revenue/income and profit, and potentially
financing expense.

Should revenue be adjusted for the effects of the time value of money?

Sales by entities in the mining sector may include financing arrangements in that the timing of
cash inflows from the customer may not correspond with the timing of recognition of revenue.
Under the new standard, the financing component, if it is significant, is accounted for separately
from revenue. This applies to payments in advance as well as in arrears, but subject to an
exemption where the period between payment and transfer of goods or services will be less
than one year.

Are exchanges of inventory within the scope of the new standard?

The new standard takes a slightly different approach, scoping out non-monetary exchanges
between entities in the same line of business to facilitate the sales to customers, or to potential
customers, other than the parties to the exchange. Entities in the mining sector may on occasion
swap inventories with other entities. Such entities will need to consider whether counterparties
to such non-monetary exchanges should or should not be regarded as in the same line of
business and whether the different scoping requirements will change any of their current
practices.
c. Banking and Securities

The profile of revenue and profit recognition will change for some entities as the new
standard is more detailed and more prescriptive than the existing guidance and
introduces new complexities. In banking and securities companies will need to
consider:
- The impact of the new guidance where pricing mechanisms include variable
amounts;
- Whether particular costs relating to obtaining a contract must be capitalized;
- The extent to which distinct goods or services are supplied, which should be
accounted for separately;
- When upfront fees should be recognized as revenue; and
- The appropriate accounting policies for credit card loyalty schemes.
 The new standard requires significantly more disclosures relating to revenue and
entities will need to ensure that appropriate processes are in place to gather the
information.

The timing of revenue and profit recognition may be affected by the new standard

IFRS 15 is more prescriptive in many areas relevant to the retail, wholesale and distribution
sector. Applying these new rules may result in significant changes to the profile of revenue and,
in some cases, cost recognition. This is not merely a financial reporting issue. As well as
preparing the market and educating analysts on the impact of the new standard, entities will
need to consider wider implications. Amongst others, these might include:
- changes to key performance indicators and other key metrics;
- changes to the profile of tax cash payments;
- availability of profits for distribution;
- for compensation and bonus plans, impact on the timing of targets being achieved and the
likelihood of targets being met; and
- potential non-compliance with regulatory requirements

Furthermore, entities in this sector will need to consider how the financial performance of their
customers will be impacted as a result of the new standard as this may impact the loan
covenants negotiated with those customers.

When should variable or uncertain revenues be recognized?

Contracts in the banking and securities sector will often include significant variable elements,
such as performance bonuses, penalties or structuring fees. There are new specific requirements
in respect of variable consideration such that it is only included in the transaction price if it is
highly probable that the amount of revenue recognized would not be subject to significant
future reversals when the uncertainty is resolved.
Which costs should be capitalized?

In addition to more prescriptive guidance on revenue recognition, the new standard introduces
specific criteria for determining whether to capitalize certain costs which are not in the scope of
other standards, for example the financial instruments standards, distinguishing between those
costs associated with obtaining a contract and those costs associated with fulfilling a contract. In
the banking and securities sector, this becomes an issue because significant costs are incurred
that are directly attributable to obtaining contracts with customers. At present, different entities
might treat these costs differently. The new standard requires entities to capitalize success fees,
which will have an impact on operating profits. In addition, the new standard requires capitalized
contract costs to be amortized on a systematic basis that is consistent with the pattern of
transfer of the associated services. Entities will need to exercise judgment to determine the
appropriate basis and time period for this amortization.

How should an entity identify and allocate revenue to different goods and services?

Entities may have to amend their current accounting policies as a result of a more detailed
guidance in IFRS 15 and, in particular, the new rules on how revenue is allocated between
different items. The new standard requires the revenue from a contract to be allocated to each
distinct good or service provided on a relative standalone selling price basis, though a residual
approach is permitted in limited circumstances.

This may result in practical implementation issues in the banking and securities sector where
services are often integrated. Customers may be charged for a number of services.

When should ‘upfront’ fees be recognized?

In the banking and securities sector, it is common for entities to receive an initial ‘sign-on fee’.
New detailed guidance may lead to a change in practice when accounting for such fees. Unless
control of distinct services is transferred to the customer at the outset, an upfront fee should be
regarded as an advance payment for future services and so should be recognized as revenue
when those future services are provided. Often, upfront fees are charged in order to cover initial
sign-up costs, but this is not in itself sufficient to justify upfront revenue recognition. The same
logic would apply to any additional fees that may be charged during the term of the contract. It
will be necessary to consider whether these relate to distinct services; if they are not separate
from the original service provided, they may result in variable consideration relating to the
overall banking services.

How should credit card loyalty schemes be recognized?

It is not uncommon for banks to offer loyalty programs as part of their credit card offerings. The
holders of a credit card may receive loyalty points every time they make a purchase. They are
then able to use those loyalty points to obtain goods or services, either from the bank of from
the specified retailers. In such cases, entities will need to evaluate what portion, if any, of their
cardholder arrangements that include loyalty programs are within the scope of the new
standard, and, if so, determine the appropriate accounting for such arrangements. They may be
 required to account for future rewards provided to cardholders under these programs as
separate performance obligations. This would require a portion of the transaction price to be
allocated to and recognized as revenue when control of the future benefits under the rewards
program transfers to the cardholder. This requirement may constitute a change from current
accounting policies for banking and securities companies.

d. Health Care
The profile of revenue and profit recognition will change for some entities as the new
standard is more detailed and more prescriptive than the existing guidance and
introduces new complexities. In particular, healthcare providers will need to consider:
- The impact of new guidance where pricing mechanisms include variable amounts;
- Whether payment for goods and services is considered collectible (receipt is
probable)
- The extent to which they supply distinct goods and services, which should be
accounted for separately; and
- Whether particular costs relating to obtaining a contract must be capitalized
 The new standard requires significantly more disclosures relating to revenue and
entities will need to ensure that appropriate processes are in place to gather the
information.

IFRS 15 is more prescriptive in many areas relevant to the retail, wholesale and distribution
sector. Applying these new rules may result in significant changes to the profile of revenue and,
in some cases, cost recognition. This is not merely a financial reporting issue. As well as
preparing the market and educating analysts on the impact of the new standard, entities will
need to consider wider implications. Amongst others, these might include:
- changes to key performance indicators and other key metrics;
- changes to the profile of tax cash payments;
- availability of profits for distribution;
- for compensation and bonus plans, impact on the timing of targets being achieved and the
likelihood of targets being met; and
- potential non-compliance with loan covenants

When should variable or uncertain revenues be recognized?

In certain jurisdictions, it is not uncommon for healthcare providers to render patient services,
without knowing how much they will ultimately be paid. A hospital may have to provide
emergency services to patients prior to knowing the amount that will ultimately be paid by a
private insurer, the government, or the patients themselves. It is possible for the transaction
price to be different in these situations depending on who is responsible for the payment.
Additionally, the amounts ultimately paid may be adjusted as a result of negotiation or dispute
and entities will need to apply judgment to determine whether the adjustment should be
accounted for as a concession (reducing revenue) or as a bad debt (separate expense).

There are new specific requirements in respect of variable consideration such that it is only
included in the transaction price if it is highly probable that the amount of revenue recognized
would not be subject to significant future reversals as a result of subsequent re-estimation. The
approach related in IFRSs and, in certain scenarios, will require a significant degree of judgment
to estimate the amount of consideration that should be taken into account. The profile of
revenue recognition may change for some entities as a result.
Is it probable that the payment will be received?

The new standard requires that it is probable that the entity will collect the consideration to
which it will be entitled in exchange for the goods and services that will be trasnferred to the
customer. In certain jurisdictions, hospitals often provide emergency services to uninsured
patients without knowing whether they meet the criteria for revenue recognition given this
uncertainty.

How should revenue be allocated to the different goods and services identified?

Entities may have to amend their current accounting policies as a result of the more detailed
guidance in IFRS 15, and, in particular, the new rules on how revenue is allocated between
different items. The new standard requires the revenue from the contract to be allocated to each
distinct good and service provided on a relative standalone selling price basis, though a ‘residual’
approach is permitted in limited circumstances.

This may result in practical implementation issues in healthcare business, particularly where
services are often integrated. Patients may be charged for a number of services, for example
diagnostics, pathology, and so on. Where it is concluded that certain elements should be
accounted for separately, entities will then typically look to a standalone selling price to
apportion the relevant amount of the transaction price to each distinct element in the contract.

This may change the profile of revenue recognition for some entities and, where an entity has a
large volume of customer contracts, there may be some practical challenges to overcome in
order to ensure systems are in place to deal with the new requirements.

Which costs relating to a contract will need to be capitalized?

The new standard introduces specific criteria for determining whether to capitalize certain costs,
distinguishing between those costs associated with obtaining a contract and those costs
associated with fulfilling a contract. In the healthcare provider sector, this may be an issue where
significant costs are incurred that are directly attributable to obtaining contracts with customers.
At present, different entities might treat these costs differently. The new standard will require
entities to capitalize the costs of obtaining a contract which will have an impact on operating
profits. In addition, the new standard requires capitalized contract costs to be amortized on a
systematic basis that is consistent with the pattern of transfer of the goods or services. Emtities
will need to exercise judgment to determine the appropriate basis and time period for this
amortization.
SOURCE:
https://www.iasplus.com/en/publications/global/ifrs-industry-insights/rev-rec-retail
https://www.iasplus.com/en-us/publications/global/ifrs-industry-insights/rev-rec-mining
https://www.iasplus.com/en/publications/global/ifrs-industry-insights/rev-rec-banking
https://www.iasplus.com/en/publications/global/ifrs-industry-insights/rev-rec-healthcare