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Revenue Recognition Paradox: A Review of IAS 18 and IFRS 15

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 REVENUE RECOGNITION PARADOX: A REVIEW OF IAS 18 AND IFRS 15
By
Oyedokun, Godwin Emmanuel
HND (Acct.), BSc. (Acct. Ed), MBA (Acct. & Fin.), MSc. (Acct.), MSc. (Bus & Econs), MTP (SA), ACA, FCTI, ACIB, MNIM,
CNA, FCFIP, FCE, FERP, CICA, CFA, CFE, CIPFA, CPFA, ABR, CertIFR

Chief Technical Consultant/CEO

OGE Professional Services Ltd
godwinoye@yahoo.com
+2348033737184, +2348055863944 & +2348095419026
May 24, 2016

Abstract

The primary purpose of venturing into business is to make profit, this motive, however, have
been criticised widely. The concept of income is crucial to the entity's financial performance,
and is half of determining an organisation's profitability and sustainability. The treatment of
"revenue" is particularly important when recognising income; revenue being income that is
derived from an organisation's everyday operating activities. The objective of this paper is to
review the provisions of the International Accounting Standards (IAS) 18 and International
Financial Reporting Standards IFRS 15 with respect to revenue recognition. The basic
foundation of the principles of how to deal with income, how to recognise revenue and other
forms of income in the financial statements, the basis of IAS 18 to help the transition when
IFRS 15 replaces it, and how to account for and disclose provisions of grants by government
and other forms of government assistance were reviewed in this paper by adopting contents
analysis methodology. The paper revealed the importance of IFRS and recommend that the
users and preparers of financial statement should start in earnest, the training and
understanding of IFRS 15 in readiness for its effective date January 1, 2017.

Key words: IFRS, Revenue, Disclosure, Government Grant, Contacts, Financial Statements

Word Count: 194

1
1.1. INTRODUCTION

The world today is packed with different kinds of products, services, transactions and many
other activities that people and business do. Logically, it is sometimes very tough issue for
accountants to determine when and even whether to recognize revenue in the financial
statements. That is exactly the main aim of the standard IAS 18 which is to give guidance on
the revenue recognition and help in the application of the revenue recognition criteria.
However, on May 28, 2014, the FASB and IASB issued their long-awaited converged
standard on revenue recognition. Almost all entities will be affected to some extent by the
significant increase in required disclosures. But the changes extend beyond disclosures, and
the effect on entities will vary depending on industry and current accounting practices.
Entities will need to consider changes that might be necessary to information technology
systems, processes, and internal controls to capture new data and address changes in financial
reporting.

The International Accounting Standards Board (IASB) and the US Financial Accounting
Standards Board (FASB) (collectively, the Boards) have jointly issued a new revenue
standard, IFRS 15 Revenue from Contracts with Customers, that will supersede virtually all
revenue recognition requirements in IFRS and US GAAP. Noting several concerns with
existing requirements for revenue recognition under both US GAAP and IFRS, the Boards
decided to develop a joint revenue standard that would: remove inconsistencies and
weaknesses in the current revenue recognition literature; provide a more robust framework
for addressing revenue recognition issues; improve comparability of revenue recognition
practices across industries, entities within those industries, jurisdictions and capital markets;
reduce the complexity of applying revenue recognition requirements by reducing the volume
of the relevant standards and interpretations; and provide more useful information to users
through new disclosure requirements. IFRS 15 specifies the accounting treatment for all
revenue arising from contracts with customers. It applies to all entities that enter into
contracts to provide goods or services to their customers.

The remaining part of this paper is devoted for the in-depth review of the provisions of the
current IAS 18 and the IFRS 15. Discussion and the relevant provisions of the standards were
made and the paper concluded by summarising the crux of the paper and recommendations
were made.

2
1.2. OBJECTIVE OF THE STUDY

International and national investors would be better placed to make rational economic
decisions when financial information are comparable between countries competing for
foreign investments. The global adoption of a single set of financial reporting standard, no
doubt, will enhance such comparability and create an enabling environment for all investors
to be able to effectively compare investment opportunities across the global market.
Objective of this stud, therefore, is to review the provisions of the International Accounting
Standards (IAS) 18 and International Financial Reporting Standards IFRS 15 with respect to
revenue recognition.

2.0. REVIEW OF LITERATURE

2.1.0. Conceptual Review
2.1.1. International Financial Reporting Standards
In everyday usage, the term 'International Financial Reporting Standards' (IFRSs) has both a
narrow and a broad meaning (IASPLUS). Narrowly, IFRSs refers to the new numbered series
of pronouncements that the IASB is issuing, as distinct from the International Accounting
Standards (IASs) series issued by its predecessor.

More broadly, IFRSs refers to the entire body of International Accounting Standards Board
(IASB) pronouncements, including standards and interpretations approved by the IASB and
IASs and the Standards Interpretations Committee (SIC) (now replaced with International
Financial Reporting Interpretations Committee (IFRIC)) interpretations approved by the
predecessor International Accounting Standards Committee. Paragraph 7 of IAS 1 on
presentation of Financial Statements defines IFRSs as comprising: International Financial
Reporting Standards, International Accounting Standards, IFRIC Interpretations, and SIC
Interpretations. The definition of IFRSs was amended after the name changes introduced by
the revised IFRS Foundation Constitution in 2010 (IASPLUS).

The major objectives (among others) and importance of introducing IFRS are as follows
(Fowokan, 2011, Oyedokun, 2014): To develop a single set of high quality understandable
and enforceable global accounting standard that require transparent and comparable
information in financial statements; To help participants in various capital markets (investors,
stockbrokers etc) across the globe to understand financial statements; To work actively with
the national standard setter to bring about convergence of national accounting standards;

3
IFRSs are designed for adoption by profit-oriented entities; IFRSs requires that financial
statements (FS) give a true and fair view of the financial health of entities.

Since the 1960s, according to Fowokan (2011), business has become more and more global
and thus lost a significant part of its national identity, Nigeria’s global players are reporting to
global finance market, therefore it makes sense to have global financial reporting
benchmarks, Nigerian businesses are making more and more international transactions, cross
border listing is now common place, accounting firms are beginning to follow their growing
corporate clients into other countries in order to maintain services (this is what accounts
partly for international accounting firms that you see nowadays which is now also forcing
significant number of smaller firms to seek international networks) and governments are
engaging in wide range reviews that recognise the importance of reassuring the markets and
the public at large that corporate reporting and governance frameworks are sufficiently
robust. The adoption of IFRS in Nigeria will create opportunities for a broader finance
transformation for companies in Nigeria, increase centralisation of their process and assist in
the realization of economies of scale (Fowokan, 2011, Akpan-Essien, 2011, Demaki, 2013).

In developing IFRSs, the IASB follows its due process requirements. Under the IFRS
Foundation Constitution, the publication of an exposure draft or an IFRS (including an
International Accounting Standard or an Interpretation of the Interpretations Committee)
requires approval by: nine members of the IASB, if there are fewer than sixteen members; ten
members of the IASB, if there are sixteen members; and other decisions of the IASB,
including the publication of a discussion paper, require a simple majority of the members of
the IASB present at a meeting that is attended by at least 60 per cent of the members of the
IASB, in person or by telecommunications (Akpan-Essien, 2011).

In compliance with IFRSs, paragraph 16 of IAS 1 requires an entity whose financial

statements comply with IFRSs shall make an explicit and unreserved statement of such
compliance in the notes. An entity shall not describe financial statements as complying with
IFRSs unless they comply with all the requirements of IFRSs. Also, when a Standard or an
Interpretation specifically applies to a transaction, other event, or condition, the accounting
policy or policies applied to that item shall be determined by applying the Standard or
Interpretation and considering any relevant Implementation Guidance issued by the IASB for
the Standard or Interpretation (IAS 8.7).

4
2.1.2. Financial Reporting and Financial Statement
Akpan-Essien (2011) argued that Financial Statements can take many forms. The best known
is the profit or loss account and balance sheet of businesses. In the specific case of limited
liability companies, financial statements are produced annually and take the form of a Profit
and Loss Account (Income Statement), Balance Sheet, Cash Flow Statement, Statement of
Changes in Equity and notes to the financial statements.

International Accounting Standards (IAS) 1 prescribes the basis for presentation of general
purpose financial statements to ensure comparability both with the entity’s financial
statements of previous periods and with the financial statements of other entities. It sets out
overall requirements for the presentation of financial statements, guidelines for their structure
and minimum requirements for their content (Sai, 2009, Akpan-Essien, 2011).

A complete set of financial statements comprises: a statement of financial position as at the

end of the period; a statement of comprehensive income for the period; a statement of
changes in equity for the period; a statement of cash flows for the period; notes, comprising a
summary of significant accounting policies and other explanatory information; and a
statement of financial position as at the beginning of the earliest comparative period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement of
items in its financial statements, or when it reclassifies items in its financial statements (IAS
1).

When preparing financial statements, management shall make an assessment of an entity’s

ability to continue as a going concern. An entity shall prepare financial statements on a going
concern basis unless management either intends to liquidate the entity or to cease trading, or
has no realistic alternative but to do so. When management is aware, in making its
assessment, of material uncertainties related to events or conditions that may cast significant
doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those
uncertainties (Sai, 2009).

Financial statements are structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information
about the financial position, financial performance and cash flows of an entity that is useful to
a wide range of users in making economic decisions. Financial statements also show the

5
results of the management's stewardship of the resources entrusted to it (Paragraph 9 of the
standard IAS 1).

Historically, annual reports and accounts of companies are produced by the directors (as
managers) to the shareholders (as owners), and other people were not expected to be
interested in them. However, today a much wider range of people are interested in the annual
report and accounts of companies and other organisations (Sai, 2009, Demaki, 2013). It is not
in doubt, the principal stakeholders of a company are typically its shareholders, but other
parties such as tax authorities, banks, regulators, suppliers, customers and employees may
also have an interest in knowing that the financial statements are presented fairly, in all
material aspects. The following people or groups of people at a glance are likely to want to
see and use financial statements:
a. Actual or Potential, i) Owners or shareholders; ii) Lenders or debenture holders; iii)
Employees; iv) Customers; and v) Suppliers
b. People who advise the above – accountants; stockbrokers; credit rating agencies; financial
journalists; trade unions, statisticians.
c. Competitors and people interested in mergers, amalgamations and takeovers.
d. The government, including the tax authorities, departments concerned with price control,
consumer protection, and the control and regulation of business.
e. The public, including those who are interested in consumer protection, environmental
protection, and political and other pressure groups.
All these people must be sure that the financial statements can be relied upon (Akpan-Essien,
2011).

2.1.3. Concept of Income, Revenue and Revenue Recognition

Income is defined in the Framework for the Preparation and Presentation of Financial
Statements as increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants. Income encompasses both
revenue and gains. Revenue is income that arises in the course of ordinary activities of an
entity and is referred to by a variety of different names including sales, fees, interest,
dividends and royalties. The objective of this Standard is to prescribe the accounting
treatment of revenue arising from certain types of transactions and events (EC, 2009).

6
The primary issue in accounting for revenue is determining when to recognise revenue.
Revenue is recognised when it is probable that future economic benefits will flow to the
entity and these benefits can be measured reliably. This Standard identifies the circumstances
in which these criteria will be met and, therefore, revenue will be recognised. It also provides
practical guidance on the application of these criteria (EC, 2009).

Revenue is the gross inflow of economic benefits during the period arising in the course of
the ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants. According BDO (2015), Revenue
is the gross inflow of economic benefits (cash, receivables, other assets) arising from the
ordinary operating activities of an enterprise (such as sales of goods, sales of services,
interest, royalties, and dividends). Revenue does not comprise gains on the sale of property
plant and equipment (PPE) – unless the PPE items were leased out under an operating lease -
or other fixed assets and net finance income. Revenue includes only the economic benefits
received or receivable on the entity’s own account. However, entities often collect the
amounts on behalf of the third parties, such as taxes payable to the state budget are NOT
revenue and cannot be recognized as such.

Also, agency transactions are very common in today’s business and sometimes it’s not easy
to determine the agency relationship. In agency relationship, the agent just collects the
amounts on behalf of the principal and thus cannot recognize the revenue. For example,
mobile operators often sell some additional content with their monthly prepaid calling plans,
such as music or application.

However, it is difficult to determine the existence of agency relationship and therefore IAS
18 sets in its Appendix 4 criteria that, individually or in combination, indicate that an entity is
acting as principal:

1. The entity has the primary responsibility for providing the goods or services to
customer or for fulfilling the order.

2. The entity has the inventory risk before or after the customer order, during shipping or
on return.

7
 3. The entity has latitude in establishing prices, either directly or indirectly.

4. The entity bears the customer’s credit risk on the receivable due from the customer of
the service.

Therefore, each transaction must be carefully assessed and if only 1 criterion is met then the
entity probably acts as a principal and recognizes revenue from the transaction.

2.1.4. Measurement of Revenue

The revenue shall be measured at fair value of consideration received or receivable. IAS 18
specifies the following:

Figure 2.1- Measurement of Revenue

Source: (Silvia, 2015, IAS 18- Revenue: IFRS Summaries)

1. Revenue is measured at the fair value of the consideration received or receivable (Fair
value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (BDO,
2015). Any trade discounts or rebates shall be deducted and revenue is measured net
of these items.
2. When the cash inflow is deferred or postponed to future, then the fair value of
consideration received might be less than its nominal amount. In this case, the fair
value of consideration received is determined by discounting future cash flows to their
present value using the imputed rate of interest. According to BDO (2015). If the

8
 inflow of cash or cash equivalents is deferred, the fair value of the consideration
receivable is less than the nominal amount of cash and cash equivalents to be
received, and discounting is appropriate. Examples of this are if the seller is providing
interest-free credit to the buyer or is charging a below-market rate of interest. Interest
must be imputed based on market rates.
3. An exchange for goods or services of a similar nature and value is not regarded as a
transaction that generates revenue. However, an exchange for a dissimilar item is
regarded as generating revenue (BDO, 2015). With regard to exchanges of goods or
services (barter transactions):

a. When goods or services are of a similar nature, then the exchange is not
regarded as a transaction revenue generating and the revenue cannot be
recognized.
b. When goods or services are of a dissimilar nature, then the exchange is
regarded as a transaction revenue generating and the revenue is recognized in
amount of fair value of goods/services received (adjusted by the amount of
any cash transferred).

2.1.5. Recognition of Revenue

IAS 18 specifies revenue recognition criteria for 3 basic revenue generating scenarios:
1. Sale of goods
2. Rendering of services
3. Interest, Royalties and Dividends

2.1.6. Sale of Goods

Revenue from sale of goods is recognized when all of the following conditions are satisfied:
the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods; the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold; the amount of revenue
can be measured reliably; it is probable that the economic benefits associated with the
transaction will flow to the entity; and the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
IAS 18 sets in its Appendix, the practical guidance on recognition of revenue from various
situations when selling goods. This hereby summarized it in the following table:

9
Table 2.1. Recognition of Revenue when selling goods

Transaction Revenue Recognition

Bill and Hold Sales When the buyer takes title.

Goods Shipped Subject to

Conditions

When the buyer accepts delivery and installation &

– installation & inspection inspection is completed.

– on approval When the buyer formally accepts the shipment

– with limited right of

return When the goods were delivered and time for return lapsed.

– consignment sales After the buyer sells goods to the final customer.

– cash on delivery sales When delivery is made and cash is received by the seller.

Lay Away Sales When the delivery is made.

Sale and Repurchase

Agreements Look out for financing arrangement – not revenue.

Subscriptions to Publications In line with the period over which the items are dispatched.
Source: Researcher (2016)

2.1.7. Rendering of Services

When the outcome of a transaction can be estimated reliably, revenue is recognised by

reference to the stage of completion of the transaction at the reporting date. The question to
be asked here is, can the outcome of the transaction be estimated reliably? If yes, then the
revenue can be recognized by the reference to the stage of completion of the transaction at the

10
end of the reporting period; and if not, then the revenue can be recognized only to the extent
of the expenses recognized that are recoverable.

The outcome of the transaction can be estimated reliably only when: the amount of revenue
can be measured reliably; it is probable that the economic benefits associated with the
transaction will flow to the entity; the stage of completion of the transaction at the end of the
reporting period can be measured reliably; and the costs incurred for the transaction and the
costs to complete the transaction can be measured reliably.

IAS 18 sets in its Appendix the practical guidance on recognition of revenue from various
situations when rendering services. This is summarized it in the following table:

Table 2.2. Recognition of Revenue when selling goods

Transaction Revenue Recognition

Installation Fees With reference to the stage of completion.

If subsequent services are included, then defer

Servicing Fees the revenue for the subsequent services.

Advertising Commissions

When the related advertisement appears before

– Media Commissions the public.

– Production Commissions With reference to the stage of completion.

Insurance Agency Commissions

Defer over the period during which the policy

– Agent Renders Further Services is in force.

At the date of policy commencement or

– Agent Does Not Render Further Services renewal.

11
Financial Services

Based on the classification of the related

– Integral Part of Effective Interest Rate financial instrument

– Earned As Services Are Provided When related service is provided.

When related significant act has been

– Earned On Execution of Significant Act completed.

When the event takes place or allocate

Admission Fees proportionally to individual events.

Tuition Fees Over the period of instruction.

Initiation, Entrance, Membership Fees

– No additional services provided Immediately when membership starts.

Defer over the membership period on some

– Additional services provided reasonable basis.

On the basis reflecting the purpose for which

Franchise Fees the fees are charged.

With reference to the stage of completion,

including the post-delivery service support
Fees from Development of Customized Software stage.
Source: Researcher (2016)

2.1.8. Interest, Royalties and Dividends

Revenue arising from the use by others of entity assets yielding interest, royalties and
dividends shall be recognized when: it is probable that the economic benefits associated with

12
the transaction will flow to the entity; and the amount of the revenue can be measured
reliably.

Revenue shall be recognized on the following bases: interest shall be recognized using the
effective interest method as set out in IAS 39; royalties shall be recognized on an accrual
basis in accordance with the substance of the relevant agreement; and dividends shall be
recognized when the shareholder’s right to receive payment is established.

2.1.9. Disclosure requirements for IAS 18

The following to be disclosed:

1. The accounting policy adopted for recognising each type of revenue;

2. For each of the categories, disclose the amount of revenue from exchanges of goods
or services; and
3. The amount of each significant category of revenue, including: -
a. Sale of goods
b. Rendering of services
c. Interest - Royalties - Dividends.

2.1.10. Current development

The standard IAS 18 undergoes major revision as a part of the convergence project between
IASB (setter of IFRS) and FASB (setter of US GAAP).
The new IAS 18 standard is expected to be applicable for periods starting 1 January 2017 or
later. Also, earlier adoption of new IAS 18 will NOT be permitted, Users and preparer of
financial statements will all have to stick with the current IAS 18 in the financial statements
for the periods starting before 1 January 2017.

2.2.0. Theoretical review

There are two theories of interest to this study, Agency Theory and the theory of the Pure –
Impression – Management Model of Accounting (PIMM). They are presented below:

2.2.1. Agency theory

Jensen and Meckling (1976) define an agency relationship as a “contract under which one or
more persons (the principal(s)) engage another person (the agent) to perform some service on
their behalf which involves delegating some decision making authority to the agent. If both

13
parties to the relationship are utility maximizers, there is good reason to believe that the agent
will not always act in the best interests of the principal”. Agency Theory explains how to
best organize relationships in which one party determines the work while another party does
the work. In this relationship, the principal hires an agent to do the work, or to perform a task
which he is unable or unwilling to do (Seven Pillars Institute for Global Finance and Ethic).

“The principal can limit divergences from his interest by establishing appropriate incentives
for the agent and by incurring monitoring costs designed to limit the aberrant activities of the
agent. In addition, in some situations it will pay the agent to expend resources (bonding
costs) to guarantee that he will not take certain actions which would harm the principal or to
ensure that the principal will be compensated if he does take such actions (Jensen and
Meckling, 1976). According to Jayeoba (2014), faithful representation [of financial
statement] is a fundamental qualitative characteristic. IASB (2010) also stated that to
faithfully represent economic phenomena [Economic resources and obligations and the
transactions and other event and circumstances that change them] that information purport to
present, annual reports [of business organisations] must be complete, neutral, and free from
material error. Agent is the management that are entrusted with the day to day running of the
business on behalf of the principal who are the shareholders/owners of the business.

Agency theory was also explained as “a simple agency model suggests that, as a result of
information asymmetries and self- interest, principals lack reasons to trust their agents and
will seek to resolve these concerns by putting in place mechanisms to align the interests of
agents with principals and to reduce the scope for information asymmetries and opportunistic
behaviour (Institute of Chartered Accountants in England and Wales 2005).

The Institute of Chartered Accountant in England and Wales (ICAEW) (2006) in Millichamp
and Taylor (2008) stated that “in principle, the agency model assumes that no agent is
trustworthy and if they can make themselves richer at the expense of their principals they
will. The principal has no alternative but to compensate the agents well for their endeavour so
that they will not be tempted to go into business for themselves using the principal’s assets to
do so”.

Agency relationship to the Institute of Chartered Accountants in England and Wales (2005) is
a “relationship that arises when one or more principals (e.g. an owner) engage another person

14
as their agent (or steward) to perform a service on their behalf”. Performance of this service
results in the delegation of some decision-making authority to the agent. This delegation of
responsibility by the principal and the resulting division of labour are helpful in promoting an
efficient and productive economy. It was also stated that, such delegation also means that the
principal needs to place trust in an agent to act in the principal’s best interests”.

The agency theory explains the relationship between principals and agents in business. The
two problems that agency theory addresses are: the problems that arise when the desires or
goals of the principal and agent are in conflict, and the principal is unable to verify (because
it difficult and/or expensive to do so what the agent is actually doing, and the problems that
arise when the principal and agent have different attitudes towards risk. Because of different
risk tolerances, the principal and agent may each be inclined to take different actions (Alatise,
2015)

2.2.2. The Pure – Impression – management model of accounting (PIMM)

The PIMM theory as propounded by Keppler (1995) as cited in Garuba and Donwa, (2011),
advocates that accountability serves as a connection construct by continually reminding
people of the need to act in agreement with the existing form and content of financial
reporting and to advance compelling, justification, excuses for conduct that depart from the
form and content of financial reporting. According to Ezeani and Oladele, (2012), financial
reporting cannot be accepted by general public or would be investors if certain
guidelines/standards that are generally expected are not followed and observed. This theory
on the other hand, recognizes that uniformity and observance of relevant standards are meant
for the smooth functioning of the public companies.

In line with the opinion of Ezeani and Oladele, (2012), this theory is also applicable to this
study as it is premised on behavioural aspect of accounting. Accountability is the missing link
in the seemingly perpetual level of analysis controversy, the connection between individual
decision makers and the collectives within which they live and work (Keppler, 1997 in
Garuba, and Donwa, 2011).

As noted above, the connection between the need to present the acceptable financial
statement and that which is below the expectation of the users of the financial statement is
better explained. The PIMM recognizes that a large measure of trust and self-accountability is

15
necessary for the smooth functioning of institutions. Therefore, if PIMM of accountability is
properly utilized by the management of companies or institutions in Nigeria, it will fetch a
good result on public accountability (Ezeani and Oladele, 2012)

2.2.3. Theoretical framework of the adopted theory

Though two theories are of interest in this study, however, the Pure – Impression –
management model of accounting (PIMM) is considered suitable for adoption. The
connection between the need to present the acceptable financial statement and that which is
below the expectation of the users of the financial statement is better explained by this theory.
It gives what is to be done in terms of the preparation of the financial statement and how the
user could approach the deviance by the preparer. PIMM recognizes that a large measure of
trust and self-accountability is necessary for the smooth functioning of institutions.
According to Ezeani and Oladele, (2012), if PIMM of accountability is properly utilized by
the management of companies or institutions in Nigeria, it will fetch a good result on public
accountability.

2.3.0. Empirical Review

2.3.1. International Financial Reporting Standards (IFRS)
Okoye, Okoye, and Ezejiofor (2014) opined that, the studies on degree of disclosure and
compliance level with IAS/IFRS began approximately the year 2000, and the results showed
an enormous deal of noncompliance with IAS necessities in various fields. In the work of
Daske, Hail, Leuz and Verdi (2007), 3,100 companies in 26 countries under mandate to adopt
IFRS with the objective to examine the economic effects of IFRS adoption for both voluntary
and mandated adopters. They found that; a company’s adoption of IFRS creates unassailable
economic gains in countries with uncompromising regulation over financial reporting. These
benefits include but not limited to an enhancement in the stock’s market value, an increase in
market liquidity, and a lower cost of capital. While Ramanna and Sletten (2009), in a working
paper, premised on reason countries embraced IFRS, they found that more powerful countries
are less likely to adopt IFRS; a country is more likely to adopt IFRS as the proportion of
IFRS adopters in its jurisdiction increases; and there is a quadratic relationship between the
quality of local governance institutions and IFRS adoption, where adoption at first increases
and then decreases with governance quality.

16
Onafalujo, Eke, and Akinlabi (2011) conducted a research on the “Impact of International
Financial Reporting Standards on Insurance Management in Nigeria”. It was advanced that
IFRS is a global agenda to foster common benchmark in financial information across
international borders with the aim of generating greater impetus for economic development.
A Perception Based Analysis of the Mandatory Adoption of (IFRS) in Nigeria was the basis
of the research of Isenmila and Adeyemo, (2013). They used questionnaire in eliciting
responses from respondents, and found that the adoption of IFRS can allow for insights into
the benefits and costs colligated with such adoption.

3.0. METHODOLOGY
Contents analysis is adopted as research methodology for this work. This analysis is a
scholarly methodology usually applied in the social sciences for the study of the content of
communication. It involves the study of recorded human communications, such as books,
journals; financial reporting standards, lecture notes websites, paintings and relevant laws.

4.0. DISCUSSION

4.1. IFRS and GAAP Revenue Recognition

Two accounting boards are working toward a common set of procedures for recognizing
revenue. The international financial reporting standards, or IFRS, are the International
Accounting Standards Board’s counterpart to the generally accepted accounting principles, or
GAAP, set forth by the U.S. Financial Accounting Standards Board. Revenue recognition is
concerned with how and when to book income as a result of completing an earnings process.

4.2. General Differences

GAAP rules for revenue recognition are detailed regarding specific industries, such as real
estate and software. IFRS guidance is universal; Standard 18 sets forth general principles and
examples applicable to all industries. GAAP also features exceptions for specific types of
transactions and requires public companies to follow additional rules set down by the
Securities and Exchange Commission. IFRS lacks these features. A joint project between the
two boards sees a common approach taking effect for public entities by Dec. 15, 2016.
Several differences will have to be resolved by then.

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4.3. Sale of Goods
Under GAAP, one can recognize revenue from the sale of goods if one has made delivery
according to a definitive agreement for a fixed or determinable fee that one is reasonably sure
of collection. IFRS allows recognition when the risks and rewards of ownership have been
transferred, entity has given the buyer control of the goods, the amount of revenue is reliably
understood and the economic benefits of the sale will flow to entity or company -- meaning,
it will get paid.

4.4. Rendering of Service

GAAP has special rules for rendering software services. Otherwise, it calls for stretching out
revenue recognition throughout the service period; company cannot book all it revenues
upfront for an extended service agreement, for example. If the service involves a multiple-
element contract, entity must wait to book revenue if entity could trigger a refund of previous
payments because entity fails to deliver later elements, unless each element has its own stand-
alone value. IFRS allows for the possibility of recognizing revenue upfront when some
amount of performances has occurred. It allows entity to book the delivered elements of a
multiple-element contract even if a refund could be triggered, as long as each element has
“commercial substance.”

4.5. Construction Contracts

The “completed contract method” is standard under GAAP; company must wait to finish
construction before recognizing revenue. However, large construction projects can use the
“percentage of completion method” in which it revenue matches the percentage of work
completed. If company meet certain criteria, it can combine or segment construction contracts
under GAAP. IFRS bans the completed contract method. It allows the percentage of
completion method under certain conditions. Otherwise, company only recognize revenue on
any recoverable costs it incurs. IFRS also allows contracts to be combined or segmented but
applies different criteria than does GAAP for this purpose.

4.6. Revenue from Contracts with Customers

The IASB issued IFRS 15, Revenue from Contracts with Customers, effective for annual
reporting periods beginning on or after January 1, 2017. The standard is converged with a
new U.S. GAAP standard issued at the same time. Below is how the IASB and the FASB
sum up the importance of this step:

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“Revenue is a vital metric for users of financial statements and is used to assess a company’s
financial performance and prospects. However, the previous requirements of both IFRS and
U.S. GAAP were different and often resulted in different accounting for transactions that
were economically similar. Furthermore, while revenue recognition requirements of IFRS
lacked sufficient detail, the accounting requirements of U.S. GAAP were considered to be
overly prescriptive and conflicting in certain areas.

Responding to these challenges, the boards have developed new, fully converged
requirements for the recognition of revenue in both IFRS and U.S. GAAP providing
substantial enhancements to the quality and consistency of how revenue is reported while
also improving comparability in the financial statements of companies reporting using IFRS
and U.S. GAAP.”

4.7. Scope of IFRS 15

The revenue standard applies to all contracts with customers, except for lease contracts;
insurance contracts; financial instruments and certain contractual rights or obligations within
the scope of other standards; nonmonetary exchanges between entities in the same line of
business to facilitate sales to customers; and certain guarantees within the scope of other
standards (other than product or service warranties).

4.8. Disclosures Requirement of IFRS 15

The revenue standard requires a number of disclosures intended to enable users of financial
statements to understand the nature, amount, timing, and uncertainty of revenue and the
related cash flows. The disclosures include qualitative and quantitative information about
contracts with customers, significant judgments made in applying the revenue guidance, and
assets recognized from the costs to obtain or fulfil a contract. The disclosures are required
for each period a statement of comprehensive income is presented and as of each period a
statement of financial position is presented. Non-public entities (FASB only) are exempt
from certain of the disclosure requirements. See the Appendix for a listing of these required
disclosures (IFRS 15, 102-103).

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5.0. RESOLVING REVENUE RECOGNITION PARADOX
IFRS 15 defines revenue somewhat more simply than the existing standard IAS 18, as
“income arising in the course of an entity’s ordinary activities.” The standard’s core principle
is that an entity “recognizes revenue to depict the transfer of promised goods or services to
the customer in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services.

The standard sets out a five-step framework to apply in implementing this principle - the
following is a very high-level summary of the framework:
1. Identify the contract(s) with the customer: A contract is an agreement between two or
more parties that creates enforceable rights and obligations.
2. Identify the performance obligations in the contract: A contract includes promises to
transfer goods or services to a customer. If those goods or services are distinct, the
promises are performance obligations and are accounted for separately.
3. Determine the transaction price: The transaction price is the amount of consideration
to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer.
4. Allocate the transaction price: An entity typically allocates the transaction price to
each performance obligation on the basis of the relative standalone selling prices of
each distinct good or service. If a standalone selling price is not observable, the entity
estimates it.
5. Recognize revenue when a performance obligation is satisfied: An entity recognizes
revenue when (or as) it satisfies a performance obligation by transferring a promised
good or service to a customer (which is when the customer obtains control of that
good or service).

The amount of revenue recognized is the amount allocated to the satisfied performance
obligation. A performance obligation may be satisfied at a point in time (typically for
promises to transfer goods to a customer) or over time (typically for promises to transfer
services to a customer).

For performance obligations satisfied over time, an entity recognizes revenue over time by
selecting an appropriate method for measuring its progress towards complete satisfaction of
that performance obligation. For some entities, these five steps might all entail differences
from existing practices. For example, the emphasis in step 5 on identifying when the

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customer obtains control of goods differs from the existing recognition guidance in IAS 18,
which focuses on whether the significant risks and rewards of ownership of the goods have
been transferred to the buyer. In many respects, such as the treatment of transactions
containing multiple elements, the new standard provides much greater detail than IAS 18.
The new standard also contains more extensive disclosure requirements, often requiring
greater disaggregation of information and greater discussion of key judgments and policy
decisions, among other things. It also addresses accounting for costs related to contracts with
customers, directing that a company recognizes an asset for the incremental costs of obtaining
a contract if those costs are expected to be recovered.

All entities, other perhaps than those clearly not at or approaching a revenue-generating
stage, will have to consider the impact of IFRS 15. As with most new standards, some entities
will be able to determine relatively easily that the impact on their financial reporting is not
significant. For others, the standard will have a fundamental impact on how they report
revenue, requiring changes to reporting systems and processes, and perhaps causing them to
reassess some aspects of their customer contracts. Compared to some new standards, the
impact of these changes may be more likely to affect key performance indicators and
therefore may be of keener interest to analysts and other users.

All of this provides a strong incentive to start considering the impact of the standard sooner
rather than later. On implementation, the standard must be adopted retrospectively – that is,
the amounts reported in the year of adoption will be calculated as if the standard had always
applied (subject to some practical expedients). However, the standard allows a choice
between fully restating comparative figures and presenting the cumulative impact on previous
years as an adjustment to opening retained earnings.

5.2. IFRS and US GAAP

The standards under IFRS and US GAAP are, therefore, identical except for the following:

1. The Boards use the term ‘probable’ to describe the level of confidence needed when
assessing collectability to identify contracts with customers, which has a lower
threshold under IFRS than US GAAP;
2. The FASB requires more disclosures in interim financial statements than the IASB;
3. The IASB allows early adoption;
4. The IASB permits reversals of impairment losses and the FASB does not; and

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 5. The FASB provides relief for non-public entities (as defined in the US GAAP version
of the standard) relating to specific disclosure requirements, the effective date and
transition

IFRS 15 must be adopted using either a fully retrospective approach for all periods presented
in the period of adoption (with some limited relief provided) or a modified retrospective
approach. For IFRS preparers, the standard is mandatorily effective for annual periods
beginning on or after 1 January 2017. US GAAP preparers must adopt the standard for annual
periods beginning after 15 December 2016. Early adoption is permitted for entities that report
under IFRS, but not for public entities (as defined in the US GAAP version of the standard)
that report under US GAAP.

6.0. SUMMARY AND CONCLUSION

Revenue is the gross inflow of economic benefits during the period arising in the course of
the ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants.

The objective of the revenue standard is to provide a single, comprehensive revenue

recognition model for all contracts with customers to improve comparability within
industries, across industries, and across capital markets. The revenue standard contains
principles that an entity will apply to determine the measurement of revenue and timing of
when it is recognized. The underlying principle is that an entity will recognize revenue to
depict the transfer of goods or services to customers at an amount that the entity expects to be
entitled to in exchange for those goods or services (1, 2).

The revenue standard is effective for the first interim period within annual reporting periods
beginning after December 15, 2016 for U.S. GAAP public reporting entities and early
adoption is not permitted. It will be effective for annual reporting periods beginning after
December 15, 2017 and interim periods within annual periods beginning after December 15,
2018 for U.S. GAAP non-public entities. Earlier application is permitted for non-public
entities; however, adoption can be no earlier than periods beginning after December 15, 2016.
The revenue standard is effective for entities that report under IFRS for annual periods
beginning on or after January 1, 2017. Early adoption is permitted for IFRS reporters (3).

22
7.0. RECOMMENDATION
From this paper, it is evident that IFRS 15 creates a single source of revenue requirements for
all entities in all industries. The new revenue standard is a significant change from current
IFRS in that it applies to revenue from contracts with customers and replaces all of the
revenue standards and interpretations in IFRS, including IAS 11 Construction Contracts, IAS
18 Revenue, IFRIC 13 Customer Loyalty Programmes, and IFRIC 15 Agreements for the
Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31
Revenue Barter Transaction involving Advertising Services.

It is also principles-based, consistent with current revenue requirements, but provides more
application guidance. The lack of bright lines will result in the need for increased judgement.
The standards will have little effect on some entities, but will require significant changes for
others, especially those entities for which current IFRS provides little application guidance.
More so, the standard specifies the accounting treatment for certain items not typically
thought of as revenue, such as certain costs associated with obtaining and fulfilling a contract
and the sale of certain non-financial assets.

The paper therefore recommends the early study and understanding of the standard by all
concerned in financial reporting activities, this is key to its adoption come January 2017.

Practitioners and academicians in accounting field need to do extensive review of the

standards and advise the standard setter of the workability of the standard

Financial reporting council of Nigeria in conjunction with the recognised professional

accountancy and taxation (ANAN, CITN & ICAN) bodies in Nigeria should take the
education of registered professionals and students in Nigeria seriously in order to ensure
smooth adoption of IFRS 15 and also, researchers are enjoined to do more in this area of
standards in order to ensure all loopholes are blocked.

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