IFRS 15 Technology sector
The technology industry comprises numerous sub-sectors, including, but not limited to, computers and networking, semiconductors, financial technology, software and internet, the internet of things, health technology, and clean technology. Each sub-sector has diverse product and service offerings and various revenue recognition issues.
Determining how to allocate consideration among elements of an arrangement and when to recognize revenue can be extremely complex and, as a result, industry-specific revenue recognition models were previously developed. IFRS 15 replaces these multiple sets of guidance with a single revenue recognition model, regardless of industry.
While the new standards (ASC 606 and IFRS 15) include a number of specific factors to consider, they are principles–based standards. Accordingly, entities should ensure that revenue recognition is ultimately consistent with the substance of the arrangement.
Since the issuance of the original standards in 2014, both the FASB and IASB issued amendments. Certain amendments, which may differ between US GAAP and IFRS, impact the technology industry.
The amendments to identifying performance obligations clarify the guidance regarding whether a good or service is separately identifiable from other promises in the contract.
This narrative summarizes some of the areas within the technology industry, broken down following the 5-steps of the IFRS 15 model, that may be significantly affected by IFRS 15s. It also highlights differences between the US GAAP and IFRS guidance. The standards are largely converged.
1. Identify the contract
Generally, any agreement with a customer that creates legally-enforceable rights and obligations meets the definition of a contract. Legal enforceability depends on the interpretation of the law and could vary across legal jurisdictions where the rights of the parties are not enforced in the same way.
Technology companies should consider any history of entering into amendments or side agreements to a contract that either change the terms of, or add to, the rights and obligations of a contract. These can be verbal or written, and could include cancellation, termination or other provisions.
They could also provide customers with options or discounts, or change the substance of the arrangement. All of these have implications for revenue recognition. Therefore, understanding the entire contract, including any amendments, is important to the accounting conclusion.
As part of identifying the contract, entities are required to assess whether collection of the consideration is probable, which is generally interpreted as a 75-80% likelihood in US GAAP and a greater than 50% likelihood in IFRS. This assessment is made after considering any price concessions expected to be provided to the customer.
In other words, price concessions are variable consideration (which affects the transaction price), rather than a factor to consider in assessing collectability.