IASB issued exposure draft on proposed amendments in IFRS for SMEs Accounting Standard (Section 23: Revenue Recognition)
Background
- This update is prepared for proposed amendments in IASB’s second comprehensive review. In this update, an overview of the proposed amendments related to Section 23 have been discussed for better understanding of the users.
- Section 23 of the IFRS for SMEs Accounting Standard sets out requirement for SMEs to recognize revenue. Earlier it was based on IAS-11 ‘Construction Contracts’ and IAS-18 ‘Revenue’. The IASB has applied the alignment approach to IFRS-15 ‘Revenue from Contracts with Customer’ and is proposing to revise Section 23 by introducing a single framework for recognizing revenue form goods and services.
Proposed Amendments
- Introduction of Single Framework for Recognizing Revenue
IASB is proposing to introduce a framework for recognizing revenue for goods and services, which
requires revenue to be recognized when the customer obtains control of the good or service, based
on five step model in IFRS 15, as below:
- Identify the contract(s) with a customer
- Identify the promises in the contract
- Determine the transaction price
- Allocate the transaction price to the promises in the contract
- Recognize revenue when (or as) the entity satisfies a promise
2. Simplification of requirements of IFRS 15
IASB has suggested simplifying the five-step model’s use for SMEs and as per the exposure draft, IASB
has proposed the necessary changes to the five-step model as defined in IFRS-15 and has introduced
an updated and simplified version of the five-step model framework in line with the nature and
complexity of business for SMEs.
3. Transition Relief
The IASB does not expect retrospective application of any of the proposed amendments to be
significantly burdensome for SMEs and has therefore proposed that the amendments to the IFRS for
SMEs in Sections 23 will be applied prospectively and transition relief would allow companies to apply
their current revenue recognition policy to contracts which are already in progress.
Key Differences between IFRS-15 and Revenue Recognition Model as per Section 23 proposed by IASB
- Instead of the word Performance Obligation as used in IFRS 15, IASB has proposed the word promise which is more reflective of the term used in SMEs’ contracts with customers.
- As per IFRS 15, Performance Obligation includes cases where a series of distinct goods or service in a contract be treated as a single promise. In Section 23, IASB has proposed to keep it as a separate requirement so as to maintain the simplicity of the definition of ‘promise’.
- IFRS 15 requires that Contract Modifications have to be accounted for as a separate contract first, if the specified conditions are met. However, SMEs have been given an option rather than a requirement to treat the modification as a separate contract.
- As per IFRS 15 if a contract includes a warranty and the customer does not have the option to purchase the warranty separately, IFRS 15 requires an entity to assess whether the warranty provides a service in addition to the assurance that the product complies with agreed-upon specifications. However, Section 23 provides for this assessment only in case where the warranty is significant to the contract.
- IFRS 15 requires that if a contract provides the customers with a right to purchase additional goods or services, either for free or at a concessional price, the option shall be accounted for as a separate performance obligation. Section 23 provides for the above requirement, only if the effect of such performance obligation/promise is significant to the accounting of the contract.
- IFRS 15 provides for recognizing the incremental costs to obtain a contract as an asset if it is expected to be recovered subsequently. Section 23 provides for the above requirement only if the cost can be assessed without undue cost or effort. The undue cost or effort exemption is intended for those entities operating in such industries where costs for obtaining the contracts is not material relative to the cost of the contract, and is therefore not included in management’s assessment of the contract pricing and profitability.
- IFRS 15 provides for allocation of a discount or variable consideration to one or more of the performance obligations but not all of them, only if a specified set of conditions are met. Otherwise, the discount or variable consideration are to be allocated proportionately to all the performance obligations. Section 23 proposes to remove the criteria satisfaction requirement and provides that if the expectation of the entity with regards to the consideration to which is entitled is not reflected by the default method of allocating the discount/variable consideration on all the performance obligations, it may allocate them on the basis which faithfully represents the conditions to which the SME is entitled.
SW Remarks:
In the aforementioned update, an effort has been made to provide an overview of the
amendments proposed to be made by IASB in Section 23 of the IFRS for SMEs Accounting Standard
for better understanding of the users. The exposure draft is still open for comments till 7th March, 2023
at “ifrs.org”
Syed Aman, Audit Associate, SW India
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