The Financial Reporting Council (FRC) has identified a number of areas in which companies need to improve their reporting under IFRS 15, Revenue From Contracts With Customers, and IFRS 16, Leases.
IFRS 15, Revenue From Contracts With Customers
In what was its third review of the application of IFRS 15, the FRC said many companies’ disclosures did not meet the regulator’s standard. IFRS 15 sets the principles to apply when a company reports information about the nature, amount, timing, and uncertainty of revenue or cash flows from a contract with a customer.
Many of the issues that the FRC highlighted relate to the new requirements introduced by IFRS 15, where best practice is still emerging — variable consideration and costs to obtain and fulfil a contract. “Often it was difficult to assess the appropriateness of the accounting in these areas as limited information was provided in the accounts,” the report said.
The FRC said companies should:
- Provide clear descriptions of performance obligations, the timing of revenue recognition, and explanations of any significant judgements made by management;
- Identify and explain significant movements in contract balances;
- Ensure there is consistency between revenue-related information in the strategic report and information in the financial statements, including, for example, details about significant contracts and disclosures of disaggregated revenue; and
- Specify the types of any variable consideration that exist within contracts and how they are both estimated and constrained.
IFRS 16, Leases
While most companies provided a good explanation of the impact of adopting IFRS 16, there was room for improvement on quality, the FRC said in its review.
It expects companies to:
- Tailor the descriptions of their lease accounting policies to match their particular circumstances and to cover all material areas;
- Provide detailed information about the significant judgements affecting their accounting for leases; and
- Include sufficient detail to enable a good understanding of the financial reporting effects of their leasing arrangements on their financial position, financial performance, and cash flows.
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.