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Developing and Implementing an Integrated

IFRS 15 Transition Approach

Robert Schiffner
PwC
Produced by Wellesley Information Services, LLC, publisher of
SAPinsider. © 2015 Wellesley Information Services. All rights
reserved.
In This Session

• A new, converged revenue recognition standard was published in May 2014 by the FASB
and IASB that will require some level of change at most companies
• In this session, we’ll explore:
 The background of IFRS 15

 How IFRS 15 affects your accounting, business, and technology

 How you can develop an integrated approach to ensure an effective and efficient
transition
 Technology options that can improve your revenue recognition process along the way
and address risks

This session will focus on the IFRS 15 transition approach and will not discuss
specific technical accounting issues
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What We’ll Cover

• IFRS 15 overview
• Accounting, business, and technology impact
• Developing an integrated transition approach
• Technology considerations and solution options
• Wrap-up

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IFRS 15 History

• IFRS 15 = International Financial Reporting Standard 15


• Result of a joint project between the IASB (International Accounting Standards Board)
and the FASB (US Financial Accounting Standards Board)
• IFRS 15 regulates revenue recognition of contracts with customers, except financial
instruments, leases, and insurance contracts. Examples:
 Software-as-a-Service/cloud computing contracts

 Equipment service contracts

 Cellphone contracts

The equivalent US standard issued by FASB is ASC 606


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IFRS 15 Objectives

One Model
A single, joint revenue standard to be
applied across all industries and capital
markets

Comparability
Enhanced Simplified
Clear principles Robust framework across
disclosures guidance
industries

Prior to IFRS 15, revenue recognition guidance was measured and


presented inconsistently
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IFRS Timeline and Adoption Options

• Likely for annual periods beginning on or after January 1, 2018


 Issued standard requires the adoption for annual periods beginning on or after
January 1, 2017
 However, both the FASB and IASB proposed a deferral by a year in April 2015

 Proposals subject to board’s due process requirements, permit adoption as of the


original effective date
 IASB exposure draft on the effective date expected in Q2, followed by an exposure
draft on other clarifications in Q3 2015
• Two adoption options:
 Retrospective

 Prospective

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IFRS Timeline and Adoption Options (cont.)

2016/2017 2018

Option 1 – NEW IFRS 15 NEW IFRS 15


Full retrospective Cumulative effect at
January 1, 2016

OLD GAAP NEW IFRS 15


Option 2 –
Prospective Cumulative effect at Disclose OLD GAAP
January 1, 2018

Notes: Simplified, based on an effective date of January 1, 2018


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IFRS Principle and 5-Step Approach

Core principle
Revenue recognized to depict transfer of goods or services

Step 1 – Identify the contract with the customer

Step 2 – Identify the performance obligations in the contract

Step 3 – Determine the transaction price

Step 4 – Allocate the transaction price

Step 5 – Recognise revenue when/as a performance obligation is satisfied

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How the 5-Step Approach Works

• Step 1: Identify contract(s) with customer


 A contract creates enforceable rights and obligations

 Combine contracts when entered into at or near the same time and when they are
negotiated as a package, when payment of one depends on the other, and when goods/
services promised are a single performance obligation (“multiple element
arrangements”)
• Step 2: Identify separate performance obligations in the contract(s)
 Performance obligations are promises in a contract to transfer goods or services

 Separate the performance obligations if they’re capable of being distinct or if they’re


distinct based on the substance of the contract

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How the 5-Step Approach Works (cont.)

• Step 2: Identify separate performance obligations in the contract(s) (cont.)


 IFRS 15 is applied to each individual “contract”

 “Portfolio approach” allowed as practical expedient if the entity reasonably expects


that the effects of applying the model to portfolio versus individual contracts would not
differ materially
 Judgment required to select size and composition of portfolio

• Step 3: Determine the transaction price


 Recognize revenue as performance obligations are satisfied only up to the amount that
is probable to have no significant reversal in the future
 Determination based on experience with similar types of performance obligations

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How the 5-Step Approach Works (cont.)

• Step 4: Allocate the transaction price


 Standalone selling price of a good or service when sold separately to a similar
customer in similar circumstances
 If not observable, estimate by considering all information that is reasonably available,
such as market conditions, specific factors, and class of customers
• Step 5: Recognize revenue when the performance obligation is satisfied
 Recognize revenue when the promised goods or services are transferred to the
customer and the customer obtains control
 This may be over time or at a point in time

Approach seems simple, but significant judgement is involved in every step!


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What We’ll Cover

• IFRS 15 overview
• Accounting, business, and technology impact
• Developing an integrated transition approach
• Technology considerations and solution options
• Wrap-up

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Will You Be Affected?

• Likely, if your business model includes:


 Multiple element arrangements

 Long-term contracts

 Advance or deferred payment terms

 Sales with a right of return

 Discounts or rebates

 Income from licenses

 Warranties

This is not a complete list!


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Will You Be Affected? (cont.)

• The impact depends on your individual business model


• Certain industries tend to be affected more than others:

High Medium Low


• Automotive • Pharma • Retail

• Software • Media • Energy

• Telecom • Real Estate • Transportation/

• Construction/ Logistics
Engineering

Every business model needs to be assessed individually to ensure specifics are


considered!
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Business Impact

• Broader implications than simply changing accounting and reporting methods, which by
itself is already complex
• This includes industries that applied industry-specific guidance so far, e.g.,
telecommunications or software
• Many parts of a business are tied to revenue, so the new standard has a pervasive
organizational impact potentially affecting:
 Financial planning

 Executive and sales compensation

 Debt covenants

 Taxes This is an opportunity to


 Product offerings and how products are sold
drive change and improve!
 Investor relations

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Accounting Impact

• IFRS 15 is less prescriptive than existing rules


 Companies have greater leeway when it comes to how they price product and service
offerings and set up customer contracts
• Organizations will rely more on estimates and judgment in recognizing revenue
 With greater flexibility comes the increased complexity of ensuring that revenue
accounting processes are compliant
• More extensive disclosure requirements under IFRS 15
• Key concept: Cash may not equal revenue

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Organizational Impact

• The finance workload during transition will increase significantly


 Thorough analysis of existing contracts, business models, company practices, and
accounting policies required
 Presentation of financials under both current and new standard

• The new standard places a significant burden on finance staff:


 Reconciliation of revenue accounting for bundled contracts, for example, may be done
manually via spreadsheets, a process that is both time-consuming and subject to
human error
 Simple headcount increase may not be practical in the long run. Technology solutions
that reduce the amount of manual activities may be needed.
• A comprehensive education and training program will be essential

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Systems and Process Impact

• Many current financial systems are already unable to handle existing revenue automation
requirements of evolving business models and solution bundling in the context of current
GAAP
• Automation may be needed to operationalize estimates such as standalone selling price,
as well as to streamline the multiple-element arrangement (MEA) approval process so
that revenue teams can focus on complex contract terms requiring judgment
• New report, interfaces, and data structures may be needed to pull, analyze, and store data
required to implement the standard
• Changes to accounting policies, processes, and systems will create new risks that will
require new controls
• Competing or supporting enhancement projects or IT initiatives will require appropriate
prioritization and robust change control

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Systems and Process Impact (cont.)

• Biggest impact is on order-to-cash and close-to-report processes

Invoicing,
Transaction Systems Revenue
Billing, Reporting
(order, quoting, Calculation General Ledger
and Collections Platform
contract processes) Systems
Systems

Accounting
Policies and
Data Procedures Organization,
Processes

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What We’ll Cover

• IFRS 15 overview
• Accounting, business, and technology impact
• Developing an integrated transition approach
• Technology considerations and solution options
• Wrap-up

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The Importance of an Integrated Approach

• Focusing solely on changes to accounting policy will not account for the complexity of
the transition:
 Revenue recognition based on the new standard requires a holistic view of the end-to-
end sales process
 Data gathering and analytics will be required to assess the impact of the change and to
decide on the transition path
 Changes to processes and systems will likely be part of the solution

 Opportunities to automate revenue accounting to control cost/effort require IT and


revenue process owner involvement
 Communication with internal and external stakeholders, e.g., shareholders, is
important to facilitate the change, which may have an impact on the bottom line

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Illustrative Project Workstreams

Accounting Oversight Systems Implementation Data Management

Organizational Change Management

Program Management

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Illustrative Project Workstreams (cont.)

• Accounting policy alignment across the organization


Accounting Oversight • Collaboration with IT, accounting inputs into system
design, testing, and training
• Business requirement and functional design specification
review

• Facilitate future state process and enable capabilities


• Implement the solution and provide inputs to IT
Systems Implementation
• Develop a standardized approach to track program
progress

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Illustrative Project Workstreams (cont.)

• Develop data migration strategy


Data Management • Enrich and convert data based on policy and system
requirements

• Determine organizational impacts, training strategy, and


Organizational Change post go-live support model
Management • Lead employee mobilization, training, and knowledge
transfer
• Establish program activities and milestones and execute
communication strategy

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Illustrative Project Workstreams (cont.)

• Develop and manage overall project plan, including


Program Management
resources, activities, and costs
• Implement a strong program infrastructure, including
best practices and frameworks for quality
• Integrate workstreams and establish a comprehensive
governance model

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Illustrative Project Phases

• Three-phase approach

Assess Convert Embed

• Each phase includes activities for all workstreams


 Helps address interdependencies

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Illustrative Project Phases (cont.)

• Determine how the organization will be impacted by the new


Assess
revenue recognition standard
• Determine what types of training and communication will be
required for a smooth transition
• Build a solid framework for the transition
• Establish governance, project management, and change
management structures
• Understand the current revenue accounting process, capability
gaps, and data quality scope

The assessment of the revenue cycle often provides valuable insights and may
identify opportunities for improvement beyond the scope of the IFRS 15 project
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Illustrative Project Phases (cont.)

• Decide which adoption method will be used


Convert
 Will be influenced by resources to implement one method more
effectively than the other
• Identify changes to:
 Business model

 Processes

 Systems

• Decide on training and communications approach


 Consider both internal and external stakeholders

• Assess data quality in detail to determine any improvements in


preparation for automation

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Illustrative Project Phases (cont.)

• Accounting team drafts disclosures


Embed
 Both for the transition and post-transition periods

• Begin to communicate policy changes to stakeholders, including


outside investors
• Build, test, and deploy technology solution and perform mock and
final data conversion

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Project Considerations and Success Factors

• Gain cross-functional support and program governance structure


• Consider planned changes to the business model and go-to-market approach
• Ensure completeness of use cases, revenue streams, and revenue accounting scenarios
• Explore revenue automation capabilities; clearly define the future-state solution
architecture and perform an appropriate fit/gap analysis of the solution compared with
future-state process
• Document as you go and maintain an audit trail
• Start your initiative early to leverage the transition period
• Use insights to explore opportunities to optimize business model

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What We’ll Cover

• IFRS 15 overview
• Accounting, business, and technology impact
• Developing an integrated transition approach
• Technology considerations and solution options
• Wrap-up

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Technology Considerations

• Technology solutions provide functionality like:


 Automation of accounting rules, e.g., revenue allocation

 G/L integration

 Workflows

 Maintenance of audit trails

 Data integration

 Enhanced reporting

Most solutions on the market only support a subset of functionality


listed above. Both the market for solutions and their functionality is
developing rapidly though.
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Technology Considerations (cont.)

• Potential benefits:
 Increased efficiency

 Increased data quality

 Increased visibility

 Decreased compliance risk

• However, there are significant challenges:


 Data quality and data volume

 Integration of disparate data sources

 Data maintenance, e.g., key figures, adjustments

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Legacy Architecture — Prior to IFRS 15

• Revenue from: • SD Revenue Recognition


 Sale of goods  At time of billing

 Event-based revenue recognition  Services based on events


based on contract fulfillment
 Services

 Straight-line method

• Projects  Results Analysis


 Percentage of completion (POC)  Planned revenue per period
 Cost-based
 Earned value
 Completed contract
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Solution Architecture — IFRS 15

• Solutions differ; however, they typically: Core principle


Revenue recognized to depict transfer of goods or services

 Gather data along the revenue cycle


Step 1 - Identify the contract with the customer

Step 2 - Identify the performance obligations in the contract

 Process the data Step 3 - Determine the transaction price

Step 4 - Allocate the transaction price

 Feed data back into the G/L Step 5 - Recognise revenue when/as a performance obligation is satisfied

Revenue Cycle (Simple Example, Industry-Specific)

Contract, Order Delivery, Billing/ G/L


Goods Issue Invoicing
SD MM SD FI
Data

Data

Data

Journals
Solution: “Revenue Recognition Engine”
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Solution Options

• A number of vendors provide revenue recognition solutions for SAP ERP. Examples
include:
 SAP – Revenue Accounting and Reporting

 Leeyo – RevPro

 Microgen – Aptitude

 Sopra Steria – IFRS15.easy

 RevStream – Enterprise Revenue Lifecycle Management Suite

 Revenue Edge – Revenue Edge

• This list is not exhaustive, as the market grows and new solutions are developed by a
number of vendors
• Scope and complexity of the solutions varies widely

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Revenue Automation Potential — Example
Transact Allocate Release
Identify Contract Assess Contract Report Revenue
Contract Revenue Revenue
Elements/SKUs, Distinct Performance Deliver/Provision
Sales Orders Establish Fair Value GAAP Reporting
Bundles Obligations Service
Deferred Revenue Establish Revenue Amortize Service
Pricing, Promotions Invoices Revenue Forecasting
Elements Allocation Rules Revenue
Pre-defined Product/ Adjustments/ Compare Sell Price/ Record Revenue/ Channel/Segment
Delivery Obligations
Service Bundle Cancellations Fair Value Deferred Revenue Reporting
Apply Revenue Management
Terms and Conditions Revenue Deferral/Hold Pricing Revenue Allocation
Release Triggers Reporting
Simple, Complex Consumption-based Build Deferred Calculate Deferred
Customers Compliance Monitoring
“Accounting MEA” Billing Revenue Schedule Revenue/Reserves

Automated via transaction system Automated outside of revenue automation solution

Potential for revenue automation solution


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What We’ll Cover

• IFRS 15 overview
• Accounting, business, and technology impact
• Developing an integrated transition approach
• Technology considerations and solution options
• Wrap-up

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Where to Find More Information

• www.ifrs.org
 IFRS Foundation/IASB website

• pwc.com/us/en/sap-implementation/articles/transitioning-to-the-new-revenue.jhtml
 “Transitioning to the new revenue recognition standard: An integrated approach for
leveraging your SAP investment” (PwC whitepaper, specific to SAP, 2015).
• inform.pwc.com, www.pwc.ch/ifrs
 Accounting news, background information, and whitepapers about IFRS 15

• www.pwcopenuniversity.com
 Click on “Find a course” and look for “Revenue Recognition” for webcasts related to
revenue recognition/IFRS 15

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7 Key Points to Take Home

• IFRS 15 implementation requires the collaboration across many corporate functions,


including accounting and IT
• Consider future changes to the business model and go-to-market approach while
assessing impact and potential solutions
• Consider leveraging technology to align the future-state revenue accounting processes
with future-state capabilities
• Start your initiative early to leverage the transition period
• Communications with outside stakeholders, including suppliers, customers, and
investors, is key
• This transition is complicated and difficult, and organizational leadership will need to be
involved
• Use the opportunity to understand the revenue process and drive future change
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Your Turn!

How to contact me:


Robert Schiffner
robert.schiffner@ch.pwc.com

Please remember to complete your session evaluation


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