The new revenue recognition standard - EY

1 The new revenue recognition standard November 2015. IFRS 15: new requirements for revenue recognition The IASB and the FASB have jointly developed The new IFRS standard is effective for annual periods new revenue standards , IFRS 15/ASC 606 beginning on or after 1 January 2018 and early adoption is permitted. revenue from Contracts with Customers, which will replace all existing IFRS and virtually all Being proactive is important to support cost effective accounting and operational changes, to achieve US GAAP revenue recognition requirements. compliance in a timely manner. IFRS 15 provides accounting requirements for all revenue This brochure provides an overview of the new arising from contracts with customers and affects all requirements, as well as our recommended approach for entities that enter into contracts to provide goods or an effective transition in a way that mitigates disruption, services to their customers. cost and risk. EY can advise and support you in delivering This has consequences for the type of financial and the outcomes that matter to you through the design of non-financial data that is captured in order to achieve a smart and bespoke road map to manage your IFRS 15.

2 Compliance, as well as the way in which the data is change journey. processed and reported. It will affect many activities across an organisation, from sales and marketing through to commercial and finance functions. It will require the disclosure of new information about customer contracts that hasn't previously been required and the creation of budgets and forecasts on a new basis of measurement. 2 | The new revenue recognition standard IFRS 15: five-step model The principles in the standard will be applied using a five-step model 1 Identify the contract(s) with the customer 2 Identify the performance obligations in the contract 3 Determine the transaction price revenue recognition 4 Allocate the transaction price to the performance obligations in the contract 5 Recognise revenue when (or as) each performance obligation is satisfied This requires a thorough review of all aspects of the commercial relationship, including but not limited [a]. to documented commercial contracts.

3 The new revenue recognition standard | 3. IFRS 15: relevant commercial issues Contracts with customers have both an accounting and an operational impact are set out below: Combining contracts Methods for measuring progress for each Contract modifications performance obligations Variable consideration Non-refundable upfront fees Rights of return, guarantees and warranties Put and call options Costs to obtain a contract Principal versus agent considerations Costs to fulfil a contract Bill-and-hold arrangements Royalties and licences Customers' unexercised rights ( , breakage). Portfolio approach Presentation and disclosures Customer loyalty programmes Transition requirements IFRS 15: initial application Early preparation will be key to a successful implementation of the new standard . Early preparation recommended due to complexity and wide range of challenges 2015 2016 20173 2018. Comparative period Reporting period Full retrospective application R/E1.

4 IAS 11/IAS 18 IFRS 15 IFRS 15. Opening balance sheet 1 Jan 2017. R/E1. Modi ed retrospective application IAS 11/IAS 18 IFRS 152. Opening balance sheet 1 Jan 2018. 1. Retained earnings. 2. Disclose all line items in the year of adoption as if they were prepared under current revenue guidance: quantifying the transition impacts. 3. Assumes one comparative period. Some jurisdictions or regulatory environments may require two comparative periods. 4 | The new revenue recognition standard IFRS 15: scope of business impact The new standard will affect companies in a wide range of industries. The scale of impact is driven by each company's commercial relationships with its customers, as well as current changes, to system and data capabilities. Accounting policy External audit Financial reporting Financial control System architecture Investor relations Budgeting, forecasting, Covenant management Systems of record, chart planning of accounts, workflow Cash tax, effective tax rate and tax reporting System supplier relationships Finance External IT.

5 Reporting, systems Data taxonomy and Assurance framework tax standards Audit committee Data cleanse and remediation Level 2 (validation). Data Performance obligation monitoring Internal governance & recognition and capture Internal audit control IFRS 15 management Data model design outcomes: compliance, Commercial, Contract design KPI design Management cost and risk sales and Contract pricing Management reporting marketing Contract management information design Marketing campaign Balance sheet management reconciliations People, Sales forecasting Working capital performance Procurement and sales force management and reward Current management revenue recognition change programmes People capabilities Contract acquisition Learning and costing development , finance P2P processes Bonus and incentive transformation schemes Scope, requirements, timing, quality The new revenue recognition standard | 5. IFRS 15: implementation Becoming compliant with minimum disruption.

6 A successful step-by-step approach. Before getting started with the implementation, you may benefit from: 1 2 3. Sample contract review Disclosure review, Contract management (commercial, operational, including traceability capability review accounting) testing 1b. Analyse 2. Develop 3. Deploy 4. Monitor post- 1a. Assess and plan and pilot and monitor implementation Assess Assess wider Complete Deploy solution Verify judgements nancial business impact detailed design to all sites made Phases statement and Draft road map Pilot solution Parallel run Update documents operational and a high-level and re ne impact Monitor and test Remediate systems solution Draft policies changed Create plan Remediate and and procedures regression test Embed training Plan deployment Governance and programme management Accounting and disclosure, forecasting, budgeting and planning Work streams Systems and data Process and control Change management and training 6 | The new revenue recognition standard IFRS 15: get started by performing a walk-through of a contract life cycle approach A proven way of getting started is to assess the accounting and business impact of the standard for a representative sample of commercial relationships.

7 This includes identifying the accounting impact, both before and after contract signature, and assessing where the data will come from to deliver transactional values and event based data items. The contract is subject to many activities. Market it Promote Expand Price it it it Discount it Renegotiate it Value Cost it Bundle Rebate it it Service Terminate credit it Sign manage revenue recognition it it Pre-contract inception Post-contract inception Time Events before contract Mid term life cycle activity inception Events before contract Events after contract inception inception Events during contract Deliver on it: Create the POs performance: Drives recognition of Generate expected values Require event-based data revenues for each of and predicted events to know if and when it has the POs happened Requires both transactional Require incident rates to data and event based data monitor frequency Require accounting adjustments The new revenue recognition standard | 7.

8 EY | Assurance | Tax | Transactions | Advisory Your EY contacts About EY. EY is a global leader in assurance, tax, transaction and advisory At EY we have developed an approach that can be tailored to meet services. The insights and quality services we deliver help build trust your specific requirements around IFRS 15 readiness assessment, and confidence in the capital markets and in economies the world implementation and compliance.* Your EY IFRS 15 contact will be over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role able to give you more insights on the standard , provide guidance in building a better working world for our people, for our clients and on potential areas of impact and guide you through the steps to for our communities. become compliant at a minimum cost. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity.

9 Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit EMEIA revenue 2015 EYGM Limited. recognition contacts: All Rights Reserved. EYG no. AU3590. Petra Brand Tel: +31 88 40 79196 BMC Agency BACS 1002746. Email: ED None Henri Rinck In line with EY's commitment to minimize its impact on the environment, this document Tel: +31 88 40 71149 has been printed on paper with a high recycled content. Email: This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. Visit our website *Note: Certain of our services for an audit client and its affiliates may be more limited in order to comply with applicable independence standards . Please reach out to your EY contact for further information. The new revenue recognition standard | 1.