Navigating the future of financial reporting

The amendments introduce a new 5-step model for revenue recognition (based on that of IFRS 15), requiring a more detailed analysis of contracts with customers. This will impact how and when revenue is recognised, potentially altering the timing and amount of reported income.

While not exhaustive, the list below outlines some of the key accounting and wider requirements, including potential challenges as a result of the amendments.

Accounting Requirements and Challenges:

• Identifying performance obligation (“PO”): Businesses will need to carefully assess what is being promised to the customer. This assessment is broader than just determining whether multiple goods or services within a single contract should be accounted for separately as distinct POs. It also requires a clear understanding of what constitutes a PO.
• Allocation of the transaction price: Where a contract contains more than one performance obligation, the total transaction price must be allocated between those performance obligations. The starting point for this allocation will be the stand-alone selling prices of the performance obligations, which may differ from the amounts specified in the contract.
• Variable Consideration: Variable consideration (e.g., bonuses, penalties) is included in the transaction price, only to the extent that it is highly probable that an entity will be entitled to the revenue recognised when the uncertainty is resolved. The estimation of variable consideration can require judgment.
• Agent vs. Principal: More prescriptive requirements on determining whether an entity is acting as a principal (recognising gross revenue) or an agent (recognising net revenue/commission). In practice, under the new requirements having primary responsibility would be expected to make an entity a principal. Experience from transition to IFRS 15 suggests that many entities will need to reconsider their principal vs agent assessments on transition to the new requirements. 

Other Impacts & Challenges:

System, data and process challenges

• The need to obtain and analyse historic contracts for retrospective application of requirements, coupled with the demand for granular contract data, often necessitates upgrades to ERP and revenue management systems.

A single-lease model for lessees is introduced, meaning most leases will now result in the recognition of a 'right-of-use' asset and a corresponding lease liability on the balance sheet.

While not exhaustive, the list below outlines some of the key accounting and wider requirements, including potential challenges as a result of the amendments.

Accounting Requirements and Challenges:

• Most operating leases will move onto the balance sheet, significantly increasing reported assets and liabilities. As a result, certain key ratios such as debt/equity leverage and interest coverage are expected to be impacted, potentially affecting loan covenants and credit ratings. However, EBITDA measures might be expected to improve.
• Entities will need to determine appropriate discount rates for lease liabilities, often requiring expert judgment or external support.
• Clearer definitions and considerations for determining the lease term, including options to extend or terminate which can require judgment.
• Optional recognition exemptions exist for short-term leases (12 months or less) and leases of low-value assets, which entities will need to consider and which would impact the lease accounting for these assets on a go-forward basis.
• Identifying all leases (including embedded leases in service contracts) can be complex and labour-intensive.
• Accounting for transactions that would historically have been regarded as a sale-leaseback will now be inherently more complex with the need to assess whether control passed on the sale, and potentially changes to the way in which any gains (or losses) are recognised. 

Impacts & Challenges:

System, data and process challenges

• Organisations often lack a centralised lease database, or legacy systems may be inadequate for tracking lease balances, payments, depreciation and interest. 

Critical Timeline:

• Mandatory Effective Date: Accounting periods commencing on or after 1 January 2026.
• Early Adoption: Early adoption is permitted if ALL amendments are adopted simultaneously. 

* The amendments for supplier finance arrangements are effective from 1 January 2025.