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IFRS 15: The New Revenue Framework: What Corporates Need To Know

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The financial reporting landscape will witness significant changes in 2018 as the two major standards on Revenue and Financial instruments (IFRS 15 Revenue from contracts with customers and IFRS 9 Financial Instruments) become effective.

For many reporting entities, the new revenue accounting principles is a paradigm shift that require care in implementation.

The investment community including auditors, regulators, financial analysts, financial reporters and the investing public at large need to be aware of the changes the new standard brings and its impact on the financial statements of reporting entities otherwise there may be a systemic wave of miscommunication, misinterpretation and analysis of company’s financial performance and position if the knowledge gap is not filled.

IFRS 15- Revenue from contracts with customers was issued on May 28, 2014 as a result of the joint effort of the International Accounting standard Board (IASB) and the Financial Accounting Standard Board (FASB)’s response to the concern in the investment community on the differences in accounting for similar revenue transactions using the different reporting framework.

Before the convergence of the revenue accounting, a huge deal of reconciliation effort went into attempting to make a meaningful comparison of financial information for most multinational companies operating in different jurisdictions and applying different GAAPs.

 Revenue is a crucial metric in performance reporting and there was need to achieve a level of comparability and enhance the quality and consistency of how it is being measured.

Notwithstanding the convergence that has been achieved in reporting revenues by the new standard, all reporting entities have to deal with managing the changes that results from the adoption of the new standard.

The changes have impacts on the nature of financial information that will be produced (in terms of disclosures, measurements, and presentations) and the processes, controls, systems that will generate the financial information.

One of the critical areas to highlight is the degree of managerial judgment that is required in complying with the standard. For instance, IFRS 15 requires companies to include in the measurement of revenue, variable considerations that it will be entitled to so far there will not be significant future reversals (constraining revenue).

A significant degree of judgment is required in determining the timing, the amount, the estimation method in arriving at the revenue to be recognized.

The principle of unbundling transactions to determine the performance obligations within each contract is another area where judgement is required.

Companies are now required to allocate the transaction price to each performance obligation provided on a relative standalone basis. There are a number of obligations within a contract that may not have a standalone transaction price or selling price or a comparable price for a similar transaction.

The application of the standard will requires a degree of judgment in the allocation process and the determination of revenue to be recognized.

In addition to the degree of judgements required in the application of the standard, there is the introduction of some new and unique assets lines in the balance sheet that will require accounting policies and process set up. The nature of these assets have to be carefully understood and interpreted.

IFRS 15: 91 requires the incremental costs of obtaining a contract with a customer to be recognized as an asset if the entity expects to recover those costs. The incremental costs are costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained.

For instance, sales commissions can be capitalized as assets. This new class of assets need to be carefully understood and interpreted as they are subject to specific principles on amortization and impairments.

For SEC regulated entities with December reporting period, the first time adoption of IFRS 15 will be reported in their first quarter financial statements in March, corporates have to brace up for the decisions that need to be made especially in term of measurement, presentation and disclosure requirements of revenue transactions.

The new standard gives room for alternative approaches and options for transitioning and the impact of each transition approach has a huge impact on the financial information provided in those first set of accounts.

For instance a company that chooses to apply the full retrospective approach and no practical expedients will be required to assess the impact of the adoption of the new standard on revenue contracts that dates back to as far as possible and to adjust the impact of the changes in principles to financial statements presented for the affected periods while companies that choose the modified approach will only be required to adjust the effect of the adoption on the opening balances of their current reporting period with no restatement of the comparatives.

This invariably implies that the companies that choose to apply the retrospective approach without any practical expedient will present a minimum of three (3) statement of financial position on transition and will have more elaborate notes and disclosures than those who choose not to.

Although the financial results of the companies that choose to adopt the retrospective approach will show less volatility in the revenue profile overtime and will have more comparable results than those who do not.

Although IFRS 15 gives room for judgments and subjectivity, the standard, however, requires companies to make more elaborate disclosures than the existing guidance. Companies will be required to provide both qualitative and quantitative information about its contracts with customers, the significant judgements, and changes in the judgements made in applying [IFRS 15] to those contracts and any assets recognized from the costs to obtain or fulfil a contract with a customer in accordance with [IFRS 15:91] in addition to other more elaborate requirements on disclosures that explain the impact that new accounting standards are expected to have on an entity’s financial statements .

This will aid the understanding of the financial statement impact of the adoption of the new revenue standard.

The investment community needs to continue to re-orientate itself to understand the intricacies and peculiarities of the application of the new revenue standard; it is quite obvious that areas that will potentially require more attention will be the application of judgement and the use of significant model estimates, the peculiarities of the new assets lines created and for first time reporters, the impact of transition decisions on trend analysis.

The post IFRS 15: The new revenue framework – What corporates need to know appeared first on Deloitte Nigeria Blog.

 

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E-Financial

CBN, NDIC Push Banks to Return to Northeast

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There are ongoing moves by the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) to get commercial banks and microfinance banks return to the troubled North-East region, Umaru Ibrahim, Managing Director, NDIC, has said.

Speaking at the ongoing NDIC Annual Workshop for financial journalists in Kano, Ibrahim, called on the CBN to provide incentives for commercial banks and microfinance banks to come back to the North-east after they closed shops because of the impact of the Boko Haram on their operations.

He said the Northeast has potentials to support economic growth and should be supported by banks to achieve the desired result. He spoke on the theme: “The Nigerian banking sector: Challenges, opportunities and the way forward.”

He said: “Many bank CEOs have forgotten the economic potentials that exist in the Northeast. We need to awaken the banks to see the economic potentials in the Northeast. During the next special Bankers’ Committee meeting, the Northeast infrastructural revival will be discussed. The CBN already has planned to rebuild the Northeast,” he said.

He called on the CBN and other major stakeholders in the financial system to rebuild the financial infrastructure in the troubled North-East region.

He said the activities of insurgents in the region in the last few years have led to huge damage of financial infrastructure in the region.

The NDIC boss disclosed that given the crisis in the North-East region, so many businesses have been adversely affected while some investors have moved their investments out of that region.

He said the rate at which people are being financially excluded in the region has increased due to lack of adequate provision of financial services which was caused by insurgents.

The NDIC boss said he would personally table the issue to the Bankers’ Committee during their next meeting so that concrete steps could be taken to address the problem.

To encourage Deposit Money Banks to open more branches in the North-East, he said there was need for the CBN to provide more incentives to banks. He said, “We need to have the government of the North-East on board, they need to be sensitised on this issue.

“We need more collaboration with the CBN and government of the North-East because without this, not much can be done.

“It is necessary for the CBN to provide incentives for various banks in order to come back to the North-East because many bank CEOs have forgotten the potentials that exist in this region.”

In his presentation titled “Rebuilding Financial Infrastructure in the North East”, Mudashiru Olaitan, Director Development Finance, CBN, lamented the low level of access to the bank’s interventions in the region.

Olaitan, who was represented by Sani Mohammed, Deputy Director in the Department, said out of the N82 billion that was spent between 2001-2008, no state in the region accessed the apex bank’s interventions.

“In the commercial agricultural scheme intervention by the CBN, no state in the North-East accessed this intervention except in Taraba and Gombe which have only one each.”So there is need for the region to tap into the interventions,” he added.

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IFC Invests to aid Better Access to Quality and Affordable Healthcare in Nigeria

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International Finance Corporation (IFC) the largest global development institution focused on the private sector in emerging markets has announced that it recently committed an equity investment of USD 8.5 million in Santa Clara Africa Limited, to support the development of a 150-bed hospital and two 10-bed clinics in Lagos, Nigeria.

 

The project is promoted by AXA Mansard Plc, the Nigerian subsidiary of AXA Group, who provided equity to the project alongside IFC, the CAPE IV Fund, managed by African Capital Alliance and the hospital operator, Healthshare Ltd, through its parent company EOH Holding Ltd.

The two clinics will create a strong referral system of patients to the hospital.

 

These three facilities together will provide the necessary economies of scale to deliver better value for money in healthcare services.

 

The project is expected to provide healthcare at a price point that is below that of comparable hospitals and clinics in the market.

Eme Essien Lore, Country Manager, IFC, Nigeria, said “with this investment, IFC wants to contribute to increase the capacity of Nigeria’s healthcare system to offer quality and affordable services.

 

“We will look to scale up this efficient and integrated model nationwide” She added.

Nigeria’s healthcare sector remains underserved as demand – driven by population growth, higher income levels, rapid urbanization, and a rise of non-communicable diseases – continues to outstrip supply of quality healthcare infrastructure.

 

Diagnostic and primary care services are also limited, and at varying qualities. As a result, Nigerians spend an estimated US$1 billion annually on health services abroad.

The lack of secure access to affordable and good quality healthcare with an appropriate service mix has also hampered the growth of health insurance in Nigeria.

 

The low levels of health insurance penetration, which currently constitutes less than 10 percent of the population, contributes to the high cost of healthcare in Nigeria.

 

An increased availability of health insurance schemes would not only provide sustainable access to health services but also motivate the service providers to adopt cost-effective models.

This is IFC’s second investment with the AXA Group in the health sector. Earlier this year, IFC supported AXA’s insurance business in Egypt which includes health insurance, also through an equity investment.

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Linkifin to provide Supply Chain Financial Solution in West Africa

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Linkifin, a leading financial technology company in Nigeria, announces a new partnership with the South African company Propell.

 

This partnership is part of Linkifin’s International Development plan. Linkifin, based in Lagos Nigeria, provides end to end Supply Chain Finance (SCF) solutions across West Africa.

 

Both companies recently signed an agreement to provide Prime Revenue’s award-winning supply chain finance platform in South Africa..

 

Ms. Omolade Fadase, business development and Ibukun Ekujumi, technical lead both at Linkifin spoke to Nigeria CommunicationsWeek on the challenges in the supply chain ecosystem, stating that one of the biggest headaches in the supply chain link was cash flow challenges and delays in payments due by buyers to suppliers and this is what Linkifin SCF platform is about to change.

 

Obinna Mejeh, head of Business Development, added, “Our platform is basically one for invoice trading, adding flexibility and visibility in a supply chain ,unlike the legacy systems used by banks , discount houses and factoring companies. One of the beautiful things about this platform is that it is a win-win situation for all – buyers, suppliers and funders.

 

Hussaini Yakubu, MD/CEO of Linkifin, further commented, “Nigeria is the second strongest economy in Africa and the largest in West Africa. In order to gear the region towards a robust supply chain finance solution for the future we have to act now. The potential is huge and untapped amongst our target of small and medium sized businesses. We have already met with several major local companies and are going to announce new customers in the coming month”.

 

He ended by expressing his optimism that Linkifin will be able to bridge the gap in the supply chain ecosystem and ended the interview by saying the future for supply chain finance in Nigeria was bright.

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