| | 5.3.1.1 M8 IFRS Compliance | |
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| Objective | | The foundations are being laid for your multi-million pound utility business that must comply with International Financial Reporting Standards (IFRS). | | The "contract" is at the financial heart of the utility business and IFRS specifies the data that must be managed. | | This is not revolutionary, but a minor evolution that will correctly classify upfront revenue as a deferred liability. | | Following the financial crisis, "revenue recognition" is a hot topic that must be done correctly. | | Any upfront fees must be accounted for as "unearned or deferred revenue liability" that may be reversed until the contract is completed. | | The primary objective of the application service is to manage "contracts", everything else is supportive of this primary objective. |
| Disclosure of revenue from contracts with customers | | The new IFRS 15 standard is effective for annual periods beginning on or after 1 Jan 2017, however early adoption is recommended. The new standard provides a framework that replaces existing revenue guidance. | | A five-step model is used to implement the core principal that is used to determine when to recognise revenue and at what amount. | | Under step-1 (Identify the contract) an entity accounts for a contract under the model when it is legally enforceable and specific criteria are met. These criteria include that collection of consideration is "probable" which means "more likely than not". | | Under step-2 (Identify the performance obligations in the contract) an entity breaks down the contract into one or more distinct performance obligations. | | Under step-3 (Determine the transaction price) an entity determines the amount of consideration to which it expects to be entitled in exchange for transferring services to a customer. Consideration includes an estimate of variable consideration to the extent that it is "highly probable" that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. | | Under step-4 (Allocation the transaction price to the performance obligations in the contract) an entity generally allocates the transaction price to each performance obligation in proportion to its stand-alone selling price. | | Under step-5 (Recognise revenue) an entity recognises revenue when or as it satisfies a performance obligation by transferring a service to a customer, either at a point in time or over time. A service is transferred when or as the customer obtains control of it. |
| Narrative | | An entity generally capitalises incremental costs to obtain a contract with a customer if it expects to recover those costs. An entity capitalises the costs of fulfilling a contract if certain criteria are met. An impairment loss recognised in respect of the capitalised costs is reversed if the carrying amount is not longer impaired. | | A contract modification is accounted for prospectively or using cumulative catch-up adjustment depending on whether the modification results in additional services that are "distinct". | | If the entity is a principal, then revenue is recognised on a gross basis - corresponding to the consideration to which the entity expects to be entitled. If the entity is an agent, then revenue is recognised on a net basis - corresponding to any fee or commission to which the entity expects to be entitled. | | An entity presents a contract liability or a contract asset in its statement of financial position when either party tot he contract has performed. Any unconditional rights to consideration are presented separately as a receivable. | | The new standard contains extensive disclosure requirements designed to enable users of the financial statement to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts with customers. There are no exemptions from these disclosure requirements. |
| What must be done: | | 1. Identify the contract: brokerage, gas, electricity, electric-half-hour, water, telco, mobile, internet, storage, licenses, insurance, etc.. | | 2. Identify the performance obligations in the contract: bill-validation, percent-of-saving, consumption. | | 3. Determine the transaction price: pounds-per-frequency, pence-per-unit. | | 4. Allocation the transaction price to the performance obligations in the contract: billing frequency. | | 5. Recognise revenue as performance obligations are met: energy used, saving made, bill validated. |
| Revenue Recognition | | Each accounting firm has a partner specializing in revenue recognition - it is a critical point of interest in all accounts. Where a utility company reports that it has no deferred liabilities then that may signal an audit concern to be investigated. Many thanks to Malcolm Coster and KPMG for their guidance. | | Services Provided: | | The nature of a utility business is to manage the procurement and operation of utility services for and on behalf of any company, business, organisation or entity. Core utilities include: gas, electric, water and land line. Modern utilities include: mobile phones, software licenses, online storage services, TV and media services, lease equipment, insurance for repairs: water, electric, heating, vehicle. | | Contracts Managed: | | The primary objective of the application service is to manage contracts - everything else is in support of this mission. Every service is specified by a "contract" with a start and end date, and one or more performance criteria such as consumptions and rates. A contract with a customer must never get mixed up with a contract with a provider or supplier. Contract value has a highly likely amount and a variable amount - energy usage may vary by 10% in any year based on temperatures. Meter failure and location closure may vary the contract value by more than 90%. |
| Document Control: | | 1. Document Title: M8 IFRS Compliance. | | 3. Keywords: M8 IFRS Compliance. | | 4. Description: M8 IFRS Compliance. | | 5. Privacy: Public education service as a benefit to humanity. | | 6. Issued: 11 Jun 2018. | | 7. Edition: 1.3. |
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