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  • Our webcast series for issues and developments related to the various accounting frameworks.

  • Today’s presentation isBringing clarity to an IFRS world. IFRS 15 – Revenue from

  • contracts with customers.” I am Jon Kligman, your host for today’s

  • webcast and I am joined by Maryse Vendette and Cindy Veinot. Let’s have a look at our

  • agenda. First, youll hear from Maryse Vendette who provide us with some background on the

  • revenue recognition standard, inform us of recent developments and begin walking us through

  • some of the proposed amendments. Next, well hear from Cindy Veinot who will continue speaking

  • to the proposed amendments as well as sharing some insights and important considerations

  • related to the implementation of the standard. Well conclude with providing information

  • on some resources for future reference and a brief question and answer session. Please

  • keep in mind that we have a lot of material for a 90-minute webcast, so we will need to

  • keep the discussion at a fairly high level. I would like to remind our viewers that our

  • comments on this webcast represent our own personal views and don’t constitute official

  • interpretative accounting guidance from Deloitte. Before taking any action on any of these issues,

  • it’s always a good idea to check with a qualified advisor.

  • I would now like to welcome our speakers for this webcast. Maryse Vendette is a Partner

  • in our National Office and is a co-leader of the Canadian IFRS Center of Excellence.

  • She is the National Subject Matter Authority in the field of Revenue Recognition as well

  • as a member of Deloitte’s Global Expert Advisory Panel on Revenue. Cindy Veinot is

  • a Partner in Toronto and has over 20 years of public accounting experience with Deloitte

  • in both Toronto and the United States. She has worked with clients on Revenue Recognition

  • under different accounting frameworks over the last 15 years and is currently focused

  • on working with clients in assessing the impact of the new Revenue Recognition standard. With

  • that, I will pass it over to Maryse. Thanks Jon. Good day to everybody on the line

  • today. So, before we get started on recent developments, we thought we would level set

  • and provide some brief background information on IFRS 15. So, as you know, the IASB and

  • FASB issued a new converged revenue standard in May 2014, that replaces all existing revenue

  • standards and these standards have a broad scope. They address how to account for all

  • contracts with customers across all industries except those that are within the scope of

  • certain other standards as you can see on the right side of your screen here. So, the

  • revenue model does not apply to contracts within the scope of IAS 17 lease contracts,

  • IFRS 4 insurance contracts, contractual rights or obligations within the scope of other standards,

  • primarily various types of financial instruments and non-monetary exchanges, whose purpose

  • is to facilitate or sell to another party. Parties to collaborative arrangements, which

  • are common in certain industries such as pharmaceuticals, biotechnology, oil & gas for instance may

  • require assessment to determine whether they are in the scope of IFRS 15 or not. So, an

  • entity would be required to assess the structure and the purpose of the arrangement to determine

  • whether the transaction is for the sale of goods or services as part of the entity’s

  • normal business activities and whether the counterparty represents a customer and if

  • that’s the case, then the collaborative arrangement would be within the scope.

  • Another item, transfers of assets that are not an output of the entity’s ordinary activities,

  • such as sales of non-financial assets, property, plant and equipment, and real estate or intangible

  • assets would be within the scope of certain parts of the standard, specifically the guidance

  • on determining the existence of a contract, measurement and control principles would apply

  • to those transfers to determine when and for what amount the asset should be derecognized.

  • IFRS 15 also deals with incremental cost of obtaining a contract and cost incurred to

  • fulfill a contract, so when should those cost to be capitalized and they provide guidance

  • on amortization of those costs and how to test them for impairment. Finally, here a

  • contract with a customer maybe partially within the scope of 15 and partially within the scope

  • of other standards like IAS 17 for leases or IAS 39, IFRS 9 for financial instruments.

  • So, IFRS 15 indicates how to assess, which guidance to consider to separate these elements

  • and initially measure each parts of those contracts. So, the effective date has officially

  • been deferred by one year to annual reporting periods beginning on or after January 1, 2018,

  • including interim periods. So, for a calendar year-end entity, they would apply the standard

  • in their first interim period and in March 31, 2018. Early application is permitted under

  • IFRS 15 and is also permitted under US GAAP, but not earlier than the original effective

  • date of January 1, 2017. The boards have provided a bit of relief by way of transition method

  • and they have also proposed additional relief as we will see a bit later on in the presentation.

  • An entity has the option to choose between two transition methods. So, the first one,

  • which I called full retrospective approach, an entity would elect to apply the standard

  • fully retrospectively taking into account certain practical expedients. So, in this

  • case, they would restate for instance are beginning retained earnings at January 1,

  • 2017. Certain expedients, as I mentioned, are currently available in IFRS 15 under the

  • full retrospective method and if any of those practical expedients are used, they need to

  • be applied consistently to all reporting periods presented and their use and likely effect

  • must also be disclosed. So, an entity could also elect to use a modified transition approach.

  • In this case, they apply the revenue standard retrospectively to contracts that are not

  • completed as of the date of initial application of the standard, which is January 1, 2018,

  • and recognize a cumulative catch up without restating comparatives. This modified approach

  • may reduce the cost and complexity of adopting the standard because it limits the assessment

  • performed only to contracts that are not completed contracts prior to the year of adoption, but

  • it also has certain drawbacks as we will discuss a bit later when we discuss the advantages

  • and drawbacks of each approach later on the presentation.

  • So, the standard supersedes all existing revenue standards and creates a single model for recognizing

  • revenue. The core principle as you can see here on the screen is to recognize revenue

  • to depict the transfer of promised goods or services to customers in an amount that reflects

  • the consideration the entity expects to be entitled in exchange for those goods and services,

  • and the model includes a five-step approach for applying this principle and that five-step

  • approach is not too unfamiliar for Canadian practitioners because it is close to what

  • we have been applying in the past in terms of a five step approach, but is really in

  • the details of each of these steps that you will see differences come up. So, the first

  • step is to identify the contract, so does an enforceable contract exist. Step 2 is to

  • identify the performance obligations in the contract, which is similar to the notion of

  • separating multiple element arrangements into accounting units. Step 3 is to determine the

  • transaction price and that’s the amount the entity expects to be entitled to under

  • the contract. Step 4 is to allocate the transaction price that we just determined under step 3

  • to the various units of accounting. Finally, step 5 is to recognize revenue when or as

  • the performance obligations are satisfied, and that’s when control of a good or service

  • is transferred to the customer. So, this is an important point under the new revenue recognition

  • model. It is based on a control approach, which differs from the risks and rewards approach

  • that’s currently applicable under IFRS. The boards decided that an entity should assess

  • the transfer of a good or service by considering when a customer obtains control of that good

  • or service, and the control is defined the ability to direct the use of and obtain substantially

  • all of the remaining benefits from the asset. So, the IASB and FASB have created a joint

  • transition resource group and the purpose of the TRG is to solicit, analyze, discuss

  • stakeholder issues arising from implementation of the standard, inform the boards about those

  • implementation issues, which will help them to identify you know what they need to do,

  • any action if needed to address those issues, provide a forum for stakeholders to learn

  • about the new standard from others that are involved with implementation. So, the TRG

  • doesn’t issue any guidance. The members of the TRG include financial statement preparers,

  • auditors, users representing a wide spectrum of industries and geographical locations.

  • They also include public and private companies as well as representatives from various organizations,

  • and basically any stakeholder can submit a potential implementation issue for discussion

  • at TRG meetings. So far, the TRG has met five times. All the

  • meetings are public and are co-chaired by the vice-chairman of the IASB and FASB, and

  • you can access the meeting papers, the summaries of the meetings, the submission tracker, that

  • lists all the issues and a summary of the issues on the current status of each of the

  • issues that have been submitted. So, as of July 2015, 75 issues had been submitted to

  • the TRG, which resulted in 43 papers that have so far been discussed at the TRG. Out

  • of those 75 issues, 36 issues had been discussed with no further action at this time. 15 issues

  • have been submitted to the boards for further deliberations, which resulted in proposed

  • amendments to the standard as we will see later. 8 issues are pending potential future

  • discussions and 13 issues are pending minutes of the July TRG, and the next meeting is scheduled

  • for November 9, 2015. So, I like this timeline because it clearly

  • demonstrates that a lot has happened since the standard was first issued in May 2014.

  • As previously mentioned, there have been 5 TRG meetings, which are highlighted there

  • in the blue boxes, which have resulted in issues being raised with the boards for further

  • deliberation and those are highlighted by the green boxes indicated FASB and IASB discussions

  • have been held. The IASB has issued one ED of clarifications to IFRS 15 with a comment

  • period ending October 28, 2015, which includes clarifications to identifying performance

  • obligations, licensing and royalties, principle and agent considerations, practical expedients

  • and the FASB, they have issued three proposed ASUs as you can see here on the slides, which

  • include more or less similar topics. Some of those, for which the comment period has

  • ended, and one of those which has a proposed ASU on narrow scope improvements and practical

  • expedients, the comment period ends November 16, 2015. So, we will be discussing these

  • proposed amendments throughout the presentation today. This slide summarizes the topics included

  • in each of the IASB and FASB proposals and we can see here that the IASB does not propose

  • for the time being to make amendments on certain topics that have been included in the FASB

  • proposals. On certain of those, notably the last three topics that you can see here on

  • the slide, sales taxes, non-cash consideration and collectability. The IASB has included

  • a question in their ED asking stakeholders whether they agree that amendments are not

  • necessary at this time, if they think amendments are required, and if so, what those amendments

  • are that they would suggest and so on. The IASB has set a higher hurdle for making changes

  • to IFRS 15 and set out in the basis for conclusion, the rationale for that decision and so they

  • clearly indicated that they wanted to minimize changes to the standard to the extent possible,

  • and we will get into some of those details on the next two slides. Of particular note

  • here, the FASB finalized on October 5, their discussions on the proposed ASU on performance

  • obligations and licensing, and they have instructed the staff to begin the balloting process so

  • that we would expect the final ASU before the year is out.

  • So, let’s kick-off the discussion on the proposed amendments to step 2 on identifying

  • performance obligations. So, there are three here and I will discuss the first two issues:

  • determining whether promised goods and services are distinct in the context of the contract.

  • So, you may recall that IFRS 15 includes two criteria to determine whether a good or service

  • is distinct. There is a first criteria that effectively acts as a floor, which is to determine

  • whether the good or service is capable of being distinct, and that is similar to the

  • standalone value test that you may be familiar with, and the other criteria is whether the

  • good or service is distinct in the context of the contract, and that’s a new requirement

  • and is basically to ensure that the good or service retains its distinct characteristic

  • in the context of the contract. So, factors that indicate that our promised good or service

  • is distinct in the context of the contract, there are three of them in the standard. The

  • first one, the entity does not provide a significant service of integrating the good or service

  • with others. The good or service does not significantly modify or customize another

  • good or service, and the good or service is not highly dependent on or highly interrelated

  • with other promised goods or services. So, stakeholders indicated that it was unclear

  • how to interpret these factors, particularly the last one on whether the goods or services

  • are not highly dependent on or highly interrelated with other goods and services. Noting that

  • many such goods or services may be seen as being highly dependent on or highly interrelated

  • with others. So, the IASB decided to clarify the intent

  • of the distinct criteria here by adding some examples and changing some of the existing

  • examples as well as improving the articulation in the basis for conclusions. However, the

  • FASB also proposes to amend the standard itself. So, as you can see here on the top right corner

  • of your slide, the following decisions were made by the FASB to define the term separately

  • identifiable and explained that the objective there is to determine if the nature of the

  • overall promise is to transfer each good or service individually or combined item, to

  • reframe the separation criteria, to focus on a bundle of goods or services and if they

  • significantly affect each other and to reframe the factors to when they are not separately

  • identifiable as opposed to when they are separately identifiable. So, this is one example, although

  • the decisions are different in terms of how the standard is effectively amended because

  • they are intended to clarify the guidance and the boards agree on the outcomes of each

  • of the examples, the IASB expects no difference in application.

  • The other topic I want to discuss here is the one on shipping and handling services

  • as a promise service or activity to fulfill other promises. So, IFRS 15 focuses on transfer

  • of control versus transfer of the risks and rewards of ownership as we have mentioned

  • before. There may be more situations where control of products has been transferred,

  • although the entity may be responsible for subsequently shipping product. In these instances,

  • revenue from the sale of product must be recognized before shipping occurs because control has

  • transferred, but the question is, should revenue be deferred to cover the shipping and potential

  • insurance obligation or should cost be accrued for that obligation as a cost of fulfilling

  • the contract? So, IFRS 15 makes clear that it does not exempt an entity from accounting

  • for promises that may be seen as perfunctory or inconsequential, instead an entity should

  • assess whether the performance obligation is immaterial to its financial statements.

  • So, in the end, the IASB decided not to propose any changes in relation to shipping and handling,

  • and the FASB on the other hand decided to offer a practical expedient as you can see

  • here on the right side of your slide. So, here in this case, there may be a difference

  • in application if the boards go ahead with their standards as currently drafted.

  • Let’s now consider some examples. The first one here is from the IFRS 15 clarifications

  • exposure draft and it helps to illustrate how to interpret the criteria of distinct

  • in the context of the contract. So, how to determine whether a good or service is a performance

  • obligation on its own. So, you have here company ABC, it enters into a contract with the customer

  • to provide equipment and installation services. The equipment is functional without customization

  • or modification and the installation can be performed by other service providers, but

  • the contract requires that company ABC is used for installation. So, the question here

  • is, what are the performance obligations in this contract? Are there two, the equipment

  • and the installation or only one, which is in fact they installed equipment? So, the

  • clarifications indicate that to make the assessment, one needs to evaluate the relationship between

  • the goods and services in the context of fulfilling the contract with the customer. The objective

  • being, are you delivering multiple things or a combined item to which the other things

  • are inputs to create an item that is greater or substantially different than the sum of

  • the parts. In this case, the contractual requirement to use the entity’s installation service

  • wouldn’t change the entity’s conclusion that its promises to transfer the equipment

  • and to provide the installation are distinct. This is because the contractual agreement

  • to use entity’s installation service doesn’t change the characteristics of the goods or

  • services themselves, nor does it change the entity’s promises to the customer. In other

  • words, the entity promised to deliver equipment and then install it. It hasn’t promised

  • to deliver an output that combines the equipment and installation, and transform those inputs

  • into something that is different. The installation doesn’t significantly modify or customize

  • the equipment and fulfilling the contract requires no significant integration or contract

  • management service. So, although there is a functional relationship between the equipment

  • and the installation, the entity would still fulfill its promise to deliver the equipment

  • without having to install it and the entity could still fulfill the same installation

  • service even if the customer had acquired the equipment from another entity.

  • The clarifications exposure draft also introduces an example about the sale of equipment with

  • a consumable like a printer and a cartridge, and also it indicate here that although there

  • is a functional relationship, the printer and the cartridge are distinct performance

  • obligations and we can contrast that with let’s say another example such as the construction

  • of a building. There are many goods or services that are capable of being distinct when you

  • think about constructing of a building, but in the context of the contract, those separate

  • goods or services are inputs into a combined output, which is the building for which the

  • customer contracted. So, the separate goods or services lose their distinct characteristic

  • in the context of the contract because they are transformed into something different that’s

  • greater or substantially different from the sum of the parts.

  • Let’s now look at shipping service example. So, in this example, we have Entity A, it

  • enters into a contract with Customer B for goods that are shipped on cost, insurance

  • and freight basis. The terms are such that title passes once the goods cross the ships

  • rail, at which time the customer is obliged to pay for the goods, and Entity A is responsible

  • for freight as a principal. So, cost insurance and freight is a trade term that is commonly

  • used in international sea transportation that requires the seller to arrange for the carriage

  • of goods to a port of destination. So, the seller is responsible to pay the costs and

  • freight to bring the goods to destination and arrange insurance during transport. So,

  • the question here is, identify the performance obligation? Is there only one, the sale of

  • goods or are there two, the sale of goods and then transporting the goods? So, the solution

  • here is that there are two. Entity A recognizes revenue and transfer of control of the goods

  • when the goods the pass the ships rail because at that time the indicators of transfer of

  • control have been met, so the entity transferred legal title, the customer has an obligation

  • to pay. Entity A presumably has not retained significant risks and rewards of ownership

  • for instance and then freight services would represent a separate performance obligation

  • assuming that they are considered material, not immaterial in the context of the financial

  • statements and the transaction price is allocated to the freight services, is recognized as

  • those services are performed. So, this next slide here illustrates quite

  • well, how to deal with shipping and handling activities. So, you can see here that if shipping

  • and handling happens before transfer of control, then shipping and handling would be seen as

  • a fulfillment activity and no revenue would have to be deferred once control transfers

  • for shipping and handling; however, cost may need to be accrued, and if shipping and handling

  • happens after transfer of control, then it would potentially be a separate performance

  • obligation to the extent it is not considered to be immaterial in the context of the financial

  • statements under IFRS 15. However, you can see here to the right side under US GAAP,

  • there would be an accounting policy election to treat these shipping and handling services

  • that occur after transfer of control as a fulfillment activity. So, now, I think I will

  • pass it over to Jon for the second polling question.

  • Okay. Thanks Maryse. Here is our next polling question. Don’t

  • tell my boss, but I was: Streaming Game 4 for the American League Championship Series

  • game at work, stayed home to watch Game 4. I am not a baseball fan and therefore didn’t

  • watch the game. Didn’t even know the Blue Jays were in the playoffs. Evidently, they

  • didn’t even know they were in the playoffs judging by the way they played yesterday.

  • Click the circle that best reflects your response and the system will automatically tabulate

  • your votes. While we are waiting, here is a question for

  • you Maryse. I only see one more scheduled TRG meeting. Does that mean, there will be

  • no TRG going forward and so, how will the issues be discussed going forward?

  • You are right Jon. There is only one more scheduled meeting for 2015, which is November

  • 9, and we understand that the TRG doesn’t currently have a meeting scheduled for 2016.

  • Most stakeholders are of the view that TRG should continue and both boards are continue

  • to work together with implementation issues. And although the submission of issues has

  • been winding down a little bit, there are still some issues that are being submitted

  • and have yet to be discussed. So, some entities have not even made real progress on their

  • implementation yet and there are some concerns that additional issues may come to the forefront

  • because of that, so in a nutshell, we think that there will be TRG meetings in 2016, may

  • be less, may be half day meetings, and we will probably know more at the next TRG meeting

  • on November 9, as to what they decide to do. Okay. Great. Thanks Maryse.

  • Okay. Let’s look at our polling results. Exactly 30% admit they were streaming Game

  • 4 for the ALCS yesterday, 9% said they stayed home to watch, 59% said they didn’t watch

  • or not a baseball fan and 3% says they didn’t even know that the Jays were in the playoffs.

  • The correct answer by the way is, didn’t watch the game, that will save you a lot of

  • pain. Anyway, hopefully things will go a lot better this afternoon. Okay. Speaking of intellectual

  • property, I will now pass it over to Cindy for discussion of the proposed changes to

  • the license guidance. Thanks Jon and Hi everyone.

  • We are going to switch gears a little bit and we are still going to talk about proposed

  • amendments, but we are going to start with talking about licenses of intellectual property.

  • So, just to level set in terms of the types of things that we are talking about when we

  • talk about intellectual property could be the typical thing that you would think of

  • like software, some kind of technology, but also things like movies, motion pictures,

  • music, could be franchises, could be patents, trademarks, so there is a quite big collection

  • of items that would fit within the definition of intellectual property and therefore would

  • be subject to this guidance. We are going to talk about two issues with respect to licensing,

  • the first one is basically how to recognize revenue from a license and the second one

  • relates to sales based and usage based royalties. So, as Maryse mentioned step 5 of this standard

  • talks about how to recognize revenue and with licenses, there is very specific guidance

  • in the standard in terms of how you make that decision and essentially, they are going to

  • be recognizing revenue either over the license period or upfront at a point when the license

  • actually begins and the customer has access to the product, but the guidance that you

  • follow is not the over time versus point in time guidance in step 5 when you are dealing

  • with a distinct license and that’s actually the first point when we are going to go through

  • this first issue, think about licenses where you already made the determination in step

  • 2 that your license is distinct. If your license is not distinct and you don’t pass the distinct

  • criteria that Maryse went through then you do follow the normal guidance in step 5, which

  • is determine whether revenue is recognized over time or at a point in time, let’s assume

  • we are dealing with a distinct license, the concern that stakeholders had raised was that

  • the guidance that was included in making this determination was difficult to apply. As I

  • mentioned, there are still two methods of recognizing license revenue and you have to

  • assess the criteria of the license in order to determine what bucket you are in and they

  • used the terms either a right to access over time, which means revenue is recognized over

  • time or right to use the intellectual property at a point in time. So, both boards have made

  • some proposed amendments, but they are different in this case, so, we will walk through the

  • IASB decision and then tell you how it differs from where the FASB is at.

  • So, IASB has said that the entity should really focus on whether an entity’s activity is

  • significantly affect the intellectual property to determine the nature of the license and

  • they have said to take a look at the criteria that already exists in the standard and we

  • will go through in an example and think about whether they change the form of function of

  • the license or they change the customer’s ability to benefit from the value of the license,

  • so the IASB has changed some of the language in the standard and also amended some of the

  • examples. The FASB has made more extensive changes to the standard and they proposed

  • that you have to characterize the nature of the license as either functional or symbolic,

  • and there is a bit of a decision tree to go through, but basically if we talk about what

  • I mentioned at the beginning of the slide, things that would often be functional are

  • software and patent. Things that would often be symbolic are things like brands, team logos,

  • trade names things of that nature and you categorize it as either symbolic or functional

  • and then you go through some additional tests to determine or additional criteria, to determine

  • whether or not you recognize the revenue based on assessing that it’s a right to access

  • or it’s a right to use at a point in time, and we will go through an example of that.

  • The second change that was made was related to when to recognize revenue for sales based

  • and usage based royalties. So, as you know, one of the big changes to this standard and

  • IFRS 15 as there is quite a bit of guidance on how to account for variable consideration

  • and in some cases, entities are going to have to estimate the variable consideration and

  • allocated to performance obligations and in some cases recognize it before all of the

  • uncertainty has resolved, but there is an exception in the standard in that when you

  • have a sales based or usage based royalty related intellectual property, you don’t

  • actually recognize it before the sale occurs or the license essentially is delivered. So,

  • a question has risen to say what happens if I have a sales or usage based royalty, but

  • I have more than just an obligation to deliver the license. In this case, the changes are

  • the same and the decision was made that an entity should not split a royalty when determining

  • whether to apply the constraint exception and that an entity should apply the royalty

  • constraint exception is the predominant feature to which the royalty relates and both boards

  • have added some paragraphs to the standard to clarify that. So, essentially if you determine

  • that the license is the predominant item or feature to which royalty relates, then you

  • are going to recognize it based on the specific guidance that relates to sales and usage based

  • royalties for intellectual property. So, we are going to go through an example of that

  • right now, so if you can just go back one slide, so here we have an entity that is a

  • movie distribution company and it enters into a contract to license a movie to a customer

  • who is an operator of cinemas for six weeks and the total consideration, the entity will

  • receive is a portion of the operator’s ticket sales or the movie. So that is the only consideration

  • in this case, that the movie distribution is going to receive. And in addition to licensing

  • the movie, the entity has also agreed to provide memorabilia for display at the customer’s

  • cinemas prior to the six-week screening and to sponsor radio advertisements for the movie

  • on local radio stations throughout the six-week screening period. So, the question we would

  • want to think about is: does the royalty constraint apply and how is revenue recognized? So, you

  • saw a preview of the answer already and in this case, the sales based royalty constraint

  • would apply because if you think about this contract, the license to show the movie is

  • the predominant item or performance obligation in the contract and since it is a license

  • of intellectual property that is the predominant feature then you follow the sales based or

  • usage based royalty constraint, which means in terms of when you recognize revenue, you

  • recognize it at the later of when the subsequent sale or usage occurs. So, in this case that

  • would be as tickets to movies are sold and the movie is shown. The other alternative

  • is when the performance obligation to which some or all of the sales or usage based royalty

  • has been allocated has been satisfied. So, in this case, the license to the movie has

  • already been delivered and so, the actuallater ofwould be the subsequent sale

  • or usage, and so in this case you are not allocating any revenue to be recognized when

  • the memorabilia is provided and you are not allocating any revenues separately that relate

  • to these radio advertisements either. So, a second example that we will go through

  • is the concept of right to use versus right to access. So, now we are talking about for

  • the license as a whole that you have already determined is distinct, how are you going

  • to recognize revenue? Are you going to recognize revenue when the license term begins and intellectual

  • property has been provided to the customer or are you going to recognize revenue over

  • the term? And in this example, we have got a creator of comic strips that licenses the

  • use of the images and the names of the comic strip characters for a four-year term. There

  • are main characters in the comic strips whose images evolve over time and new characters

  • are periodically introduced. The customer can use the entity’s characters in various

  • ways, but the contract requires the customer to use the latest images of the characters

  • and in exchange for granting the license, the creator receives a fixed payment of a

  • million dollars in each year of the four-year term. So, the question we have to ask is what

  • is the nature of the license because that’s going to determine whether or not I am going

  • to recognize revenue as basically characterizing it as a point in time, so a right to use or

  • a right to access. So, basically the criteria in the standard that you look at are listed

  • on the right hand side of the slide and the three criteria to consider, the first one

  • is the creator’s activities, so, in this case, changing the images of the characters,

  • introducing new characters, does that change the form of the intellectual property to which

  • the customer has rights. In this case, we would say that that’s true. The second criteria

  • is: the rights granted by the license directly expose the customer to any positive or negative

  • effects of subsequent activities. So, in this case, the contract require the customer to

  • use the latest characters and to the extent that something happened with the comic strip,

  • then the customer would actually be exposed to positive or negative effects of the activities

  • of the developer of the comic strip. The third one is: even though the customer benefit from

  • those activities through the rights granted by the license, they do not transfer a good

  • or service to the customer as those activities occur. So, as the comic strip gets produced

  • each day, there is no transfer of any good or service to the entity that is licensed,

  • the right to use the characters, but that does have an impact in terms of how the benefit

  • that the customer may derive from having licensed those characters. So, in this case, we would

  • conclude that the license is a right to access the intellectual property throughout the term

  • and therefore, the license revenue would be recognized over time and not at a point in

  • time. With that, I am going to turn it back to Maryse to take us through a couple of more

  • changes. Okay. Thanks Cindy.

  • Next changes we will be discussing are changes to non-cash consideration and sales tax presentation.

  • So, more changes related to determining the transaction price step 3. So, the first item

  • I want to discuss is determining the measurement date for non-cash consideration and application

  • of the variable consideration constraint. So, remember that IFRS 15 requires that in

  • a revenue transaction if you receive non-cash consideration, it must be measured at fair

  • value. The stakeholders indicated that there were diverse views about the measurement date

  • to use for promise consideration in the form other than cash. So, examples that were brought

  • up are shares or share options, advertising or any other goods or services. As well, there

  • were different interpretations of the guidance on how the variable consideration constraint

  • would apply when the fair value of the consideration varies because of the form of the consideration,

  • so for example, shares of market price varies and the form of the consideration as a share

  • and also for reasons other than the form of the consideration, for example, in the share

  • option, the exercise price may vary because of the entity’s performance. So, the TRG

  • discussed this in January and three options were discussed for the measurement date to

  • use, for the non-cash consideration. The options were: 1) should it measured at inception when

  • the contracts are first signed and we have an enforceable contract, 2) when consideration

  • is received or receivable, or 3) when the performance obligations are satisfied if it

  • is in earlier date and there were also two options that were considered for the constraint

  • and how it applied that variable consideration constraint applied to both, the form or other

  • than the form of the consideration or only to variations other than the form of the consideration.

  • So, you will see here that the IASB decision is not propose any change s to IFRS 15 for

  • this topic, although the TRG members acknowledge that there was a lack of clarity around these

  • questions and the boards had instructed the staff to do some further research. They have

  • noted that the issue had important interactions with other standards like the share-based

  • payment standard, IFRS 2 and IAS 21 on foreign exchange and any changes that they might likely

  • make to IFRS 15 may result an unintended consequences, but they did ask stakeholders to comment on

  • that decision in the ED on clarifications, but the FASB on the other side has decided

  • to propose an amendment to require the measurement at contract inception and the reasons that

  • they noted were that it would be less costly, less complex, more in line with the notion

  • of estimating the transaction price at contract inception and allocating the transaction price

  • and also on the constraint, they have decided that he constraint should only apply to variability

  • resulting from reasons other than the form of the consideration. So, variability resulting

  • from the share price, the constraint wouldn’t apply. So, here the decisions are different

  • and will lead to divergence to the extent that an entity chooses under IFRSs to measure

  • non-cash consideration other than at contract inception and we will see an example shortly

  • of that. The other change that was discussed is simplifying the application of the sales

  • tax presentation. So, remember that IFRS 15 indicates that amounts collected on behalf

  • of third parties like sales taxes for instance should not be included in the transaction

  • price. So, entities are required therefore to identify and assess all their sales taxes

  • and determine whether they should be included or excluded from the transaction price. Because

  • many entities operate at multiple jurisdictions, some stakeholders raised concerns about doing

  • this type of analysis for all taxes in all jurisdictions and it also said that the analysis

  • may be complicated by the fact that in certain jurisdictions laws may be unclear as to which

  • party is primarily obligated for the tax. So, the FASB decided to propose a practical

  • expedient to reduce the complexity and therefore would allow entities to exclude from the transaction

  • price all taxes that are assessed by government authority and that is imposed on a revenue-producing

  • transaction and is collected from customers. Certain types of taxes would be excluded from

  • the scope of the expedient, but the IASB decided against the change because of the lack of

  • comparability that it may create and also noting that entity is currently has to do

  • this work to some extent and that the disclosures would suffice and explain what the stakeholders

  • have, and what their accounting policy was. So, again here, the decisions are different

  • and likely to lead to diverse accounting; however, some say that the extent of divergence

  • may not be so clear at this point in time. So, let’s look at an example of non-cash

  • consideration. That’s currently included in IFRS 15 and also an equivalent US standard.

  • So, an entity enters into a contract of the customer to provide a weekly service for one

  • year and assume the contract is signed January 1 and the work begins immediately, an exchange

  • for the service, the customer will promise to provide 100 shares of its common stock

  • per week of service, so 5,200 shares in total. The contract requires that the shares are

  • paid upon the successful completion of each week of service. So, every week, the entity

  • will receive 100 shares over one year. So, the question is in this case how should the

  • non-cash consideration be measured? So, the entity will receive 100 shares every week

  • for each week of service. The promise consideration is obviously non-cash, so we know it has to

  • be measured at fair value based on the standard. What is the measurement date to be used? Should

  • it be measured a contract inception? When consideration is received, receivable or when

  • the performance obligations were satisfied if it’s earlier. Well. On the next slide,

  • you will see that we highlight two fact patterns. Under IFRS, in this case, the service is single

  • performance obligation because the entity is providing a series of distinct services

  • that are basically substantially the same, had the same pattern of transfer and therefore,

  • the service will be recognized based on a time-based measure of progress and so, the

  • entity would measure the fair value of 100 shares that are received upon completion of

  • each weekly service period and this is exactly in line with the illustrative example that

  • is currently found in IFRS 15. So, you see here that when they received the first 100

  • shares, they will recognize revenue there based on the market price in week one, when

  • they received the second batch of 100 shares, they will recognize based on the market price

  • in week two, and so on and so forth. Under US GAAP, the FASB board concluded that

  • variable non-cash consideration should be valued at a contract inception date, so in

  • this case, they modified the illustrative example to measure the consideration at that

  • date. So, in this case the 5,200 shares will be measured at the market price of contract

  • inception under both frameworks though the entity does not reflect any subsequent changes

  • in the fair value of the shares received or receivable in revenue. So, obviously, a difference

  • there in application and could result depending on facts and circumstances in different accounting

  • treatment. Another issue discussed at TRG and brought

  • to the boards for deliberation is how to deal with collectability concerns on the next slide.

  • Recall that IFRS 15 includes collectability as a criteria under step one. The criteria

  • says it’s probable that the entity will collect the consideration to which it is entitled

  • in exchange for the goods and services that will be transferred to the customer. It also

  • indicates that that consideration may be less than the stated contract price if the entity

  • will give a price concession. So, the collectability threshold was introduced to ensure that the

  • contract is valid, it represents a genuine transaction from an accounting perspective

  • and therefore, if the threshold is met and all the other criteria are met, then you could

  • apply the IFRS 15 requirement to that contract. If, however, collectability is not probable

  • and consideration has been received, then the accounting treatment was considered to

  • be punitive because it would indicate that revenue cannot be recognized even on the cash

  • basis, but rather only when either of the following events occurred, the entity had

  • no remaining obligations to transfer goods or services of the customer and substantially

  • all the consideration promised had been received and was not refundable or alternatively the

  • contract had been terminated and the consideration received from the customer was non-refundable.

  • So, some stakeholders had interpreted the guidance to an entity should always assess

  • the probability of collecting all of the consideration and promise on the contract, and therefore,

  • contracts where probability of collection or the counterparty had credit risk would

  • fail this criteria would not represent genuine and valid transactions from an accounting

  • perspective. So, you know, you wouldn’t be able to recognize revenue for those contracts

  • until some other event occurred. Others indicated these could be valid transactions nonetheless

  • because the entity could protect itself from credit risk by requiring advance payment,

  • by stopping to provide future goods and services, etc., and that the collectability criterion

  • should only apply to consideration to receive for goods and services that will be transferred

  • to the customer and that may not be all the promised goods and services if an entity can

  • stop transferring goods or services, if the customer defaults on payment. So, in a nutshell,

  • the IASB thinks that the guidance and explanatory material on the basis for conclusion is sufficient

  • and that entities would not need to consider probability of collection of consideration

  • for goods and services that will not be transferred to the customer because the entity can stop

  • performing and again the IASB asked stakeholders their opinion on this decision and whether

  • they agree not to amend IFRS 15 at this time. This FASB on the other hand thought clarifications

  • were required in the standard as you can see on the slide here and I have added additional

  • illustrative examples. So, obviously here the decisions are different but because of

  • the FASB’s decision, it is intended to clarify the guidance that the IASB sort of agrees

  • or acknowledge that the answer is similar to what the FASB is proposing, the significant

  • divergence is currently not expected. So, we will look at example here. In this

  • example, you have an entity that enters into a contract with the customer from of supply

  • of a good, a modem and the provision of internet service for three years, the contract price

  • is 460 and it’s 100 payable at contract inception when the modem is transferred to

  • the customer and 10 payable at the end of each month for the next three years as the

  • service is provided and the first month of the second year, the customer stops paying

  • consideration when it is due. So, the question is how should revenue be recognized and what

  • if the entity stops providing the service to the customer. So, let’s look at two different

  • situations. So, assume at inception, the customer had good credit quality, which would normally

  • be the case. So, when there is an event of default in this case where they stopped paying

  • consideration, this may be an indication of a significant change in facts and circumstances

  • that may lead to reassessing collectability of future consideration.

  • So, in this case, if the entity reassesses that collectability is no longer probable,

  • but it can stop performing in the event of non-payment and let’s say just provide a

  • limited grace period, let’s say one month if you don’t pay that last month, you will

  • be disconnected from service, then basically there would be no problem around collectability

  • because the entity can stop performing and therefore, collectability of what is expected

  • to be transferred to the customer is still probable; however, if it was the other way

  • round that the entity could not stop performing then it may no longer have a genuine contract

  • and therefore would be required to stop recognizing the revenue. Same situation if the customer

  • had a low credit quality at inception, in that case if we receive an advance payment

  • for the modem so there is no credit risk there, but the entity would have to assess history

  • with this class of customer and if that history demonstrate that the customer will pay consideration

  • for six months and after that the entity had a right to stop performing after a short grace

  • period that’s about a month or two, then the entity would assess probability of collection

  • of consideration for the goods or services that they expect will be transferred to the

  • customer, which in this case would be the modem and six months plus the grace period.

  • So, if they expect collectability has been probable for those that are expected to be

  • transferred to the customer, then probability of collection is not a problem.

  • So, let’s move on now to another issue brought up early on at first TRG meeting in July 2014,

  • which is gross versus net principle versus agent considerations. The issue here basically

  • as you know is when another party is also involved in providing goods or services to

  • a customer, so you are providing goods or services a customer, but you are hiring third

  • party who is also involved in providing goods and services to your customer. IFRS 15 requires

  • the entity to determine whether it is a principle in the transaction, and should recognize revenue

  • on the gross amount or an agent and should revenue for the fee or commission for arranging

  • for the other party to provide the specified goods or services. IFRS 15 includes guidance

  • to help an entity make that determination. Basically, IFRS 15 includes a presumption

  • that if an entity controls a good or service before it is transferred to a customer, it

  • is presumed to be a principle, and it includes a number of indicators to help you make that

  • determination. The TRG discussed a number of issues regarding this guidance and some

  • people question whether control was always the basis for determining whether an entity

  • is a principle or an agent and how the control principle and the indicators, which right

  • now are indicated as indicators that an entity is an agent, how those things worked together.

  • Other people question how to apply the control principle to contracts that involve intangible

  • goods like online games and apps, website advertising space, e-tickets or vouchers that

  • type of thing and how to apply the control principle also to services provided by others.

  • So, because of these discussions, the boards clarify the principle versus agent guidance

  • quite a bit, and both boards are converged in the wording that they used to clarify their

  • guidance, which is great in this case because they are harmonized. So, basically they have

  • clarified that if an entity controls discussed by good or service before that good or service

  • is transferred to the customer, it is a principal in a transaction and if the entity does not

  • control the specified good or service before it is transferred to a customer, it is not

  • a principal and the transaction with the customer. So, that control is determinative. The indicators

  • that an entity has control before it transfers a good or service were included to support

  • an entity’s assessment in scenarios for which that assessment might be difficult and

  • how those indicators tie to the concept of control. So, the indicators don’t override

  • the assessment of control, they shouldn’t be viewed in isolation. They don’t constitute

  • a separate or additional evaluation and/or shouldn’t be considered a checklist of criteria

  • to be met, but rather factors to be considered in all scenarios and the indicators are helpful

  • and depending on the facts and circumstances, individual indicators will be more or less

  • relevant or persuasive than others. The guidance also includes indications about when a specified

  • good or service to be provided to the customers are a right to goods or services to be provided

  • in the future by another entity because in these cases, it may be difficult to assess

  • whether you control such right and also indications of when a service is to be provided by another

  • party. It may sometimes be difficult to assess when you control a service ahead of time.

  • So, basically as I said decisions are the same and let’s look at an example. So, this

  • example is where an entity engages the third party to a vendor services on the entity’s

  • behalf. So, entity enters into a contract with the customer to provide office maintenance

  • services and the customers then voiced a fixed price on a monthly basis with 10-day payment

  • terms. The entity then engages a third-party service provider to provide the office maintenance

  • services, and again here the payment terms are aligned with the customer’s terms; however,

  • the entity must pay regardless the third-party service provider regardless of whether they

  • received payment from the customer. So, the question is, is the entity a principal or

  • an agent? As I said before it’s a difficult assessment when we are talking about reselling

  • services because a service comes into existence only when it is delivered, but the entity

  • needs to assess whether it controls the right to the specified service before it is transferred

  • to the customer, so, how would we go about making this determination?

  • So, on the next slide, we will see that the terms of the entity’s contract with the

  • service provider basically give the entity the ability to direct the service provider

  • to provide the services on its behalf. In addition, when the entity considers the indicators

  • in IFRS 15 that provide further evidence that the entity controls the office maintenance

  • services before they are provided to the customer, they consider the entity is primarily responsible

  • for filling the promise to provide office maintenance services. So, although the entity

  • has contracted the services to the service provider, the entity is responsible in the

  • end for the acceptability of the services regardless of whether the entity performs

  • the service itself or engages the third party. The other indicator, the entity has discretion

  • in setting the price for the services to the customer. So, they have set the price independently

  • of negotiating with the service provider and the entity has credit risk. So, although the

  • entity does not have inventory risk in this case because it doesn’t commit to obtain

  • the services from the service provider before obtaining the contract with the customer.

  • It still concludes that it controls the office maintenance services before they are provided

  • to the customer based on the other evidence. So, this is an example in the clarifications

  • ED and you need to be mindful of whether this may eventually change once they have redeliberated

  • all the comments received. So, I think that’s it from me Jon. I give it back to you, I believe

  • for polling question 3. Okay. Thanks a lot Maryse. So, here is the

  • polling question 3. Where are you in the process of adopting IFRS 15?

  • We have not yet started thinking about the adoption process.

  • We are starting to get acquainted with the new standard.

  • We have done enough work to develop our implementation plan; or

  • We are well into our implementation process? So, while we are waiting for the results to

  • tabulate, Maryse, there is a question for you. Are the illustrative examples that accompany

  • the standard authoritative? Yeah. That’s a good question Jon.

  • So, if you look at the beginning of the illustrative examples similar to if you look at the beginning

  • and the basis for conclusions, it states that these examples or the basis for conclusions

  • accompany, but are not part of IFRS 15. They say that the examples illustrate aspects of

  • IFRS 15, but are not intended to provide interpretative guidance; however, this being said, there

  • are more than 60 examples in the standard and on many occasions, the IASB had decided

  • to clarify the standard by changing the examples as opposed to amending the standard. So, in

  • my view, the examples are essential to the correct understanding of the standard and

  • so, I would expect the clients consider them before coming to the conclusions under IFRS

  • 15 under similar facts and circumstances. Okay. Thank you.

  • Let’s see our polling results. So, just under 60% say they are starting to get acquainted

  • with the new standard and hopefully, this webcast is helping in that respect. About

  • 30% say they have not yet started thinking about the process, I guess, hopefully, they

  • will start to deal with that pretty soon and we are into single digits in terms of those

  • who have done enough work to develop an implementation process and just 4% are well into the implementation

  • process. As you will hear from Cindy soon, the implementation process might be very heavy

  • for your company. Okay and with that, I will turn it over to Cindy.

  • Okay. Thanks Jon. Before we get into the heavy lifting, let’s

  • talk about some good news in terms of some practical expedients that are being proposed

  • to be available on transition. So, if we just think about transition, Maryse has talked

  • about earlier in the presentation the two methods that you can use to adopt the new

  • standard either full retrospective or modified retrospective. So, just remember the keyword

  • in there is retrospective in both cases, you have to assess contracts that are not complete

  • as of the date that you adopt the new standard and in some cases, even in contracts that

  • you may think are complete and we will get to that. So, I think that’s a really important

  • point because historically under Canadian GAAP, which is Part 5, which is the last time

  • we had any significant revenue recognition changes. The standards were prospective to

  • new agreements or contracts that were significantly modified, but this is really a standard that

  • you are going to have to deal with from an inventorying perspective. So, if you are a

  • retailer, may be that is not a big impact, but if you are entity that has long-term contracts,

  • then this is going to be potentially a lot of work for you and that’s one of the reasons

  • you know, when think about when you are going to start to kind of dive in and get involved

  • and understanding what the impacts are. Some of the companies that I have been working

  • with or doing that now just because they have contracts that are long-term and they want

  • to understand what the impact is to them for these contracts that they are signing now.

  • So, let’s get started. We are going to talk about two new practical expedients that are

  • available on transition, and the first one relates to contract modification. So, keeping

  • in mind that the standard has to be applied retrospectively and the fact that there is

  • no very specific guidance on contract modifications, this is an issue without a practical expedient.

  • So, just a reminder, when you modify a contract, depending on how you modify it with respect

  • to changes in pricing and changes in performance obligations, you can either treat that modification

  • as a separate contract, you can essentially account for the original contract as if you

  • terminated it and you account for that and the modification together or you can have

  • a cumulative catch up. So, think about a contract that was signed in even though late 90’s

  • that has been modified two or three times since then. Without any practical expedient

  • what you be required to do is to go back and determine how that contract would have been

  • accounted for in terms of the modifications on a sequential basis because one modification

  • can impact the accounting, and then another modification subsequent to that can have a

  • different impact as compared to whether that was a first modification. So, with all that

  • being said, what is being proposed is that, an entity is able to use hindsight as of the

  • contract modification adjustment date. So, we have got this new acronym CMAD and to perform

  • a single analysis in terms of the impact of that contract under the new standard and so

  • the difference is when that date is and so the IASB has defined the CMAD or the contract

  • modification adjustment date as the beginning of the earliest period presented under both

  • transition methods and on the next slide we will illustrate that. That’s different as

  • compared to what the FASB is proposed because they are saying that the CMAD date is the

  • beginning of the earliest year presented upon initial adoption of the standard under the

  • full retrospective method and the beginning of the current period under the modified approach.

  • So, on the next slide we have a handy timeline, so as we have talked about already 2018 is

  • the date of initial application and let’s assume right now that you have one year comparative

  • financial information. So, if you do full retrospective, you are going to modify the

  • numbers that you are presenting for the year ended in 2017 and then you adopt the standard

  • in 2018 and if you are applying modified retrospective, you are only doing your cumulative adjustment

  • as at the beginning of 2018 and so, in this case we have assumed that there are two modifications.

  • The contract begins in 2014 sometime. There is one contract modification in 2016 and there

  • is one contract modification in 2018, and so from an IASB perspective regardless of

  • whether you are applying the full retrospective approach or the modified retrospective approach,

  • what you don’t separately evaluate or adjust modifications prior to January 1, 2017, and

  • that’s a little bit confusing when you read the guidance. So, you have to really go through

  • it pretty carefully in terms of what is being proposed as a change, but essentially the

  • thought process is you don’t want to wait and just look at amendments that are happening

  • before the beginning of 2018 because that might not give you enough time to deal with

  • the issues, so let’s look at modifications and use a cutoff date of January 1, 2017,

  • so if I had multiple modifications before the beginning of 2017, that’s what I would

  • be able to look at in one single area. In this particular circumstance, I will look

  • at that modification and then I have got a new modification, modification 2, that I have

  • to deal with separately. If I was applying the proposed practical expedient that the

  • FASB has, I would have different outcomes because they are saying that CMAD date is

  • different depending on the full retrospective method or the modified retrospective method.

  • We won’t get into all of that granular detail, but I think that the takeaway here is just

  • to know that, if you got long-term contracts and if they have been modified, then you are

  • going to have to be pretty careful in figuring out what the impacts are for your material

  • revenue streams or your material contracts. The next practical expedient deals with completed

  • contracts. So, the IASB already had in its guidance the fact that if you were using the

  • modified retrospective method, you would not have to deal with contracts that were completed

  • before the date that you applied a standard and now, it’s also come up with a practical

  • expedient to enable you to exclude evaluation of any contract completed at the beginning

  • of the earliest period presented when you are applying a full retrospective transition

  • approach. So, you can apply that concept in both scenarios whether you are applying modified

  • or full retrospective. The FASB though took a different tact, one they change the definition

  • of completed contract and we will get to that in a minute, but the second thing is they

  • are only permitting entities that applied a modified retrospective method to use this

  • practical expedient and they can do it to all contracts or only contracts not completed

  • as at the initial application date. So, let’s just think about what this might mean. So,

  • from a FASB perspective, if you have a contract that was completed let’s say in 2016 but

  • under the new standard may be it wouldn’t be considered complete because you wouldn’t

  • have recognized all the revenue, we are going to have to figure out how to come up and look

  • at that population of contracts which, I think it is going to be really really tricky in

  • terms of finding those if you have complicated contracts, so that’s is just something to

  • think about if you are following US GAAP. So, now let’s just take a look at the differences

  • in definition. So, the IFRS definition of what a completed contract is, is a contract

  • for which the entity is transferred all of the goods or services identified in accordance

  • with IAS 11 or IAS 18, and this was also the definition that was provided in ASC 606, which

  • was the original standard issued under US GAAP when it was first issued in 2014, but

  • the FASB has changed that definition and their proposal is a completed contract is a contract

  • for which all are substantially all of the revenue was recognized in accordance with

  • revenue guidance that is in effect before the initial date of application. So, for those

  • of you where you recognize revenue at the same time that you transfer goods and services,

  • the difference in definition isn’t really going to be a big deal, but there can be situations

  • where it’s going to make a difference, so for example if you bought license with the

  • future royalty stream and let’s say under current GAAP, revenues being recognized as

  • royalties are being reported, but the entity has delivered the license.

  • So, from an IFRS perspective, the contract would be considered complete because the license

  • has been delivered, but from a US GAAP perspective, the contract would not be complete, so it

  • changes a little bit what you consider in and out of scope, and it also leaves open

  • a question as to under IFRS, what do you do with that revenue that has not yet been recognized,

  • but the contract is actually considered complete. So, once you get into the granularity of making

  • some decisions on this. I think it’s really important to make sure you scope the population

  • of contracts that are going to crossover the transition date or the first application date,

  • so you are clear on what you have to dive into in terms of assessing the impact. We

  • just want to talk for a couple of minutes about what the advantages and disadvantages

  • are with respect to the full retrospective method and the modified retrospective method.

  • I would say a year ago or so, may be even 18 months ago as I was talking to companies

  • about the standard, most of them were saying that they are going to apply full retrospective

  • method that was their desire and I think that came from the fact that the entities that

  • started working on this implementation years ago, are the entities that are going to be

  • significantly impacted by it. So, the Telcos certainly have been working on this for a

  • number of years and it totally make sense that they would be thinking about applying

  • the retrospective method because otherwise they are not going to be able to tell the

  • user what the trends are in terms of the impact of this statement and they may end up with

  • revenue that never gets recognized in any period if they used the modified retrospective

  • method. Now, I am finding that people are more looking to explore the modified method

  • and it could be because it provides a little bit more time and it could be because if you

  • are not going to have significant impacts in terms of timing or measurements in terms

  • of recognizing revenue under the new standard, then it may not matter in terms of having

  • such clarity with respect to prior period revenue versus current period revenue. Some

  • other advantages with respect to the population of contracts that you may have to look to,

  • that could be larger if you are doing full retrospective method, we talked about the

  • trends for stakeholders, I guess the harder part with retrospective is, the potential

  • issue with obtaining historical information and the disclosure that is required, one of

  • the disadvantages on the modified retrospective method is in the year of transition, you have

  • to disclose what your revenue would have been if you would continue to apply existing GAAP.

  • So, you are going to have to run parallel regardless, it’s just a question as to whether

  • you do it before you implement, like before you have to start to disclose actually the

  • information resulting from the application of the standard or after the fact. I guess

  • my last point in this is I would say my advice is don’t make this decision too early, so

  • a lot of clients want to make this decision as well, the first decision that they make,

  • but really I think you have to understand what the impact will be to your company before

  • you make this decision, so are you going to have significant impacts related to timing

  • of recognition and if you applied modified retrospective, would you have revenue that

  • kind of falls into a black hole and never gets recognized under the old guidance or

  • the new guidance. So let’s move on to implementing IFRS 15 and as Jon mentioned it can be a pretty

  • significant project for some entities. For some entities, it will be a process of analysis

  • and documentation to find out that there is not going to be an impact on timing of recognition,

  • but there may be a significant impact on disclosure, so that’s really what we have been talking

  • about so far is what’s going to change with respect to timing, presentation and disclosure,

  • but there are many other aspects to it and today we are going to talk a little bit about

  • processes and controls, and also information technology, but in coming up with an implementation

  • plan, certainly there are other things to consider such as tax, people, both the people

  • involved in doing the accounting, the people involved in processes and controls, and systems.

  • People that are on commission structures, where the commissions may change if they are

  • tied to accounting, folks in the sales function, legal function, and the marketing function

  • because you want to ensure that they are up to speed with respect to understanding the

  • impact of the new standard and finally all the various stakeholders, so you got senior

  • management, audit committee boards, investors, bankers looking at how your bank covenants

  • are calculated if you are going to have a significant impact in terms of timing and

  • recognition is that going to have an impact on how your covenants are calculated, so lots

  • to think about there. Let’s just touch on processes and controls

  • for a few minutes. You could take it a standard and pull out every implication of the standard

  • and determine what processes are going to have to change if any or what controls are

  • going to have to be put in place. For purposes of illustration, we just picked out three

  • different items and the first one I am going to talk about is combining contracts, contract

  • combinations or contract modifications. So, the standard has some specific guidance now

  • on when you have to combine a contract and assess that group of contracts as one, and

  • also we talked a little bit about modification. So, I think one thing that think about with

  • contract combinations is how are you going to decide, which contracts actually need to

  • be monitored or combination. So, if you are a retailer, probably you are going to think

  • that the timeline in most cases going to be relatively short, but if you are an entity

  • that where it takes three or six months or an year to negotiate a contract, what process

  • do you have in place to identify those contracts that are assigned with same counterparty and

  • assess whether or not they should be combined for purposes of the standard, and what controls

  • that you are going to put in place to ensure that your processes are working properly and

  • are preventing errors or detecting errors. If you can just go forward one more slide

  • and then with respect to modifications, again since there are so many different ways to

  • account for modifications now that you have to analyze, you need to think about processes

  • for tracking modifications, you might even have some processes for assessing what types

  • of modifications that are now permitted, identify them and actually analyzing them so that they

  • got reflected appropriately in your financial statements. The next area we will touch on

  • are material rights. So, the standard includes a requirement to account for a material right

  • and a material right is essentially when the customer is paying for something now that

  • relates to an option in the future, so they can include things like loyalty programs,

  • so if you walk into a drug store and you use your loyalty card, the theory being that you

  • are paying not only for the goods that you are buying, but also for those points that

  • entitled you to something in the future once you accumulate enough points. The contracts

  • can have right in it and option to purchase goods or services that some kind of incremental

  • or significant discount, maybe there is an option to extend the contract at a lower price

  • or maybe you have a situation where there is a non-refundable upfront fee that is paid

  • upfront and that actually enable someone to kind of renew a contract at a consistent,

  • but not pay that upfront non-refundable fee again and so the challenges are firstly identifying

  • these, secondly valuing them, so you only are looking at valuing the incremental discount

  • to what anybody else could get if they just walked in and negotiated a contract with you,

  • for that good or service that’s going to be delivered in the future and you also take

  • into consideration the likelihood of exercise. So, these are some pretty big challenges in

  • terms of how you are going to come up with evaluation process that makes sense in terms

  • of implementing the standard and also when you have the track, when the options are exercised

  • or when they expired in terms of recognizing the amount that was allocated to them and

  • that doesn’t even get into some of the questions that have been raised as to whether when you

  • actually exercise this option is that a contract modification or not and can some of these

  • material rights resulting in significant financing, so there is still a lot of things to think

  • about that once you get the accounting solved you actually have to do a lot of work to figure

  • out what processes need to change and then what controls need to be in place, and the

  • last one that I am going to touch on is disclosure. So, we haven’t talked a lot about disclosures

  • yet, but you have probably heard that there are a significant number of new disclosures

  • that are going to be required under the standard and there are significant number of both qualitative

  • disclosures and quantitative disclosures, and for purposes of thinking about processes

  • and controls, I have just listed on this slide a number of the quantitative disclosures that

  • are going to be required. So, the first one is disaggregation of data. You are supposed

  • to disaggregate your revenue in order to inform the reader about the nature, amount, timing

  • and uncertainty of your revenue stream that could be caused by economic factors and that

  • may relate to the geographic areas that you operate in, the uncertainty or differences

  • in uncertainty could related to the duration of your contracts, economic factors could

  • have an impact related to the nature of the markets that you are in or the type of customers,

  • so this may actually require you to assemble data from sources that you previously haven’t

  • done before, so that can take a lot of time and effort with respect to processes and controls.

  • The second item here is that you have to disclose the transaction price that is allocated to

  • remaining performance obligation. So, let’s say you have a contract and you are delivering

  • a three different items and you have only delivered and they are all distinct, and you

  • have only delivered the first one by the end of the first year. You have to disclose the

  • price that has been allocated to the remaining performance obligations. It is sort of like

  • a backlog concept and a number of clients that we have talked to really don’t have

  • the contract databases is in place in order to pull that information and aggregate it

  • in order to disclose that. There is a number of other ones that you have to disclose and

  • listed here and that’s just a sample of what is in the standard, so lots of areas

  • where you are going to have to put new processes and controls are at least considered what

  • needs to be put in place in terms of applying and implementing the new standard. Then, I

  • am just going to touch on technology considerations for a couple of minutes and we just wanted

  • to give you a brief overview of what’s out there, so in terms of what’s available from

  • information technology perspective, certainly the ERP vendors are coming out with or have

  • already come out with solutions, so SAP, Oracle, NetSuite all have modules that are addressing

  • this new revenue recognition standard, I will say addressing loosely because it’s going

  • to be dependent on the solution in terms of how far that module is going to take you.

  • Then, there are specialty solutions, so vendors like Leeyo, RevStream, Microgen, and Softtrax

  • have what we callbolt-onsthat are out there, that are also have been designed

  • taking into consideration the requirements of the new standard and then you could certainly

  • get into customized solutions, although those usually take a longtime to develop and they

  • can have a higher cost of ownership, what’s not on here is Excel that certainly may be

  • a solution for some of you depending on the number of contracts that you have and the

  • implications of the standard, but that comes with its own set of issues. In terms of deciding

  • what’s right for you, on this next slide we just have some consideration points, so

  • what incremental data are you going to need to collect and what’s the best way to come

  • up with that data. Is there a solution that caters to or specializes in your particular

  • industry that you want to think about? Can the current process be readily scaled or automated

  • to reduce overall process risk? Do you need to integrate, so if you think about the Telcos,

  • they have got to integrate this engine or whatever they are going to use as their solution

  • with their billing systems and many of you may have the same issue and then thinking

  • about other technology type issues like do you want it to be hosted or not? Then the

  • final point on information technology consideration is just that there are a number of things

  • out there to help you in making this decision, so learning from others who have already made

  • this decision, looking at some accelerated tools, so when I say accelerated tools, leveraging

  • off of others who have come to accounting positions, understanding what’s out there

  • in terms of industry guidance or industry interpretation to think about and then external

  • expertise, right. Looking at what people are using in different geographies, taking part

  • in roundtables or things of that nature and the final slide that I am going to speak to

  • is just how do you get started. So, from the slide or from the last poll that we did, it

  • sounded like that there are a fair number of views that are getting acquainted with

  • the standard and are not quite at that point where you have been able to develop an implementation

  • plan. So, I think where to start is to scope the impact of the standard, so when we are

  • talking to the companies, the first point I make is like lets figure out what your total

  • revenue is now and determine what’s in and what’s out, so that would be the first step

  • and I would say almost every entity that I have talked to is going to have some revenue

  • streams that are going to be impacted this new standard. So, I wouldn’t assume that

  • you are not impacted before you that analysis. And then I would start with a short-term plan

  • to assess the key impacts and to use that to prepare an implementation plan, so review

  • a sample of contracts figure out for those contracts what’s the impact going to be

  • to your financial statements and I would also start identifying the disclosures that are

  • going to require new data elements to be collected. I think we will have a basis to start estimating

  • the level of effort required to implement the standard and to think about who needs

  • to be involved in your steering committee, how are you going to proceed or you are going

  • to have a decentralized approach, is that how your organization operates, how you are

  • going to derive consistency during implementation, I think a lot of things to think about as

  • you get going on this. Decisions, certainly accounting policy choices and significant

  • judgment, the transition method we talked about, contract versus portfolio approach.

  • So, we didn’t talk about that today, but there is inability to look at groups of contracts

  • as a portfolio if they meet certain criteria, which may be helpful to some of you and then

  • finally starting early on your systems approach. So, I know 2018 sounds a long way away, but

  • if you have to implement a system change, I think most people would think that there

  • really isn’t that much time before you get started on the system side of things and Jon

  • I will turn it back to you. Okay. Thanks a lot Cindy.

  • On the slide in front of you, you will see a list of resources that will help you understand

  • and transition to the new standard, the list at the top are the Deloitte resources and

  • you will see some additional resources near the bottom of the slide. The next slide you

  • can see the list of our experts across the country who you can contact and I’ll be

  • happy to assist you in dealing with the standard. If you have any questions or issues related

  • to the standard, please reach out to your Deloitte partner or Deloitte contact and well

  • be happy to help you with any questions or concerns if you might have. We have time for

  • one question here for Maryse and the question is if the FASB is provided specific guidance

  • and the IASB hasn’t, can IFRS preparers turn to the guidance issued under US GAAP?

  • Yes Jon. I was actually expecting this question. I thought somebody would ask it. So, the boards

  • have issued a converged standard and are making clarifications to the respected standards

  • in different ways and so, although some may say that even if there is different words

  • would expect the same outcome, I think this may be very difficult in practice. So, if

  • the boards agree on an outcome, it’d be most helpful if they said such and they have

  • used harmonized words and if they disagree on an outcome, it should be made clear in

  • the respective standards as well. So, I guess what I am saying is that, I would hope that

  • the boards work together to finalize the respective standards and that take this into account,

  • nevertheless if the boards do indicate the they expect that they should come to the same

  • outcome. If the words are slightly different, then there are some helpful words in the US

  • standard, then I don’t see how we could preclude a client from looking at those words,

  • but it’s clear that there is a difference for example we talked about non-cash consideration

  • being one, additional practical expedients being others, licensing and there is many

  • more, then I don’t think it would be appropriate to look the US GAAP guidance in those cases.

  • I hope that’s helpful. Yes, it is. Thanks Maryse, appreciate that.

  • Okay. We are coming to the end of the 90 minutes now. So, I would like to thank our speakers

  • today, Maryse Vendette and Cindy Veinot. Also, thanks to our behind the scenes team Alexia

  • Donahue, Elise Beckles, Allan Kirkpatrick, Nura Taef and Evan Dang. We hope you found

  • this webcast helpful and informative. If you would additional information please visit

  • our web site Deloitte Canada Center for Financial Reporting and to all of you viewing our webcast

  • today, thank you for joining us. This concludes our webcast, Bringing Clarity

  • to an IFRS world, IFRS 15 Revenue from contracts with customers.

Our webcast series for issues and developments related to the various accounting frameworks.

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