Get ahead of the curve with IFRS 15 & 16 compliance — Financier Worldwide (2024)

FAQs

What is the difference between IFRS 15 and 16? ›

IFRS 16 is the 'leases' standard and is to be applied as of 1 January 2019, however early application is permitted if adopted with IFRS 15. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors.

Why is it difficult to compare IFRS15/ASC606, Revenue, to U.S. GAAP? A) The IASB definition of revenue is very complicated, whereas the defination of revenue under U.S> GAAP is straighforward. Which of the following statements is true of the treatment of actuarial gains and losses under IFRS and U.S. GAAP?

This study documented that the average compliance score with IFRS 16 MPDR was 58.72% with a maximum of 83% and minimum of 15%.

International Financial Reporting Standard (IFRS) 15: Revenue from Contracts with Customers was introduced by the International Accounting Standards Board to provide one comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across ...

Disadvantages of IFRS include a lack of detail, significant adoption costs, and the perception that IFRS is a less stringent standard than what is already in place in some countries.

IFRS 15 establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer.

The balance sheets prepared under IFRS tends to be more useful due to its layout and the consistency, and the level of complexity compared to GAAP that tended to be more detailed.

Which is better IFRS or GAAP? It depends on the context. Generally speaking, IFRS is more widely used globally and is better for companies that operate in multiple countries, while GAAP is more focused on the US and is better for companies that only operate in the US.

By being more principles-based, IFRS, arguably, represents and captures the economics of a transaction better than GAAP.

Under US GAAP, a lessee remeasures the payments only when it is required to reassess the lease obligation for other purposes. IFRS, however, requires an entity to remeasure these payments every time an adjustment to the lease payments takes effect.

What is IFRS 16 in US GAAP? ›

IFRS 16 accounts for one type of lease for lessees: finance leases. Unlike ASC 842 which contains specific lease classification criteria, no specific finance lease classification rules exist for lessees under IFRS 16.

IFRS 16 takes a totally new approach to accounting for leases, called the 'right-of-use' model. This means that if a company has control over, or right to use, an asset they are renting, it is classified as a lease for accounting purposes and, under the new rules, must be recognised on the company's balance sheet.

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

IFRS 15: Contract Combinations Vs Contract Modifications.

Under IAS 17, lease expenses were accounted as operating expenses. However, IFRS 16 will recognize them as the depreciation of the right-of-use assets as well as an interest expense. Therefore, under IFRS 16, deprecation will be higher, operating expenses will be lower and interest expense will be higher.

What is the impact and effect of IFRS 16 on financial statements? The introduction of IFRS 16 / AASB 16 will lead to an increase in leased assets and financial liabilities on the balance sheet of the lessee. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of the lessee increases as well.

Under IFRS 15, the bank accounts for consideration payable to a customer (such as a cashback award) as a reduction of the transaction price, and therefore of revenue, unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the bank.

IFRS 15 replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers.

IFRS 15 Revenue from Contracts with Customers was issued by the IASB on 28 May 2014 and applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2018.

Why is USA not adopting IFRS? ›

Declaring (and rightfully so) that their main goal is to protect US investors' interests, the SEC notes that IFRS lacks consistent application, allows too much leeway with judgment, and is underdeveloped in many specific areas, for which the US GAAP has detailed and accepted guidance and established practice ( ...

Walmart uses US GAAP while Carrefour uses IFRS to present and prepare their financial statements. Review their financial statement footnotes and disclosures.

GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.

GAAP is more conservative, while IFRS encourages reporting financial results that align with current realities. For example, GAAP requires recording fixed assets at their historical cost, then regularly depreciating the fixed assets. IFRS allows for assets to be revalued on a periodic basis to reflect their fair value.

Switching to IFRS will help companies, investors, and the public globally compare their financial statements more easily. “By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier” (American Institute of Certified Public Accountants).

IFRS 16 and Topic 842 became effective for IFRS Standards preparers and US GAAP public companies in 2019. Both require lessees to report most of their leases on-balance sheet, as assets and liabilities.

IFRS 9 is probably the most complicated accounting standard ever issued, written to address the accounting weaknesses claimed to have contributed to the global financial crisis and intended to be fit for purpose for the most complex banking and financial services companies.

Enterprise Values increase due to capitalisation of the present value of future lease payments2 (resulting in higher financial debt). EBITDA increases: due to the removal of operational lease expenses. Based on our research, the vast majority of EV/EBITDA multiples are expected to decrease.

How do you compare IFRS standards and US GAAP? ›

The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP.

IFRS 16 results in an increase in assets, liabilities and net debt where leases are brought on to the balance sheet, and can also affect key accounting and financial ratios impacting a company's attractiveness to investors and its ability to raise finance.

IFRS 16 applies only to leases, or lease components of a contract. IFRS 16 changes significantly how a company accounts for leases that were off balance sheet applying IAS 17, other than short-term leases (leases of 12 months or less) and leases of low-value assets (such as personal computers and office furniture).

US GAAP requires that fixed assets are measured at their initial cost; their value can decrease via depreciation or impairments, but it cannot increase. IFRS allows companies to elect fair value treatment of fixed assets, meaning their reported value can increase or decrease as their fair value changes.

The key objective of IFRS 16 is to ensure that lessees recognise assets and liabilities for their major leases. A lessee applies a single lease accounting model under which it recognises all leases on-balance sheet, unless it elects to apply the recognition exemptions (see Section 2.6).

Under IFRS 16 lessees may elect not to recognise assets and liabilities for leases with a lease term of 12 months or less. In such cases a lessee recognises the lease payments in profit or loss on a straight-line basis over the lease term. The exemption is required to be applied by class of underlying assets.

Identify the contract. Identify separate performance obligations. Determine the transaction price. Allocate transaction price to performance obligations.

Are there any implications for cash flows? Changes in accounting requirements do not change amount of cash transferred between the parties to a lease. Consequently, IFRS 16 will not have any effect on the total amount of cash flows reported.

In other words, IFRS encourages managers to be creative, and to use professional judgment, which tends to decrease the comparability, transparency, relevance and reliability of financial information, and hence, have negative impact on the quality of financial reporting (Barth et al., 2006.

What costs can be capitalized under IFRS 15? ›

In order to fulfil the capitalisation criterion as required in IFRS 15:95(b), the cost incurred has to be used in satisfying the performance obligation in the future. During the process of construction, there is no resource created in order to satisfy the performance obligation in the future.

In general, contracts are classified along four different dimensions: explicitness, mutuality, enforceability, and degree of completion.

The resale of goods purchased by an entity (for example, a retailer selling its inventory) Performing a contractually agreed-upon task for a customer. Providing a service of standing ready to provide goods or services to a customer (such as software updates that are provided on a when-and-if-available basis)

Seller has no control over goods sold. The collection of payment from goods or services is reasonably assured. Amount of revenue can be reasonably measured. Cost of revenue can be reasonably measured.

To recognize revenue, you must begin by identifying the contract or contracts with the customer. Not all contracts need to be formal and signed to complete this step in the revenue recognition process. Verbal agreements and stated terms and conditions of your service or product can be considered a contract.

Generally accepted accounting principles (GAAP) require that revenues are recognized according to the revenue recognition principle, a feature of accrual accounting. This means that revenue is recognized on the income statement in the period when realized and earned—not necessarily when cash is received.

IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

IFRS 16 takes a totally new approach to accounting for leases, called the 'right-of-use' model. This means that if a company has control over, or right to use, an asset they are renting, it is classified as a lease for accounting purposes and, under the new rules, must be recognised on the company's balance sheet.

Under US GAAP, a lessee remeasures the payments only when it is required to reassess the lease obligation for other purposes. IFRS, however, requires an entity to remeasure these payments every time an adjustment to the lease payments takes effect.

What is the most significant impact of IFRS 16? ›

What is the impact and effect of IFRS 16 on financial statements? The introduction of IFRS 16 / AASB 16 will lead to an increase in leased assets and financial liabilities on the balance sheet of the lessee. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of the lessee increases as well.

IFRS 16 applies to leases of property, plant and equipment (PP&E), and other assets, with limited exclusions. The standard may be applied to leases of intangible assets, other than certain rights held under licensing agreements for items such as motion picture films, video recordings, copyrights, etc.

The new Standard:

IFRS 15 replaces all previous revenue requirements in IFRS (mainly IAS 11 Construction Contracts, IAS 18 Revenue, and related IFRICs IFRIC/SIC) and applies to all revenue arising from contracts with customers, unless the contracts are in the scope of other standards, such as IAS 17/IFRS 16 “Leases”.

One of the key changes introduced by IFRS 15 Revenue from Contracts with Customers is that revenue recognition is now based on the transfer of control over goods or services to a customer, rather than just the transfer of risks and rewards.

The challenges to IFRS 16 implementation were, of course, exacerbated by the pandemic. The need for time and investment was undermined by furloughed staff, the difficulties of remote work, social distancing and/or isolation constraints.

The benefits that IFRS 16 produces are: - The quality of financial statements for companies recording off-balance sheet leasing contracts will increase. - The comparability of the financial statements will improve.

It was for this reason that IFRS 16 was introduced. Although the concept of operating leases and finance leases still exists from the perspective of the lessor, they do not relate to the accounting of the lessee and lessor accounting is beyond the scope of this article.

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.