IFRS 15: Implementation challenges

(1)

www.pwc.ru/

IFRS 15: Implementation

challenges

29 July 2014

Christoph Cruss

Partner, PwC Germany

(2)

PwC

Agenda

Revenue Impacts the Entire Organization

Impact Study of various Industries

Key aspects to consider implementing IFRS 15

Slide 2 July 2014 IFRS 15 Revenue Recognition - Implementation Challenges

(3)

Revenue Impacts the Entire

Organization

(4)

PwC

Accounting & Reporting

• Changes to revenue model

- Number of things to track

- Allocation of revenue

- Timing of recognition

• Changes beyond revenue

- collectibility; time value of

money; sales commissions

• Judgment & estimates

• Additional disclosures

• Transition considerations

Process & Systems

• Impacts across quote-to-cash cycle

• Involvement of IT is paramount

• Likely to accelerate trend of revenue

automation (replacing Excel and

manual processes)

• Potentially IT 3-5 year

roadmaps

• Significant Cost trigger

Cross-functional Impacts

Business Changes

Revenue Impacts the Entire Organization

Is it a main operational change

• Executive management

• Audit Committee

• Investor Relations

• Financial Planning & Analysis

• Sales

• Legal

• HR

• Tax

• Accounting and IT Functions

• Changing business models

- Organic changes

- M&A activity

• Opportunity to structure and

go-to-market differently

• Pricing strategy

• Impact on compensation

• Executive communication and awarenes

(5)

Impact Study of various Industries

(6)

PwC

Impact Study of various Industries

It really depends on your business models

Review of all

contracts is

required

Disclosures

are affected

Staff training

and education

needed

Assessment of

collectability,

time value of

money, …

•Subsidized

services/warranties

•Tooling and

products

Automotive

• Licenses

• Multiple element

arrangements

• Variable

consideration

Software

•Subsidized services/products •Licenses •Milestone payments •Multiple element arrangements

Healthcare &

Pharma

•Licenses

•Variable

consideration

•Multiple element

arrangements

•Subsidized hardware

Media

• Variable

consideration

Energy

• Multiple element

arrangements

• Collectability

• Contract cost

Telecommuni

cation

•Repurchase

agreements

•Variable consideration •Time value of money •Contract costs

Real Estate

•Milestone payments

•Variable

consideration

•Warranties,

•Time value of money

Construction/

Engineering

• Material rights

(Gift cards)

• Right of return

Retail

• Combination of

contracts

• Milestone

payments

Transportation

& Logistics

(7)

Key Aspects to consider

implementing IFRS 15

(8)

PwC

Key Aspects to consider implementing IFRS 15

Overview

• Full

retro-perspective

• Partially

retro-perspective

• Accounting

options

o

Contract-by-Contract

o

Portfolio

Approach

• IT aspects

o

Data Sources

o

Calculation

Engine

o

Interface to

G/L

• Pilot entity to

confirm

analysis and

probe detailed

approach

• Cluster option

for entities

• Complexity

driven by

heterogeneity

• External

Reporting

• Management

Reporting /

Controlling

• Future

business

models

• Extent and

scope internal

and external

involvement

• Auditor‘s

involvement

Organi-sational

Scope

Transition

_mentation

Imple-

_Strategy

Rollout

Project

_Setup

(9)

2016

2017

Effective date = 1 Jan 2017

Option 1 –

Full

retrospective

(Apply IAS 8)

NEW

IFRS 15

NEW

IFRS 15

Cumulative effect

at 1 Jan 2016

Reliefs

For completed contracts:

• No adjustment for interims

• Hindsight allowed for variable

consideration

Option 2–

Partially

retrospective

OLD GAAP

_{IFRS 15}

NEW

Cumulative

effect at 1 Jan 2017

No reliefs

Disclose

OLD GAAP

It depends.

Transition and implementation

Transition timeline

(10)

PwC

Exposure Draft

Final Standard (28.05.14)

Effective date (2017)

Phase I:

Assessment

Phase II:

Implementation

Phase III:

Embedding

• Project plan & governance

• As-is analysis

• Cross functional impact

assessment

• Training & education

• Determination of implementation

approach and roadmap

• Data gathering

• Accounting and IT concepts

• System changes and upgrades

• Adoption planning

• Testing

• Go live & business as usual

• Training

• Reporting updates

• Disclosure modifications

• Stakeholder communication

• On-going monitoring

Assess impact and determine

strategy

Establish policies and prepare

result

Embed the new standard

Implementation

methodology and timeline

Have you started now?

Revenue

recognition

tomorrow

Revenue

recognition

today

Project management, communication, knowledge transfer &

preparation

(11)

Transition and implementation

Implementation challenges and success factors

Challenges

• Technical accounting

application

• Increased management

judgement

• Project management

• Maintaining dual GAAP

• Operational process and

system changes

• Data gathering & analysis

• Communications

• Changing business models

Success factors



Start preparing now to figure out how

the standard affects your financial

picture, your investors, and the way

you do business



Develop an approach that effectively

leverages the transition period–

measured approach



Establish robust governance structure



Agree project management and

change management protocol



Document as you go–maintain an

(12)

PwC

Transition and implementation

Portfolio approach may be an option

Generally the contract-by-contract approach shall be applied



In general IFRS 15 specifies the accounting for an individual contract with a

customer.



However, as a practical expedient, an entity may apply this Standard to a portfolio of

contracts (or performance obligations)

• with similar characteristics

• if the entity reasonably expects that the effects on the financial statements of

applying this Standard to the portfolio would not differ materially from

applying this Standard to the individual contracts (or performance obligations)

within that portfolio.

(13)

Transition and implementation

Contract-by-contract approach vs. portfolio approach

With Contract-by-Contract Approach

With Portfolio Approach

iPhone 500 € 5483 S4 450 € 5484 HTC One 400 € 5485 … … …

System 1

Hardware

5484 Tariff1 20 € p.m. 5483 Tariff1 20 € p.m. 5485 Tariff2 40 € p.m. … … …

System 2

Services

iPhone 500 € S4 450 € HTC One 400 € … …

System 1

Hardware

Tariff1 20 € p.m. Tariff1 20 € p.m. Tariff2 40 € p.m. … …

System 2

Services

Link between different systems necessary to identify

performance obligation on a contract by contract

basis:

• Unique ID over system borders necessary,

• Data granularity in different systems must match.

Key Figure Selection Criteria:

- sold with service

- minimum contract term: 24 month

- month: February - new contract

Key Figure Selection Criteria:

- sold with hardware - minimum contract term:

24 month - month: February - new contract

𝐻𝑎𝑟𝑑𝑤𝑎𝑟𝑒 15 𝑀𝑖𝑜 €

𝑆𝑒𝑟𝑣𝑖𝑐𝑒 5 𝑀𝑖𝑜 €

≙

Contract 1: iPhone Tariff 1 Hardware 500€ Service: 480€

(14)

PwC

Im

p

lementio

n

co

st

Cost savings

potential

through

portfolio

approach

Company A: Implementation of a contract-by-contract approach

Company B: Portfolio approach including controlling requirements

Company C: „Lean“ portfolio approach (satisfy compliance requirements only)

Portfolios

Contract-by-contract

Number of portfolios

Transition and implementation

Portfolio approach may reduce your implementation cost

(15)

Rollout Strategy

Pilot Project and Cluster Option

Cluster 3

Cluster 2

Cluster 1

Pilot Project

Project phases

C

lu

sters

January

2015

January

2016

December

2016

Impact Study and

Analysis

Preparation &

Decision IT Project

IT Realization

Planning

Phase

September

2014

(16)

PwC

Project Setup

PwC project approach

Impact study and

analysis

Implementation

Preparation and

decision

• Analysis of processes and

systems used

• Analysis of contracts, business

models and products

• Definition of technical

requirements as well as

system requirements

• Identification of interfaces

• Preparation and performance

of workshops involving

different departments

(accounting, controlling, sales,

business development, etc.)

• Design of future revenue

recognition process

• Identification of data gaps

• Assure accordance with future

compliance requirements

• Decision on appropriate

software solution

• Adjustment of internal &

external reporting

• Consolidation and

prioritization of requirements

of different departments

• Data collection and migration

of current data

• Implementation,

customization , testing and

Integration of software

solution into the existing

systems

• Accounting policies &

reporting updates

• Roll-out & communication

• Coaching and support during

the period of familiarization

Project management, communication and knowledge transfer

(17)

Project Setup

Summary of points to consider

Implementation Options

Contract by contract versus portfolio approach

Options for IT Solution

Technical consulting independent of solution design

PwC implementation concept

Proven milestone concept

Scope of work

Previous Pre-project

Professional

Services

IT

T

ec

hn

ica

l

co

ns

ult

in

g

Pre-project

Pilot

Contract by contract

Rev Rec

1 2 3

Own

Portfolio approach

(18)

PwC

Question for voting

IFRS 15, Revenue from Contracts with Customers, will be

mandatory for annual periods starting on 1 January 2017.

When do you plan to assess the impact of the new standard on

your company?

2

1. In 2017

2. In 2016

3. “Today", as we may need to adjust business

processes and/or IT systems

(19)

Thank you!

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