50 | AUGUS T 2017 www.canadianmetalworking.com
BY TODD BUCHANAN
International Financial Reporting Standards (IFRS) are changing once
again, and following the changes from
2011, these new standards have the
potential to dramatically impact metal
The four new standards, IFRS 9—
Financial Instruments; IFRS 16—
Leases; IFRS 17—Insurance Contracts;
and IFRS 15—Revenue From Contracts
With Customers, will come into effect
over the next two years, and all of
them, with the exception of IFRS 17,
which primarily targets the insurance
industry, will likely affect businesses
of all sizes in all sectors.
But while most of these standards
are worthy of metal manufacturers’
attention, IFRS 15 deserves immediate action. Not only is the standard designed to transform revenue
reporting for companies engaged in
long-term customer contracts, which
includes most manufacturers, it is
incredibly extensive and is scheduled
to come into effect Jan. 1, 2018.
To meet the implementation requirement, organizations must fully understand the new standard and what it
entails, and take active steps to meet it
as soon as possible.
WHAT IS IFRS 15?
IFRS 15 will completely overhaul how
your organization reports revenue—
affecting both timing and recognition.
It will also involve more judgments
and estimates, more revenue disclosures, and potentially different
The source of all this change is
essentially a new five-step model for
1. Identify the contract with a
2. Identify the performance
3. Determine the transaction price.
4. Allocate the transaction price.
5. Recognize revenue.
While it appears simple enough, this
model represents a radical shift from
previous approaches, and it will probably result in a number of changes. They
include the following.
Revenue Recognition. Under the
new standard, revenue and cash flows
are disconnected from one another.
Traditionally, as soon as a manufacturer ships products to the customer,
revenue is recognized. Under IFRS 15,
however, revenue from manufactured
products may be recognized over time,
instead of when those products are
shipped. That means revenue recognition will change, even if the dollar
amounts stay the same.
Revenue Amounts. IFRS 15 may
change the types of items included
in revenue. For example, free product
samples offered when a new contract
is signed, previously considered a
marketing expense, may now need to
have a revenue value assigned and be
recorded on the financial statements.
Compensation Plans. As the timing for revenue recognition shifts
and revenue amounts change, other
organizational processes will also be
affected. Consider this: Once revenue is recognized at a different time,
your organization’s incentive compensation metrics could change. For
instance, compensation plans that pay
out against quarterly revenues might
begin to yield unexpected results.
Similarly, as revenue allocations shift
across products and divisions, tracking systems and award calculations
will be affected as well. Higher recognized revenues could result in higher
compensation payouts—even if those
recognized revenues don’t translate
into higher sales.
Accounting Systems. Changes
in how revenue is recognized could
also affect the way contract revenue
is reflected on the balance sheet. To
accommodate this, companies may
need to develop entirely new account-
ing systems to recognize revenue as
goods are manufactured and to capture
the time value of money adjustments.
Taxes. Whenever significant changes
are made to financial statements, there
is typically a tax fallout. Following
IFRS 15, this fallout could possibly
reach beyond income tax (to include
commodity tax, for example).
The implications of IFRS 15 will inevitably be far-reaching and could potentially spill over into a range of other
areas, such as your profile of margin
on contracts, data collection systems
and processes, contract negotiations
with customers, debt covenants, and
disclosures in annual reports.
HOW TO PREPARE
Preparing for IFRS 15 will be no easy
feat. It will demand more resources
and more investment, as well as
directly affect the way your company’s top-line revenues appear on your
balance sheet. You will also likely have
to help prepare others, such as investors and business analysts, to adjust to
your organization’s new representation
To succeed, metal manufacturers will
need to undertake a range of activities, including analyzing contractual
arrangements using the five-step
model; reviewing existing accounting
practices and systems across the board
to evaluate necessary changes; and, of
course, reporting correctly under the
The process can be made easier by
including your accounting team at the
outset, and making sure boards, audit
committees, and management are
working together, and asking the right
questions, to meet this tight implementation timeline.
IFRS 15 will require a tremendous
change in mindset. That said, those
organizations that anticipate the true
extent of its impact, and implement the
appropriate change management processes to facilitate this new standard
effectively, will be well-positioned to
meet the fast-approaching compliance
Todd Buchanan is national leader,
accounting advisory services, KPMG
in Canada, 416-777-8847, www.kpmg.
PREPARING FOR IFRS 15
What metal manufacturers need to know