Understanding IFRS 18: What Companies Need to Know

IFRS 18 replaces previous standards such as IAS 18 (Revenue) and IAS 11 (Construction Contracts), creating a unified framework for revenue recognition. The key changes include:

1. Five-Step Revenue Recognition Model: IFRS 18 introduces a comprehensive five-step model for recognizing revenue:

   • Identify the contract with the customer.

   • Identify the performance obligations in the contract.

   • Determine the transaction price.

   • Allocate the transaction price to the performance obligations.

   • Recognize revenue when (or as) performance obligations are satisfied.

2. Performance Obligations: Companies must assess whether goods and services promised in a contract are distinct and identify separate performance obligations.

3. Variable Consideration: Revenue is now recognized based on the expected value or the most likely amount of consideration to be received, adjusted for the probability of occurrence.

4. Contract Costs: IFRS 18 allows capitalization of incremental costs of obtaining a contract, provided they are expected to be recovered.

5. Enhanced Disclosures: Companies are required to provide more detailed disclosures about contracts, performance obligations, and judgments made in applying the standard.

The changes introduced by IFRS 18 will have varying levels of impact depending on the nature of the business. Industries most affected include:

• Technology and Software: With complex, multi-element contracts, these companies must carefully allocate revenue to distinct performance obligations.

• Telecommunications: Bundled services (e.g., devices with service plans) require significant judgment to allocate revenue appropriately.

• Construction and Engineering: Long-term contracts may need reevaluation, particularly regarding performance obligations and variable consideration.

• Retail and Consumer Goods: Loyalty programs and variable pricing arrangements will need careful analysis under the new standard.

• Media and Entertainment: Licensing arrangements and bundled offerings will require a fresh look at revenue recognition practices.

IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, with earlier application permitted. Companies can adopt the standard using one of two methods:

1. Full Retrospective Approach: Restating prior period financial statements as if IFRS 18 had always been applied.

2. Modified Retrospective Approach: Applying the standard from the effective date and adjusting retained earnings at the beginning of the period without restating prior periods.

Choosing the right transition method depends on the complexity of the company’s contracts and the availability of historical data.

Implementing IFRS 18 can be challenging, particularly for companies with intricate contracts and diverse revenue streams. We have helped several client to implement and assess the impact of ASU 2014-09-Revenue from contracts with customers (Topic 606) when it was introduced, therefore, our firm is here to assist you with:

• Comprehensive Impact Assessments: Evaluating how IFRS 18 will affect your financial statements and internal processes.

• Customized Transition Plans: Guiding you in selecting the most appropriate transition method and ensuring compliance with the new standard.

• Staff Training and System Updates: Preparing your team and systems for the changes in revenue recognition practices.

• Ongoing Support and Compliance: Offering ongoing consultation and support to ensure continued compliance and address emerging issues.

IFRS 18 represents a significant shift in revenue recognition practices, with far-reaching implications for many industries. Early preparation is essential to ensure a smooth transition and compliance with the standard. If you’re uncertain about how IFRS 18 will impact your business or need expert guidance, contact our firm today. Our experienced team is ready to help you navigate these changes confidently and effectively.