CHAPTER 1: INRODUCTION

1.0 Introduction

The main reason behind the change between IFRS 15 and IAS 18 is to deliver more meaningful

and precise data to the people who need to utilize of financial statements. The business dealings

is becoming more complicated day after day. So more comprehensive yet less confusing methods

are required. While various types of revenue are recognized in different tactics under IAS 18, the

new standard, IFRS 15 approaches to implement consistency in recognizing all types of revenue.

Because along with IAS 18 it also replaces IAS 11, SIC 31, IFRIC 13, IFRIC 15 and IFRIC 18.

The success or failure of this can be only understood fully once it is applied. On 1 January 2018,

IAS 18 will be superseded by IFRS 15. So for now we can only form theories and speculate the

outcomes. But real effects will only be understood only after 2018.

1.1. Origin of the Study

Being the students of business studies in Bangladesh University of Professionals, we understand

the fact that we must think beyond our course syllabus and thrive through personal studies and

researches done by ourselves. So when we were assigned with the term paper topic of Changes

between IAS 18 and IFRS 15 we became very glad and very anxious at the same time. Our

teacher Dr. Musfiqur Rahman sir has taught us a lot about IFRS 15. But unfortunately we had

little to no knowledge initially about the changes from IAS 18 to IFRS 15. But then we realized

things arent as tough as we thought it would be. But ultimately we had to rely only on the

secondary sources of information

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We particularly focused on the rules of IAS 18 and IFRS 15. Then we tried to understand where

the difference exists. We also found some article on the changes that occurred that helped us a lot

in the preparation of this paper.

We are confident that this report will fulfill the requirements and purpose of the task we were

assigned with for our Advanced Accounting course. We expect that this report will provide a

clear idea about the changes that occurred from IAS 18 to IFRS 15 and meet our teachers

expectations.

1.2 Purpose of the Study

This paper seeks to:

Provide an understanding of IAS 18 and IAS 15;

Provide an analysis of the changes that have occurred with proper examples; and

Understand the most affected industries and the future prospects of these changes.

1.3 Scope of the Study

We kept our focus only on the changes occurred from IAS 18 to IAS 15. But along the way we

also have included some relevant information like who will be the most affected stakeholders of

these changes and why. So in a way we tried to cove as much as possible about IAS 18 and IFRS

15 that we could in a very short span of time.

1.4 Limitations of the Study

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Although we tried our level best to prepare this term paper the most sincere way, we are still

aware of its limitations and shortcomings.

First of all, most of the data, if not all, were collected from secondary sources. Although we tried

our best to remain original as much as possible, but we cannot certify that these information are

100% accurate. Because we are relying on the other peoples judgments. But the sources are very

reliable.

Secondly, we sincerely think we could use more time to finish a term paper on such a broad topic

like this. We were also burned with multiple term papers and presentation in this week. So the

time given to us was very limited.

Finally, although we are in the final year final semester of our BBA course, we still consider

ourselves immature to write great quality reports on such important topics. So we might overlook

some important aspects of these accounting standards that might be very crucial in the eyes of the

professionals.

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CHAPTER 2: METHODOLOGY

2.0 Research Method

Although we have added proper mathematical examples, this term paper is mostly descriptive in

nature. We mainly collected data from the secondary sources. As the primary sources the first

one would be the lectures from our sir regarding IAS 15 and IAS 18. We had the opportunity to

inquire some of our seniors to know about this. We also talked to some of our friends and relatives

who keep knowledge about IAS. But unfortunately none of these people could actually help us.

Our main sources of information are secondary- various websites and articles.

2.1 Collecting Information

To ensure the dependability and authenticity of this term paper, we tried to collect data from many

reliable sources. But the source of primary data is very limited. Lectures of our class teacher Dr.

Musfiqur Rahman were the main source of primary information. We talked to our respected

seniors about it. We also talked to some of our friends and relatives. IT was futile. The secondary

data were mainly collected from reports from reliable websites.

So in short, our:

Primary Sources:

Class Lectures of our respected teachers Dr. Musfiqur Rahman and Zobaida Khanam Ana

madam.

Our own observation and understanding on the topics.

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 Secondary Sources:

Various websites.

Different research reports and articles.

2.2 Organizing the Information

In the course of gathering data, we collected both necessary and unnecessary information. So we

had to organize the information in such a way that let us present only the most useful and

dependable information and expel the unnecessary ones. This enabled us to minimize the size of

this report to the lowest yet serving the purpose of this report perfectly.

2.3 Analyzing of Information

After selecting the articles we had to analyze them thoroughly to find suitable summaries of these

articles. We tried to find out only the key information and we weeded out the unimportant ones.

The changes occurred is huge. But we could not mention all of these changes in this term paper.

So some of the less important changes were excluded from this paper.

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CHAPTER 3: CHANGES FROM IAS 18 TO IAS 15

3.1 Introduction IAS 15 and IAS 18

IAS 18: Revenue generally talks about the accounting policies about when to recognize revenue

from the sale of goods, rendering of services, and for interest, royalties and dividends. IFRS 15

is going to replace IAS 18 on January 2018, in order 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. The

application of IFRS 15 is going to be mandatory for annual reporting periods starting from 1

January 2018 onwards. However earlier application of IFRS 15 is permitted.

3.2 Recognizing Revenue under IAS 18

According to IAS 18 Revenue comes from the ordinary activities that a company does. As per

IASBs framework, revenues and gains, both are included in income. Revenues from the sale of

goods, execution of services and consumption by others of entity assets yielding interest, royalties

and dividends is covered by IAS 18. But this standard blatantly ignores various streams of

revenues: arising from extraordinary and non-operating activities such as leases, insurance

contracts, changes in value of financial instruments or other current assets, natural increases in

agricultural assets and mineral ore extraction.

In the below we will describe the conditions of revenues to be recognized under IAS 18:

For Sale of goods

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According to IAS, revenue should be acknowledged for sale of goods when all of the following

conditions are met:

The buyer or entity transfers all risks and rewards of ownership of the goods to the buyer;

The seller will no longer have management participation or operational control over the

goods;

The amount of revenue can be calculated in a reliable manner

It is possible that the economic benefits related with the transaction will flow to the entity;

and

The costs incurred in respect of the transaction can be measured in a reliable manner.

For Rendering of services

According to IAS, revenue should be acknowledged when all of the following conditions are met

for rendering of service:

The amount of revenue can be measured reliably;

It is possible that economic benefits related with the transaction will flow to the entity;

The stage of accomplishment of the transaction at the end of the accounting period can be

calculated in a reliable manner; and

The costs experienced for the transaction and the costs to finish the transaction can be

calculated reliably.

FOR INTEREST, ROYALTIES AND DIVIDENDS

(a) Interest shall be acknowledged using the effective interest method as set out in IAS 39,

paragraphs 9;

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(b) Royalties shall be acknowledged on an accrual basis; and

(c) Dividends shall be acknowledged when the shareholder's right to obtain payment is proven

Disclosure for IAS 18

The following items should be disclosed:

First of all the accounting policies implemented for the acknowledgement of revenue

should be disclosed.

Then, the amount of each substantial category of revenue acknowledged in the course of

the period as well as revenue arising from: sale of goods; rendering of services; interest;

royalties; and dividends should be disclosed.

Finally, the amount of revenue arising from exchanges of goods or services consisting of

each substantial category of revenue should be disclosed.

3.3 The limitations in IAS 18

There are several confusions regarding IAS 18 and IAS 11 prevailing among the users. These are

one of the reasons these standards are to be replaced by IFRS 15.

The weakness and limitations of IAS 18 includes:

i. Timing of revenue recognition

Some companies are still not understanding about when they should acknowledge revenue

because of there is lack of clear and inclusive direction in both IAS 18 and IAS 11. This is why

many companies cant implement these standards properly.

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ii. Distinguishing between goods and services

IFRS does not distinguish between goods and services. As a result, some companies may not be

entirely sure whether to report using IAS 18 or IAS 11. Even though construction contracts are

commendably sale of goods, IAS 11 uses the stage of completion method. However, under

IAS 18, revenue from sale of goods is only acknowledged when risks and rewards of ownership

are reassigned to the customer. Revenue reported could vary significant subject to which standard

is applied.

iii. Multi-element arrangements

IFRS does not deliver supervision on how to deal with transactions that comprise the delivery of

more than one good or service. IAS 18 positions that in definite circumstances the revenue

recognition criteria must be applied to distinctly recognizable constituents of a transaction.

However, it does not elucidate the conditions when a transaction can be divided into separate

components.

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3.4 Recognizing Revenue under IAS 15

IFRS 15 follows the following 5 steps to recognize revenue:

Step 1: Identify the contract(s) with a customer

In the beginning we should find out if a contract exists? Is the contract alongside a customer? For

a contract to continue below IFRS 15, it have to fulfil all 5 criteria mentioned below:

Both parties need to agree upon the terms of the contract

Every single partys entitlements or obligations in relation to goods and services can be

identified clearly without any vagueness.

Payment information for the goods and services can be identified seamlessly.

Contract should include the core business substance

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So for an example lets say a telecom company makes a contract with a customer for two years.

Step 2. Identify the performance obligations in the contract

A contract obligation is a promised good or ability (promised in the contract) to be transferred to

the customer. Identifying obligations helps us to identify how revenue is recognized.

This will be more clarified in step 4, but in short, if there are several presentation obligations, the

deal worth will demand to be allocated to the presentation obligations, established on their

moderately stand-alone price. I will give an example, and clarify this in larger detail in pace 4.

So if a telecom company makes a contract with a customer for two years, There will be 2

performance obligations: (1) Mobile phone, and (2) two-year mobile plan.

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Step 3: Determine the transaction price

Transaction price is basically the amount the firm expects to be entitled in transactions for the

transfer of goods and services. This is usually straight-forward, but it can be complex sometimes.

Sales returns and refunds are an example.

So according to our example, if the client needs to wage $100 each month to the telecom firm for

mobile services the transaction price is $1000 x 24 = $2400.

Step 4: Allocate the transaction price to the performance obligations in the contract

So in the step 4 we will allocate the transaction price to various obligations of the contract. In the

example that we gave, we found there are two obligations: (1) Mobile phone, and (2) two-year

mobile plan. And the total transaction price was $1000 x 24 = $2400. So now we need to allocate

this $2400 to the two obligations according to our estimation.

Say we allot 1000$ for the mobile and 14,000$ for the two years plan.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

In the final step, we should recognize revenue when the entity satisfies a performance obligation.

For our example if the first obligation is met, which was Mobile phone we will recognize 1000$

as revenue. And after the two-year mobile plan is fulfilled we will recognize the rest of the

$14,000.

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Performance obligation is an obligation brought by the contract for the sellers to transfer a pre-

agreed amount of goods or services to the buyers within an agreed time and satisfying the intended

quality requirements.

If all the above criteria are met only then we are ready to record revenue under IFRS 15. On the

other hand, if any of these requirements is not satisfied, we should re-evaluate the contract and

try to amend it so that it can be treated as a proper business transaction.

3.5 What Standards are Going to be Replaced by IAS 15?

But IFRS 15 will replace IAS 18 and some other standards like:

IAS 11: Construction Contracts

SIC 31: Revenue Barter Transaction Involving Advertising Services

IFRIC 13: Customer Loyalty Programs

IFRIC 15: Agreements for the Construction of Real Estate and

IFRIC 18: Transfer of Assets from Customers

IFRS 15 Revenue from contracts with Customers will replaces IAS 18 Revenue and IAS 11

Construction Contracts and all interpretations related to these two standards by the 1st of January

2018.

According to IFRS 15 an entity has clear directions about how to report information about the

nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer.

According to IFRS 15, an entity recognizes revenue to depict the transfer of promised goods or

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services to the customer in the same amount that reflects the consideration to which the entity

expects to be entitled in exchange for those goods or services.

IFRS 15 Revenue from Contracts with Customers and IAS 18 both -Revenue connect to the

accounting treatments on recording income generated through business deeds. IAS 18 was issued

in December 1993, and IFRS 15 will be effectual for accounting periods of time starting from

January 2018. The main difference between IFRS 15 and IAS 18 is that while IFRS 15 delivers

a standardized five-step model to recognize all types of revenue earned from customer contracts,

IAS 18 weighs different recognition criteria for a different type of incomes received. This is why

there is a lot of information in IAS 18. And companies sometimes get confused a lot for this.

3.6 Major Dissimilarities between IFRS 15 and IAS 18

The major dissimilarities of IAS 15 and 18 are:

IAS 18 VS IFRS 15

According to IAS 18, there are different Unlike IAS 18, IFRS 15 doesnt need

recognition methods for different categories different methods for different categories of

of revenue like - sale of goods, rendering of revenue. It applies a uniform approach for all

services, for interest, royalties and dividends types of revenue.

etc.

Reporting Criteria

Reporting criteria is selected by the Reporting criteria is acknowledged based on

categories of revenue like whether revenue is the contract and performance requirement.

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 obtained from goods, services, interest,

royalties or dividends.

Effective Usage

IAS 18 was introduced on December 1993 IFRS 15 will be effective for accounting

and will be used until the effective date periods starting from on or after January

(January 2018) of IFRS 15. 2018.

Apart from these major differences there are other differences. For an example IFRS 15 requires

detailed disclosures. But the existing financial statements are accused of having inadequate

disclosures of revenue information. According to IFRS 15 financial statements must disclose

sufficiently detailed information to enable the stakeholders to understand the nature, amount,

timing, and uncertainty of cash flow and revenue related to customer contracts. Users of IFRS 15

will enjoy flexibility to choose various methods based on the standards principles and objectives.

The reporting entity will have the freedom to decide any method that provide the most relevant

and useful information for its business and the external users of their financial statements.

3.7 Who are Mostly Affected from This Change?

The biggest impact of the new standard is that the companies will report profits in a different way

and profit reporting patterns will change. There are many speculations regarding who will be the

most affected users for these changes. But most of the experts agree that real estate, telecom,

software development and some other industries who made long-term contracts are going to be

the most affected industries. Also industries in which companies provide both- goods and services

to their customers, are the probable affected users to feel the impacts of this change.

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It is also an expected phenomena that companies in telecom and software will recognize revenue

earlier than they used to do under older rules. Because according to the new rules of IFRS 15, an

entity must allocate the transaction price to the individual performance obligations. Entities

should recognize when these obligations are satisfied.

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CHAPTER 4: CONCLUSION

IAS 18 and the other standards like IAS 11, IFRIC 13 etc. leaves the users with major confusions.

These standard are accused of having a lot of weaknesses and vagueness. Also the use of these

varying standards caused inconsistencies among the different financial statements issued by

various companies. This phenomena affects the goal of having a comparable financial statement.

This is why all previous standards are now being replaced by one framework but with many

possible judgments and estimations. So all the users of these old standards should upgrade them

with the new and comprehensive IFRS 15. This will revolutionize the revenue system and bring

all the users under one platform. As a result there will be less confusions and more consistencies.

It will be easier to compare the financial reports of various firms. But all these are just theories.

We will see the real effect after 1 January, 2018, when these standards are expected to completely

be replaced by IAS 15.

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REFERENCES:

[1] Change in Revenue Recognition in 2018 from IFRS 18 to IFRS 15

[http://tfageeks.com/2016/11/10/accounting-change-in-revenue-recognition-in-2018-from-ifrs-

18-to-ifrs-15-are-you-ready/]

[2] IFRS 15 vs. IAS 18: Huge Change Is Here! [http://www.ifrsbox.com/ifrs-15-vs-ias-18/]

[3] Difference between IFRS 15 and IAS 18 [http://www.differencebetween.com/difference-

between-ifrs-15-and-vs-ias-18/]

[4] IFRS 15: Revenue from Contracts with Customers [https://www.iasplus.com/en/standards/

ifrs/ifrs1/]

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