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Aerospace and defence | IFRS 15 Revenue - Are you good to go?

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Practical guidance for aerospace and defence companies on implementing the new revenue recognition standard. Find out more at kpmg.com/ifrs.

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Aerospace and defence | IFRS 15 Revenue - Are you good to go?

  1. 1. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Aerospace anddefence IFRS 15 Revenue – Are you good to go? April 2017 kpmg.com/ifrs
  2. 2. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Areyougoodtogo? 2 IFRS 15 will change the way many aerospace and defence companies account for their contracts. To help you drive your implementation project to the finish line, we’ve pulled together a list of key considerations that many aerospace and defence companies need to focus on.
  3. 3. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. 3 For each of the following, documenting your analysis and the conclusions drawn will be essential
  4. 4. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Contractexistence 4 Do your agreements meet the contract existence criteria? Think about… MSAs | Government approvals | Unfunded contracts | Termination clauses Approved and parties committed to obligations Generally, you can only recognise revenue from a contract once all these criteria are met Collection of consideration is probable Contract has commercial substance Identifiable rights and payment terms
  5. 5. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Combiningcontracts 5 Do you enter into multiple contracts with the same or related parties – e.g. government entities? Single commercial objective Price interdependent Single performance obligation Contracts are combined if: ― entered into at or near the same time with the same customer; and ― any one of these criteria are met… 1
  6. 6. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Distinctgoodsandservices 6 Do several goods and services promised in the contract meet the new ‘distinct’ test to be accounted for separately? Think about… Capable of being distinct Distinct in the context of the contract + Spare parts | Multi-unit contracts | Warranties | Integration services | Offset obligations
  7. 7. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Seriesofdistinctgoods 7 Do your contracts for multiple units meet the ‘series’ requirements? The series guidance may bring forward revenue recognised in cases of ‘learning curve costs’ Is substantively the same Uses the same method to measure progress + Meets the over- time recognition criteria + A series of distinct goods are accounted as a single performance obligation if each good…
  8. 8. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Over-timerecognition 8 Meeting the definition of a construction contract is no longer a reason to use percentage of completion accounting e.g. training services e.g. refurbishing a customer’s aircraft e.g. built-to-order satellite Customer consumes benefits as entity performs Customer controls asset as it’s created Asset has no alternative use and right to payment exists Instead, assess whether one of these three criteria are met
  9. 9. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Workinprogress Does your accounting policy for work in progress meet the requirements of IFRS 15? Capitalise amounts related to future performance Recognise work in progress as a balance sheet ‘true up’ to ensure a smooth profit margin You’ll need to… You can no longer… 9
  10. 10. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Measureofprogress 10 Do you use the units of production or units of delivery methods to recognise revenue? They do not give rise to material amounts of WIP controlled by the customer Only permissible if…? Alternative measures include cost-to-cost method and surveys of construction
  11. 11. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Variableconsideration 11 Expected value If the contract price contains variable consideration, have you decided on the estimation method and applied the constraint ? Most likely amount or Could there be a significant revenue reversal? Penalties | Cost escalation clauses | Completion and performance bonuses For example…
  12. 12. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Significantfinancingcomponents 12 Do deferred or advance payment terms in your contracts give rise to a significant financing component? Performance date Interest expense Interest incomeAdvance payment Deferred payment Practical expedient – No need to recognise if period between payment and performance is < 1 year Adjustments for financing components will be more common !
  13. 13. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Claimsandvariations 13 Can your internal controls identify contract modifications accounted for prospectively? Is the modification distinct from goods or services already transferred? Account for it prospectively Use cumulative catch-up Account for it Do not account for it Yes No Yes No Is the contract modification enforceable?
  14. 14. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Loss-makingcontracts 14 There is no specific guidance in IFRS 15 on accounting for loss-making contracts You are now required to assess losses at the contract level using the onerous contract guidance in IAS 37
  15. 15. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Transitionadjustments 15 Have you identified all of the areas where differences exist between IFRS 15 and your existing accounting? Use the helpful guidance in our Transition Options and Issues In-Depth publications IFRS 15 is more detailed than the existing revenue requirements, so you may find unexpected changes in your accounting !
  16. 16. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Disclosurerequirements 16 Have you identified the additional information and processes needed to meet the disclosure requirements? Read our Guide to annual financial statements – IFRS 15 supplement Under IFRS 15, you’ll need to provide more detailed information about contract terms, as well as how and when you recognise revenue
  17. 17. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Checklistofactions Have you…?  Determined whether your agreements meet the contract existence criteria?  Assessed whether you need to combine multiple contracts with the same party?  Determined whether your contracts include more than one performance obligation?  Decided how you will account for series of distinct goods?  Identified contracts that meet the criteria for over-time recognition?  Checked that your accounting policy for work in progress meets IFRS 15’s requirements?  Selected your measure of progress for contracts recognised over time?  17 Have you…?  Revised your estimates of variable consideration elements?  Identified and calculated any significant financing components?  Documented your accounting policy for claims and variations?  Assessed your loss-making contracts using the guidance in IAS 37?  Identified and quantified your transition adjustments?  Identified the additional information needed to meet the disclosure requirements? 
  18. 18. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Howdidyoudo? 18 How many of our 13 questions have you answered ‘yes’? All 13 – You’re good to go! 7-12 – You’re on your way 0-6 – You really need to engage
  19. 19. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Don’tforgetthebroaderbusinessimpacts Have you… ― updated your management reporting, including KPIs? ― developed a transition plan for parallel runs, including reconciliations? ― thought about the tax implications? ― calculated the impact on bonus schemes? ― compared your approach with peers? Revenue Accounting Change Accounting, tax and reporting Data, systems and processes Business People and change 19
  20. 20. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. Findoutmore 20 Talk to your usual KPMG contact Use our Transition toolkit Follow the discussion on LinkedIn
  21. 21. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. © 2017 KPMG IFRG Limited, a UK company limited by guarantee. All rights reserved. KPMG International Standards Group is part of KPMG IFRG Limited. KPMG International Cooperative (“KPMG International”) is a Swiss entity that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMG International (including sublicensees and subsidiaries) in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind KPMG International or any other member firm, in any manner whatsoever. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. kpmg.com/socialmedia

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