Accounting for forex forward contracts

In the past few years, the revenue recognition rules changed dramatically with introduction of the new standard IFRS 15. All affected companies face a lot of challenges accounting for forex forward contracts work related to the proper implementation of the new standard. IAS 18: Huge change is here!

In today’s article, I’d like to point out the main rules and principles of IFRS 15. What is the objective of IFRS 15? If you have a contract with party other than a customer, then IFRS 15 does not apply. Non-monetary exchanges between entities within the same business to facilitate sales.

We need to apply IFRS 15 for periods starting from 1 January 2018 or later. It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out! It seems understandable and very easy at first sight, and it truly is in many cases. So why is IFRS 15 so extensive?

To make it systematic, IFRS 15 requires application of 5 step model for revenue recognition. So, if the contract does not meet all 5 criteria, then you don’t apply IFRS 15, but some other standard. IFRS 15 provides a guidance about contract combinations and contract modifications, too. Contract combination happens when you need to account for two or more contract as for 1 contract and not separately. IFRS 15 sets the criteria for combined accounting. Contract modification is the change in the contract’s scope, price or both.

In other words, when you add certain goods or services, or you provide some additional discount, you are effectively dealing with the contract modification. IFRS 15 sets different accounting methods for individual contract modification, depending on certain conditions. Step 2: Identify the performance obligations in the contract Performance obligation is any good or service that contract promises to transfer to the customer. A series of distinct goods or services that are substantially the same and have the same pattern of transfer. Simply said, distinct means separable, or separately identifiable, and IFRS 15 sets criteria that you must assess in order to determine whether the performance obligation is distinct or not.

Let me say that this is extremely important and you must do it right. The reason is that in further steps, you will account for distinct performance obligations and their revenues separately, in line with their allocated transaction price, and if you fail in the correct identification of distinct performance obligations, then the whole contract accounting will be wrong. I say more about that in my IFRS Kit, so check it out if you need. Also, if there’s no transfer to customer, then there’s no performance obligation. For example, imagine you construct a building for your client. Before you actually start, you build a small mobile toilet for your workers. As this will not be delivered to your customer, it is not a separate performance obligation.

That’t the definition from the standard and in other words, it’s what you expect to receive from your customer in return for your supplies. NOT always the price set in the contract. It is you expectation of what your receive. It means that you need to estimate the transaction price.

When allocating considerations with variable amounts. The best way to determine a stand-alone selling price is simply to take observable selling prices and if these are not available, then you need to estimate them. IFRS 15 suggest a few methods for estimating stand-alone selling prices, such as adjusted market assessment approach, etc. If this seems to theoretical, let me point you to this article. It illustrates all steps on a very simple telecom example. This happens when control is passed.

IFRS 15 sets a few criteria when you should recognize revenue over time. In all other cases, revenue is recognized at the point of time. You can read more about it in this article, or learn it in details in my IFRS Kit. Those are the incremental costs to obtain a contract. If not, then you should capitalize them only if certain criteria are met. Under this approach, you need to apply IFRS 15 fully to all prior reporting periods, with some exceptions.