IFRS 15, quantified effects of future adoption, including accounting policies and judgements to be applied

Atlas Copco AB – Annual report – 31 December 2017

Industry: manufacturing

  1. Significant accounting principles, accounting estimates and judgments (extract)

New or amended accounting standards effective after 2017 (extract)

IFRS 15 Revenue from Contracts with Customers

This new standard will replace existing revenue recognition standards and establishes a five-step model to account for revenue from contracts with customers. Revenue recognized will reflect the expected and entitled consideration for transferring goods and/or services to customers. Mandatory effective date of the new standard is January 1, 2018 for annual periods beginning on or after January 1, 2018. The Group plans to adopt the new standard on the effective date using the full retrospective method using the following expedients:

  • For completed contracts, the Group has not restated contracts that were completed before the beginning of the earliest period presented (2017).
  • For all reporting periods presented before the initial application, the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Group expects to recognize that amount as revenue will not be disclosed.

The Group performed a preliminary assessment of the effects of IFRS 15 during 2016. This assessment continued with a more detailed analysis and was completed during 2017. The below implications have been identified to affect the timing of revenue from contracts with customers:

a) Sale of goods

In some cases, the Group provides customized equipment to customers, which includes installation and commissioning. Under these circumstances, the Group’s assessment is that the customer simultaneously receives and consumes the benefits provided by the Group. Currently, these projects are accounted for over time. However, in some contracts with customers the Group does not fulfil all requirements in IFRS 15 to recognize revenue over time. The Group’s assessment is therefore that for these contracts, the control is transferred at one point in time when the performance obligation has been satisfied.

b) Rendering of service

The Group provides installation, commissioning, extended warranty and other services with certain equipment. These services are either sold separately in contracts with customers or bundled together with the sale of the equipment to the customer. Due to the more detailed requirements for determining whether goods or services are performance obligations under IFRS 15, the assessment of identified performance obligations might differ from identified deliverables according to the current revenue recognition standard. IFRS 15 also requires allocation of the transaction price to the identified performance obligations.

c) Variable consideration

Some contracts with customers provide a right of return, volume rebate or variable prices depending on certain factors. In order to prevent over-recognition of revenue, IFRS 15 requires estimated variable consideration to be constrained. Variable consideration may only be included in the transaction price allocated to the performance obligations if it is highly probable that a significant reversal of revenues will not occur when the uncertainty of the variable consideration has been resolved.

Presentation and disclosure

IFRS 15 presentation and disclosure requirements are more detailed compared to current revenue recognition standard. This will be a significant change from what is currently disclosed and will increase the volume of disclosures required in the financial statement. Development and testing of appropriate systems, internal controls and procedures to collect and disclose the required information continued during 2017.

d) Other adjustments

In addition to the adjustments described above, on the implementation of IFRS 15, other items of the financial statement such as deferred tax and exchange difference on translation of foreign operations will be affected and adjusted accordingly.

Summary

In summary, the impact of the implementation of IFRS 15 is expected to be, as follows:

The below table shows the impact on equity of December 31, 2017. Impact on equity of January 1, 2017 was MSEK –102.

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New accounting principles from January 1, 2018 (extract)

Revenue recognition from January 1, 2018

Revenue recognition

Revenue is recognized at an amount that reflects the expected and entitled consideration for transferring goods and/or services to customers when control has passed to the customer.

Goods sold

Revenue from goods sold are recognized at one point in time when control of the good has been transferred to the customer. This occur for example when the Group has a present right to payment for the good, the customer has legal title of the good, the good has been delivered to the customer and/or the customer has the significant risks and rewards of the ownership of the good.

When the goods sold is highly customized and an enforceable right to payment is present, revenue is recognized over time using the proportion of cost incurred to date compared to estimated total cost to measure progress towards transferring the control of the good to the customer.

For buy-back commitments where the buy-back price is lower than original selling price but there is an economic incentive for the customer to use the buyback commitment option, the transaction is accounted for as a lease.

Variable consideration

Some contracts with customers provide a right of return, trade discounts or volume rebates. If revenue cannot be reliably measured, the Group defers revenue until the uncertainty is resolved. Such provisions are estimated at contract inception and updated thereafter.

Rights of return: When a contract with a customer provides a right to return the good within a specified period, the Group accounts for the right of return using the expected value method. The amount of revenue related to the expected returns is deferred and recognized in the statement of financial position within “Other liabilities”. A corresponding adjustment is made to the cost of sales and recognized in the statement of financial position within “Inventories”.

Rendering of services

Revenue from service is recognized over time by reference to the progress towards satisfaction of each performance obligation. The progress towards satisfaction of each performance obligation is measured by the proportion of cost incurred to date compared to estimated total cost of each performance obligation.

Where the outcome of a service contract cannot be estimated reliably, revenue is recognized to the extent of cost incurred that are expected to be recoverable. When it is probable that total contract costs will exceed total revenue, the expected loss is recognized as an expense immediately. When the value of the service performed to the customer corresponds directly to the right to invoice for that service, revenue will be recognized to the amount invoiced.

Critical accounting estimates and judgements for revenue recognition from January 1, 2018

Key sources of estimation uncertainty: Revenue for services and for highly customized goods where an enforceable right of payment is present are recognized over time in profit or loss by reference to the progress towards satisfaction of the performance obligation at the balance sheet date. The progress towards satisfaction is determined by the proportion of cost incurred to date compared to estimated total cost of each performance obligation.

Revenue for goods sold is recognized in profit or loss at one point in time when control of the good has been transferred to the customer.

Accounting judgement: Management’s judgment is used, for instance, when assessing:

  • the degree of progress towards satisfaction of the performance obligations and the estimated total costs for such contracts when revenue is recognized over time, to determine the revenue and cost to be recognized in the current period, and whether any losses need to be recognize,
  • if the control has been transferred to the customer (i. e. the Group has a present right to payment for the good, the customer has legal title of the good, the good has been delivered to the customer and/or the customer has the significant risks and rewards of the ownership of the good), to determine if revenue and cost should be recognized in the current period,
  • the transaction price of each performance obligation when a contract includes more than one performance obligation, to determine the revenue and cost to be recognized in the current period, and
  • the customer credit risk (i.e the risk that the customer will not meet the payment obligation), to determine and justify the revenue recognized in the current period.

 

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