The New IFRS Wave – Not to be Underestimated

The new IFRS 9, 15, 16 require significant work from the corporates applying IFRS.


Revenue from Contracts with Customers (IFRS 15)


IFRS 15 is to be applied as of January 1, 2018. Early application is permitted. The standard supersedes IAS 11 (Construction Contracts) and IAS 18 (Revenue).In the future revenue recognition will be derived from the changes in assets and liabilities (i.e. Asset-Liability Approach). According to a five-step model, first the respective contract with the customer and the specific performance obligations must be identified within this contract. Subsequently, it is necessary to determine the total transaction price for the contract. This price must in turn be allocated to the individual performance obligations. The revenue recognition takes place immediately after the specific performance obligations have been fulfilled and in the amount of the correspondingly allocated partial transaction price. A business sector which is potentially greatly impacted by these changes is, for example, the telecommunications industry with the multiple-component contracts which prevail there. In accordance with IAS 18, until now it was permissible to recognize the smartphone as revenue over the entire term period by increasing the installment payments. As per IFRS 15, a new requirement now specifies that the individual sale price of the smartphone and the service provision contract must be determined separately. The price for the smartphone is then recognized immediately as revenue at the start of the term period (upon handing over to the customer). With this, the now reduced monthly installment payments are still correspondingly recognized as revenue over the term period. And although the total transaction price remains the same, according to IFRS 15 vis-à-vis IAS 18 the allocation of the recognized revenue to the individual accounting period changes. This could possibly also have a significant impact on performance based payment schemes.

IFRS users from all sectors are well advised – also with a view toward the retroactive application of the new rules – to evaluate early on the formulation of their customer contracts as to the effects of IFRS 15. At most, essential modifications to IT systems are necessary (invoicing, interface to accounting and internal control systems), as well as appropriate checks by the auditors.


Leases (IFRS 16)


IFRS 16 is to be applied as of January 1, 2019. Early application is permitted provided that IFRS 15 is also applied. The standard supersedes IAS 17 (Leases). Essential changes arise primarily on the part of the lessee. The major change is the de facto abolishment of off-balance-sheet transactions (i.e. operating leases). With the exception of short-term (term period < 12 months) and immaterial (amount < 5000 USD) transactions, all leasing relationships must be recognized as a right of use (asset) and a corresponding liability, consequently prolonging the balance sheet. This has a direct effect on key performance indicators, such as the debt to equity ratio. Earnings such as EBITDA and EBIT, as well as operating cash-flow will also be affected over the course of time. Instead of linearly allocated lease installments which must be recognized, depreciation of the rights of use, as well as interest payments on the liability, have to be recognized separately in profit and loss. In the initial periods, oftentimes depreciation plus interest will be higher than linear installment payments.

According to estimates, IFRS 16 will bring about EUR 14 billion of leases to the balance sheet of Deutsche Telekom. The necessary adaptations – especially for companies with numerous leasing relationships – should not be underestimated. It is important to uniformly compile all leasing relationships – throughout all organizational units and international subsidiaries – in a database and to qualitatively prepare these data in accordance with IFRS 16. In addition, prior to the initial application of IFRS 16, existing lease contracts should be examined with a view toward the retroactive application of the new standard.


Financial Instruments (IFRS 9)


IFRS 9 is to be applied as of January 1, 2018. Early application is permitted. The standard supersedes IAS 39 (Financial Instruments: Recognition and Measurement).

The potential effects – particularly on non-financial institutions – should not be underestimated. IFRS 9 is basically more principle-based than IAS 39 and opens up room for discretion, which must be explored on the part of preparers. Among other things, IFRS 9 requires a new appraisal of business models for classifying financial instruments, as well as the determination of expected losses (Expected Loss model) for subsequent valuation. Affected entities should contend with such requirements at an early stage. The determination of loss carry-forwards, as well as the adaptation of IT systems, are required in particular.




Corporates are currently analyzing the impacts of these new standards and start implementing them. These projects require a strong involvement also from the legal department and IT department as more and more information needs to be captured by the reporting. The extent of these projects - especially with regard to the expectations of the auditors - should not be underestimated.

Post written in Collaboration with Marc Sager - Institute of Accounting, Control and Auditing of the University of St.Gallen (ACA-HSG), Switzerland.

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