IFRS 15 - Revenue from contracts with customers
The new revenue recognition standard – IFRS 15 –, which became effective on 1 January 2018, may change the way investment managers account for non-refundable up-front fees and variable fees. It also introduces changes for capitalising the costs of obtaining an investment management contract.
The new standard provides a framework that replaces previous revenue guidance in IFRS. New qualitative and quantitative disclosure requirements aim to enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entities apply a five-step model to determine when to recognise revenue, and at what amount. The model specifies that revenue is recognised when or as an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognised:
- over time, in a manner that best reflects the entity’s performance; or
- at a point in time, when control of the goods or services is transferred to the customer.
1Implementation / enforcement 06/2002 - 06/2010
2Discussion / consultation 06/2010 - 05/2014
3Implementation / enforcement 05/2014 - 01/2018
4In effect 01/2018 -
IFRS 15 might affect investment managers in the following areas:
- Investment managers often receive a non-refundable up-front fee for administrative set-up activities at or near inception of an investment management contract. Under the new standard, the timing of revenue recognition for these fees may change. This is because administrative set-up activities do not result in the transfer of a promised good or service to the customer.
- Investment management contracts typically include some variable consideration – e.g. a management fee based on net asset value at the end of each quarter. The new standard no longer allows variable consideration to be measured at fair value and an investment manager will need to estimate it using either an expected value or most likely amount method. Under both methods, variable consideration in investment contracts may be constrained but not precluded.
- Some costs to obtain a contract that were capitalised previously may be expensed as incurred under the new standard, and vice versa. This is because there is more detailed guidance on identifying the incremental costs that are to be capitalised under the new standard.
- In addition, investment management companies are subject to extensive new disclosure requirements.
Unexpected changes may also arise because the new standard is more detailed than the previous revenue requirements. Therefore, it’s essential that the accounting impacts are assessed in detail, as well as the broader business impacts – e.g. the impact on tax and employee bonus schemes.
IFRS 15 for investment management companies - Are you good to go?