In importance, all pale in comparison to IFRS 15, the most important standard ever issued.

Why the hyperbole?

Business involves convincing customers to exchange their money for the goods and services a company sells, a difficult task.

Revenue shows how well, or not, a company accomplishes this task.

Given the importance of revenue, it is nice to see the boards took their time.

Starting with the ASB's 2001 discussion paper on improving FRS 5, App. G, the project took thirteen years.

The result?

A standard with 129 paragraphs, a 89 paragraph appendix, a 327 paragraph set of examples and a 510 paragraph basis for conclusions.

Obviously, those thirteen years were not spent idling about.

Not that everyone is pleased.

Some consider the mind-numbing detail overkill.  Some call it an Americanization of international standards.  Some even suggest it perverts the very, principles-based nature of IFRS.

These detractors may have a point.  On volume alone, IFRS 15 and IAS 18 bear practically no family resemblance while ASC 606 and ASC 605, with its 36 subtopic and 1,000 plus paragraphs, are practically kissing cousins.

Similarly, guidance like “an entity shall recognise revenue when (or as) the entity satisfies a performance obligation” does have a rule like air.

But, on closer inspection, IFRS 15 really does turn out to be principles based. Its detail and prescriptive language simply the result trying to make those principles usable day-to-day.

In a theoretically pure environment, “an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” would be all the guidance needed.

Beyond the ivory tower, where revenue affects, among other things, stock price and option value, the cost of mergers and acquisitions, management prestige and tenure, clear, detailed, unambiguous guidance is more help than hindrance.

Even so, the critics are probably rejoicing that the Americans seem to have lost interest in IFRS, given up on convergence and decided to refocus on making US GAAP more American again.

Some, however, will be sad to see them go. If anyone has experience keeping accounting standards up with the constantly evolving attempts to avoid them, it is the FASB.

Not to suggest that IFRS 15 is perfect.

A perfect standard would provide perfect guidance perfectly consistent with its core principle in every detail and respect.  It would also live up to its promise and be fully converged.

IFRS 15 fails on both counts, although barely.

As pointed out by FASB member R. Harold Schroeder, the only dissenting vote, both IFRS 15 and ASC 606 diverge from their core principle in two important areas: variable consideration and the collectibility threshold.

Also, while IFRS 15 and ASC 606 use, spelling aside, the same exact wording in practically every sentence and paragraph, the same words do not necessarily mean the same thing everywhere.

Again the critics will chime in: how can IFRS 15 be so great if the experts can't agree? Or what about convergence? Didn't the experts promise us convergence? What's up with that?

One possible reply: getting 21 people from various countries, cultures and professions to agree on anything is like herding cats.  19 out of 21, a second FASB member abstained, is not just an achievement, but an accomplishment of biblical proportions.

Unfortunately, this answer is both alibistic and disingenuous.

Accounting is not, to paraphrase Max Weber, the art of compromise.

The aim of accounting is to represent economic reality faithfully. Since only one economic reality exits, only one way to represent it faithful can also exist. If the experts could not find and agree on that one way, they were either not trying very hard or are not particularly expert.

More subtly, while it is sometimes presented as a body of techniques designed to investigate phenomena, acquire new knowledge, form testable hypotheses and predictions, integrate and organize tested knowledge with the aim of discovering the true nature of the universe, accounting is not science either. Accounting has a more modest aim.

The real answer boils down to cost versus benefit. Not particularly noble, but there it is.

A simple fact, accounting does not seek the right answer. That would not be cost effective. Accounting is perfectly happy with an answer good enough without being so good that its cost exceeds its benefit.

Failing to find consensus, the boards could have tried again, spending another two, three, six, ten years?

In the meantime, investors would have continued using an old, inferior standard, basing decisions on information that was not good enough. Would that cost have been worth the benefit?

Unfortunately, there is no answer to the second charge.

The boards tried to converge, got close, but ultimately failed.

On the other hand, every country and region has its own business environment, accounting conventions, legal framework and regulatory practices, so IFRS is not applied consistently everywhere either.

Until the world appoints a single International Financial Regulatory Commissions empowered to enforce IFRS worldwide, making sure every company in every country applies IFRS in exactly the same way, trying to fully converge IFRS and US GAAP is a Sisyphean task.

Rather than wasting resources trying to achieve the unachievable, it is probably better the boards decided to devote their time to something else.

Turning to more practical issues.

On paper, IFRS 15 appears a radical departure from IAS 18.

Instead of transactions, IFRS 15 addresses contracts with customers.  Rather than goods and services, it splits recognition into point of time and over time.  In place of risk and rewards, control is the primary criterion.

Nevertheless, when it comes to applying IFRS 15, the majority of companies will see most differences melting away.

Historically, the problem with IAS 18 was not that it did not provide good guidance.  Its problem was vague and difficult to interpret guidance with so much wiggle room that avoiding it did not take too much effort.

Thus most companies, those that have tried to apply IAS 18 faithfully, in both letter and spirit, should find the transition fairly painless.

A minority, those that have been lax in applying, or purposeful in avoiding IAS 18’s guidance, will find the transition less painless.  Not only will it require new policies and procedures, upgraded systems and processes, but internal controls designed to make sure staff falls into line.

Unfortunately, there will also be some collateral damage. Although the current version of IAS 18 was issued in 1995, the world has changed significantly since then. Although small, a group of companies will find, even though they have tried their best to apply IAS 18 as intended, the transition to IFRS 15 will still require a revamp of accounting policies suitable to twentieth not twenty-first century.

Finally, from an accountant’s perspective, when faced with recalcitrant managers, nothing beats a good rulebook.

Every manager appreciates how reported revenue effects share price, stock option value or their tenure.  Few managers know, and even fewer care, how this number must be determined and calculated.

When management dreams and wishes overwhelm their sense of reality, and a rigorous beating about the head and shoulders is the only way to get cooperation, a hefty rulebook makes a fine blunt instrument.

By shifting from IAS 18’s focus on accounting treatment to reporting useful information, IFRS 15 reinforces the difference not only between International Financial Reporting Standards and International Accounting Standards but, more importantly, between International Financial Reporting Standards and the legislated standards (a.k.a. national GAAP) prescribed by law in many countries.

This distinction is especially important in countries where, unlike the US or UK, financial accounting standards are drafted by parliament and ministry, rather than independent body of experts.

Another difference, instead of the transaction, paragraph 1 focuses on the contract. The body of the standard not only defines the term and sets out identification criteria, but discusses, in some detail, how the criteria aught to be interpreted and applied.

While seemingly semantic, this shift from transactions to contracts will be critically important to some companies.

For example, companies for whom the transaction was a service to which they incidentally added a “free” good (such as a telephone handset) will find separating the contract into its two deliverables (performance obligations) challenging.

The third objective paragraphs states: “An entity shall consider the terms of the contract and all relevant facts and circumstances when applying this Standard” (emphasis added).

Considering all relevant facts and circumstances implies the written terms of the contract are the beginning, not the end.  In addition explicit rights and obligations, oral or implicit promises must also be identified and accounted for.  This particular feature of IFRS 15 could prove especially challenging for companies operating in countries where the gulf written and promised can be vast.

Finally, returning to paragraph 1, IFRS 15 discusses: “...the nature, amount, timing and uncertainty of revenue and cash flows” (emphasis added).

As such, it emphasizes the importance of payment, acknowledging that revenue without cash flow is like a water glass without the water.

Note: while IFRS 15 does not define “the transaction”, paragraph 47 does give guidance on “the transaction price”, a term that is used throughout the standard.

It is debatable whether the fourth scope exception, non-monetary exchanges in the same line of business, is necessary as the counterparties to these exchanges do not meet the definition of “customer” and so are scoped out by paragraph 6.

Also worth noting, in the event of an overlap, paragraph 7 specifies that the separation and/or measurement requirements in the standards listed above take precedence, in that IFRS 15 would only be used to separate and/or initially measure those parts not specified.  This consideration is especially important if the payment received from a customer is a financial instrument within the scope of IFRS 9.

Note: IFRS 15 makes no reference to assets used by others as this use is either covered by a contract (royalties) or in the scope of another standard (interest or dividends).

IFRS 15's scope section focuses on contracts with customers and thus does not elaborate on goods or services. Goods and services are, however, discussed in the body of the standard.

Paragraph 26 gives examples of some goods and services to which IFRS 15 may apply.

Some “inventory of a manufacturer” or “merchandise of a retailer” are instantly familiar.   Others “standing ready to provide goods or services” or “granting rights to goods or services to be provided in the future” may take getting used.

What will also take getting used to is that paragraph 26 merely elaborates on paragraph 22, which introduces the concept of recognizing revenue on the basis of performance obligations.

In other words, under IFRS 15, revenue is no longer recognized after delivering of goods or the rendering services.  Revenue is recognized after satisfying performance obligations (paragraph 31).

For some accountants, recognizing revenue on the basis of obligations may seem counterintuitive. For other it may seem like the most bizarre concept they have ever come across.

Fortunately, translating theory into practice, for most companies anyway, the difference will be purely semantic.

For example, if companies ABC and XYZ agree that ABC will sell and XYZ will buy product X, ABC satisfies its performance obligation by delivering product X.  In all practical respects, the delivery of product X, and the satisfaction of the performance obligation, are one and the same.

On the other hand, companies that have traditionally “sold free” goods or services will find that they need to make some adjustments to their policies and procedures.

If customers believe they are entitled to “free” goods or services, because it is stated in the contract, implied by common practice, promised by a sales representative or for whatever other reason, these “free” goods and services are separate performance obligations that must be accounted for as if they were not “free”.

For example, mobile phone operators will no longer be able to pretend handsets given to customers are “free”.  Similarly, software publishers cannot pretend that customers buy licenses without expecting “free” fixes, updates, upgrades or improvements.  Retailers may also be surprised that offers of unlimited returns are performance obligations just like the promises to service or repair vehicles given by automobile manufactures to their customer’s customers.

In each of these situations, the cash selling price of this “free” good or service must be determined (or estimated) and recognized separately from the “non-free” good or service.

Although they have never figured prominently in the vernacular, performance obligations are not new.  They have appeared in IFRS 3’s BC, IFRS 9’s IG, IFRIC 13’s BC and SIC-27.  IFRS 15 is, however, the first international standard to formally define the term and feature it prominently in its guidance.

Going back further, the term “performance obligation” was introduced in 1999 by the US SEC in SAB 101.  It became a formal, defined US GAAP term on September 15, 2009, when the ASC came online.

Also, while they too are performance obligations, licensing fees are special enough to receive their own, specific guidance (B 52 to 62), while usage-based royalties (B63) are singled out in even more detail.