One step closer to MFRS 15

3 November 2017
By Tay Choon Ling, Assurance Executive Director, PwC Malaysia and
Mahesh Ramesh, Assurance Executive Director, PwC Malaysia

The new revenue model

The objective of the Malaysian Financial Reporting Standards 15 (MFRS 15) is to provide a single, comprehensive revenue recognition model for all contracts with customers, improving comparability within industries, across industries, and across capital markets.

Is my organisation affected by MFRS 15?

The answer to this is most likely, yes. However, the extent of the impact is dependent on revenue arrangements within your organisation. Existing revenue standards have limited revenue guidance that is often difficult to apply to complex transactions.

For example, revenue on extended services (such as warranties) that are promised in addition to the goods delivered have not always been recognised. There is also uncertainty whether for some construction contracts, revenue should be recognised as the construction occurs or upon its completion.

The new revenue standard prescribes a robust framework for recognising revenue, setting out a five-step approach.

The five steps might appear simple, but significant judgement will be needed to apply the underlying principles. Most entities should expect some level of change from their current practice.

Central to this approach is the concept that revenue is recognised when control is transferred to a customer, which will require judgement for many transactions.

Additionally, significantly enhanced disclosures are required surrounding specific accounting estimates and judgements such as determining the transaction price, allocating the transaction price to performance obligations and determining the satisfaction of performance obligations.

The 5-step approach to revenue recognition

What are some of the key changes?

Accounting perspectives

Allocating bundled sales - Additional revenue may need to be allocated to discounted or ‘free’ products provided at the beginning of a service. Revenue recognised may no longer reflect billed revenue.

Contract costs - MFRS 15 is likely to affect the accounting treatment of customer acquisition costs and certain contract fulfilment costs.

Profiling contracts into portfolios - Companies may apply MFRS 15 to a portfolio of contracts or performance obligations. They need to be mindful though as this approach may create additional implementation challenges and complexities.

Timing of revenue recognition - Identifying performance obligations are key to determining when revenue can be recognised, whether over time or at point in time.

Implementation challenges and other considerations

The following should be considered as part of the implementation process of MFRS 15:

Identify gaps in relation to information, data and processes between the current MFRS practice and MFRS 15. This consists of examining processes supporting the recognition of revenues and identifying IT systems that provide the data required for calculation of adjustments arising from MFRS 15 adoption.

Establish a process to develop models that determine and allocate transaction price based on performance obligations, especially where revenue contracts are voluminous.

Establish a process to review guidelines, process flow designs and contract templates in relation to products and packages.

Conduct an impact assessment of the organisation’s Key Performance Indicators (KPIs) matrix arising from the adoption of MFRS 15. This would be applicable not only to senior management teams but also sales commission structures.

Identify data and information gaps for full retrospective or modified transition methods.

Assess tax implications (if any) of MFRS 15 adoption

Next steps

To successfully implement MFRS 15, early preparation is key. With less than a few months to the adoption date, it is important to understand the implications of applying the standard.

Recognising how MFRS 15 will impact your financials and how to implement it will help to minimise interruption to your business.

More importantly, it will result in a smoother implementation process with higher compliance post-implementation.

In the next few weeks, we will be sharing some of these issues across a number of industries here. Watch this space.

Coming up: MFRS 15 implementation challenges in the telecommunication industry