Financial regulations for publicly listed companies could mean changes are afoot for some agencies when it comes to revenue recognition.
IFRS15 is the new revenue recognition standard for public companies. Broadly speaking, it provides guidance on accounting for revenue based on your client contracts.
How could this affect agencies?
If your agency is a listed company, it could impact the timing of revenue specifically, how and when you recognise it.
IFRS15 regulations say, a company must apply the following five steps for revenue recognition:
Client Contracts – have they signed on the dotted line?
The first changes of IRFS15 that could impact agencies? Work cannot be counted or recognised without a signed contract. Agencies have been known in the past, to start work without a signed client contract. While technically going against standard business practice, they play a bit fast and loose with the rules in order to get work done in a timely manner. Now, if your agency has shareholders, this practice will have to stop if the agency wants to recognise that effort as revenue.
Additionally, a contract should outline a clear set of deliverables, based on the client brief. If the client hasn’t signed a contract and an agency begins work, they won’t have a leg to stand on if the client brief changes. Whereas, a signed contract will ensure all parties are clear on the deliverables required up front. This will ensure any deviation from the original brief from the client, will require a new contract agreement. Providing an opportunity for the agency to be paid for any out of scope work.
Changes to Revenue Recognition
A key component of IFRS15 is how and when revenue is recognised. As a result – many agencies are turning to the WIP Methodology, when it comes to revenue recognition. This is based on a percentage complete method, where agencies look at the value of time used, compared to the client approved budget and turn this into a percentage.
In order to accurately recognise revenue in this way, agencies will have to review their jobs frequently. This means keeping an eye on time spent so far for each deliverable and assessing whether the time spent accurately represents the percentage complete. If it doesn’t, a write up or write off will need to be applied.
As this source states “For a performance obligation satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied.” [source: ifrs.org]
Examples of how agencies have changed their revenue recognition process
Publicis Groupe, released a document detailing the impact of IFRS15, on the Groupe. “Items that can be re-billed to clients do not come within the scope of assessment of operations, Publicis Groupe has decided to use a different indicator, i.e. Net Revenue, which is a more relevant indicator to measure the operational performance of the Groupe’s activities.”
For WPP, they summarised the impact of adopting IFRS15 on the Group’s consolidated income statement in their 2018 Interim Results. “The adoption of IFRS15 resulted in a change in our accounting for certain third-party costs. As a result, there was an increase in third-party costs included in revenue and costs of services.” [source: WPP 2018 Interim Results]
Complying with IFRS15 and using the WIP methodology to recognise revenue, ensures agencies are keeping a better eye on the progress of their job, and only recognising the revenue that has been earned so far. It brings attention to the agreed contract, potential scope creep and can also relieve the big write offs when jobs are closed. This makes for happy holding companies and shareholders alike.
Should only publicly listed companies then look towards this method? No, on the contrary – as of 2019, IFRS15 also applies to private companies and the WIP methodology brings benefits to all agencies. It is simply the right method.
Kenneth Weesgaard is an agency consultant and qualified accountant.