Revenue Recognition

Why Agencies Should Embrace IFRS 15 for Revenue Recognition

In an industry where transparency with clients is paramount, agencies are encouraged to view IFRS 15 not merely as a requirement but as the right methodology that aligns seamlessly with global standards. Discover how embracing IFRS 15 can streamline your revenue recognition, delivering clarity, compliance, and enhanced financial reporting. 

What is IFRS 15? 

IFRS 15, or the International Financial Reporting Standard 15, is a global accounting standard developed by the International Accounting Standards Board (IASB). It provides guidelines on recognising revenue from contracts with customers. IFRS 15 was introduced to standardise and improve how revenue is reported across different industries and countries, replacing the previous IAS 18 standard. Broadly speaking, it provides guidance on accounting for revenue based on your client contracts. 

What does IFRS 15 mean for agencies? 

IFRS15 regulations say, a company must apply the following five steps for revenue recognition:

Revenue Recognition

Client Contracts – have they signed on the dotted line?

Without a signed contract, the work performed cannot be officially recognised. Some agencies, in the hustle to get things done quickly for demanding clients, might have started work without the formality of a signed client contract. Sound familiar? For agencies with shareholders, this approach will have to stop if the agency wants to recognise that work as revenue.  

A contract should outline a clear set of deliverables, based on the client brief. In the absence of a signed contract, agencies risk being on shaky ground if the client brief changes. A signed contract will ensure all parties are clear on the deliverables required up front and any deviation from the original brief will require a new contract agreement. This also presents agencies with an opportunity to be compensated for any work that falls outside the initially defined scope. Revenue Recognition

Changes to Revenue Recognition

A key component of IFRS 15 is how and when revenue is recognised. As a result – many agencies are turning to Work In Progress (WIP) based revenue recognition. We explain this further in our golden rules for revenue forecasting but Work In Progress (WIP) based revenue recognition is based on a percentage of work complete method, where agencies look at the value of time and resources used, compared to the client approved budget. 

For precise revenue recognition using this method, agency teams need to engage in regular job reviews. This involves closely monitoring the time invested in each deliverable and evaluating if it accurately mirrors the percentage of job completion. Should there be a mismatch, a necessary adjustment through a write-up or write-off will need to be applied. 

How agencies have changed 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 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.”

Revenue Recognition

 

WPP Group’s consolidated income statement, for six months ended 30 June 2017 and the year ended 31 December 2017.

Why Agencies Should Embrace IFRS 15 for Revenue Recognition 

By aligning with IFRS 15 and adopting WIP-based revenue recognition, agencies can fine-tune their monitoring of job progress, ensuring that revenue recognition reflects the earned value to date. This approach brings attention to the agreed-upon contract terms and protects agencies against potential scope creep which we all know is one of the biggest killers for agency projects. IFRS 15 not only aligns agencies with global standards but also helps set your team up for financial reporting and agency growth.  

If you’re an agency looking to fine-tune your financial operations, get in touch and Tangram can help with agency finance and operations. 

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Helen Johnson 
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