The IFRS 15

The International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS)

The International Accounting Standards Board (IASB) developed International Financial Reporting Standards (IFRS) to provide direction on how contract-based revenue should be recorded. Although it will be implemented in 2018, IFRS was first proposed in 2014. The IFRS did, however, ask for feedback from society before the proposed modifications were put into effect. This essay demonstrates how certain areas of BC63 should be changed to improve the draft regarding revenue from customer contracts.

Unclear Phrases in BC63 Paragraph

The opening few phrases of the so-called paragraph BC63 are unclear in some important ways. The first sentence suggests that the assessment of the intellectual properties is determined by their potential to meet the client’s demands. Therefore, it is evident that the proposed changes have been formulated in a way that suits the dictations of paragraph B59A (a). Nonetheless, it is worth noting that article B59 has two sub-articles - articles a and b - and, thus, it is not right to overlook the dictations of one of the sub-articles (IASB, 2015). As sub-article b suggests, there is a potential that the ability of the customer to derive the benefit of intellectual property will be affected by the ongoing in the respective company (European Financial Reporting Advisory Group, 2015). As each day goes by, organizations have been coming up with better innovations and creative ways of enhancing their production activities, which may ultimately affect the nature of the product. Whenever such a case occurs, the customer might not be in a position to get the common benefit he/she was getting from the older version of the product, which would be contrary to the agreement between him/her and the firm. On the other hand, dictating that the assessment of the product should be based on its efficiency in meeting the customer’s needs would be equal to hindering the organizations from embracing creativity and innovations.

Importance of Innovation and Creativity

However, it is imperative to note that companies engage encourage innovation to achieve two primary objectives; expand and counter competition, hence, making them remains relevant in the market. It is, thus, evident that limiting the firms from enhancing their creativity levels would consequently lead to their decreased growth. Therefore, it is prudent for the two sub-articles to be included in the proposed rules to guarantee the welfare of the customers and that of the organizations as well.

Ambiguity in the Proposed BC63 Paragraph

Additionally, the third sentence of paragraph BC63 proposes that ’if the activities are expected to change the form or functionality of the intellectual property, those activities are considered to significantly affect the customer’s ability to obtain benefit from the intellectual ability’ (IASB, 2015). First, it is entirely true that the activities (the advancements) done on an intellectual property might affect the form - or even the functionality of the intellectual property- which would ultimately affect the customer’s potential to derive the desired benefits. Nonetheless, in this case, there exists an ambiguity between the advancements that may influence the client to gain the supposed benefits and his/her ability to obtain the benefits (European Financial Reporting Advisory Group, 2015). In other words, the wording of the statement depicts that the firm should not engage in any innovative practices since doing so would affect how the intellectual property works. As mentioned before, such convictions are wrong since it is not guaranteed that an advancement of a given form of intellectual property will limit the user from acquiring the benefits he/she desires. It is paramount to note that most of the creativities are done with the primary objective of making sure that the consumers derive the maximum utility possible from the use of a given product. The newer versions of a product (which would arise from the activities performed on the property) might, thus, not have any effect on the client’s potential to make use of the property and gain some benefits. Therefore, it is important that the wordings of this statement be revised to get rid of this ambiguity.

Conclusion

Although the proposed IFRS 15 policies are aimed at making sure that licensing of the intellectual property is efficient and that the clients gain the desired benefits, it is important that some of the articles such as BC63 be revised before the dictations are implemented. Specifically, the first and the third sentences of the article should be reviewed as they limit the organizations from embracing innovation, which is an integral factor that makes it possible for them to expand and counter their rivals. The first sentence depicts that the main essence of the new rules would be to safeguard the interests of the customers only, thus, ignoring the interests of the firm. On the other hand, the second statement points out that any innovations done on a product would consequently affect its functioning, which would ultimately limit the ability of the customer to gain the desired benefits. However, as noted in the above analysis, it is evident that the innovations might lead to the better functioning of the intellectual property, thus, enabling the customer to gain more benefits.

References

European Financial Reporting Advisory Group. (2015). IASB ED: Clarifications to IFRS 15 revenue from contracts with customers. European Financial Reporting Advisory Group. Retrieved on 2 September 2017, from https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FLists%2FProject%20News%2FAttachments%2F151%2FEFRAG__-_Comment_letter_-_Clarifications_to_IFRS_15.pdf&AspxAutoDetectCookieSupport=1

IASB. (2015). Exposure draft ED/2015/6. Clarifications to IFRS 15. IFRS Foundation.