01 Mar,2019

MFRS 15 Implementation Issues and

Challenges in for the Construction,
Telecommunication and Automotive Industries
Published: February 2019

By Dr. Kamaruzzaman Muhammad and Associate Professor Dr. Erlane K Ghani

Introduction

Revenue recognition has always been a controversial issue in accounting especially on

long-term contracts or services (Silvia, 2014). For many entities, revenue is the largest
single number in the financial statements and often used as a key determinant for many
performance indicators such determination of key personnel remuneration package, future
investment decisions, tax expenses and more importantly, their reputation (ACCA, 2011).
Acknowledging the importance of revenue to be measured and presented fairly in the
financial statements, the Malaysian Accounting Standards Board (MASB) has issued MFRS
15 Revenue from Contract with Customers in 2014. The objective of MFRS 15 is to
establish principles for entities reporting on the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers (MASB, 2015; Delloite,
2016). Prior to the implementation of MFRS 15, the existing revenue standards such as
MFRS 118 Revenue and MFRS 111 Construction Contracts have limited guidance
particularly on complex transactions, resulting in different accounting treatments for similar
transactions.. With MFRS 15, it addresses shortcomings of MFRS 118 and MFRS 111
asbetter guidance is laid down on how and when an entity shall recognise revenue from
contract with customers and provide more information and disclosure in the financial
statements. This standard is to be adopted for annual periods beginning on or after 1
January 2018, but earlier adoption is also permitted.

The Five-Step Model Framework for MFRS 15

The core principle of MFRS 15 is that an entity shall recognise revenue to show the transfer
of promised goods or services to the customers in an amount that reflects the
consideration to which the entity supposes to be entitled in exchange for the goods or
services. Under this standard, the core principle of revenue recognition is represented by a
five-step model framework, depicted in Figure 1 and briefly explained further below:
 Figure 1 Five-step model framework of revenue recognition under MFRS15

Step 1: Identify the contract(s) with a customer.

MFRS 15 defines a contract as an agreement between two or more parties that establishes
the enforceable rights and obligations and sets the criteria for each contract to be fulfilled.

Step 2: Identify the performance obligation in the contract.

 A performance obligation is a promise (explicit and implicit) in a contract with a customer
to deliver goods or services.

Step 3: Determine the transaction price.

The transaction price is the total consideration that the entity is expected to be entitled in
exchange for the transfer of the goods or services promised to the customer, excluding the
amount collected on behalf of the third party (if any).

Step 4: Allocate the transaction price to the performance obligations in the contract.

Once a performance obligation is identified, the transaction price is allocated. Some

contracts may have more than one performance obligation. For example, a contract that
includes the delivery of a product with packages involving free services and extended
warranties. In this situation, the transaction price is allocated based on the respective
stand-alone selling price (SSP). The SSP is the price of the goods or services if sold
separately to the customers based on an observable price. When SSP is not directly
observable, significant judgement is needed to estimate the SSP.

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.

The obligation of performance is satisfied when the asset is transferred (or as) the
customer acquires control over the asset whose obligations of execution can be fulfilled
either at one time or from time to time, depending on the contract with the customer. Upon
satisfying the obligation, revenue can be recognised.

Issues and Challenges of MFRS 15 Adoption

The requirements set out in MFRS 15 significantly impact some industries such as
construction, telecommunication and automotive industries (Silvia, 2014). The entities in
these industries are facing difficulties in implementing this standard, at least at the initial
stage of its adoption. The issues and challenges faced by these industries are attributed to
the nature of the business environment and the types of business activities of the entities
(Ling & Ramesh, 2017).

Construction Industry

The contracts in the construction industry often include design and building houses that
come with fully-furnished or semi-furnished, free parking lot, security and maintenance
services. The contractors provide a significant integration of goods and services to their
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 customers, incurring costs during the bidding process and sale commission (KPMG, 2014).
Such contracts are agreed upon the completion of the houses. However, in the Malaysian
scenario, the contracts often are agreed before the completion of the houses and this
poses a challenge to the contractors on how to recognise revenue using the five-step
model. In particular, the contractors need to consider the following:

Whether the revenue is to be recognised progressively over time (stage of completion)

or at a point of time (completion method)?
Which method can be used to measure the stage of completion should the contract
with customers contains a clause that permits revenue to be recognised progressively?
Whether the revenue is to be recognised at a specific on time; for example, on the
transfer of control should the contract does not permit revenue to be recognised
progressively?
How the contractor should measure the contract progress?
How the contractor should account for contract modification and variations?
How the contractor should account for a loss-making contract?
Whether the cost during the bid process can be capitalised?

Telecommunication Industry

Contracts in the telecommunication industry often include packages with free handsets
with 12- or 24-months service plans/agreement that provide voice, SMS and data services
(Fern, 2017). In addition, there are some contracts that include additional goods and
services such as an option to upgrade the handset, roaming passes, weekend data, pocket
Wi-Fi, free trial access to video on demand services and club member privileges. The
transaction price needs to be fairly and appropriately allocated to all goods and services
according to performance obligation in the contract based on SSP. With the variety of
goods and services bulked into one contract, the telecommunication entities may face
challenges in applying the five-step model. This is because the SSP of the goods and
services are not all observable and easily measured. In particular, the entities need to
consider the following:

Whether the revenue is to be recognised over time or at a point in time?

How to allocate revenue related to the distinct goods and services?
How to account for the contract modification?
Whether the costs relating to obtaining a contract need to be capitalised or otherwise?
Whether the revenue needs to be adjusted in order to account for time value of
money?

Automotive Industry

The contracts in the automotive industry often contain delivery of a vehicle with packages
involving discounts or rebates, free services and extended warranties. MFRS 15 requires
the entities including automotive entity to allocate the transaction price into individual
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 goods or services. This involves identification of performance obligation and assessment of
the SSP for each performance obligation, and allocation of the transaction price into the
respective performance obligation (Ramesh, 2017). The contractors may face challenges in
the allocation of transaction price to the respective departments such as revenue on the
sale of the vehicles to the sales department and the revenue on the maintenance services
provided to the customers to the maintenance service department. In addition, the
contractors may face difficulties in identifying the performance obligation when the
services have not been provided yet by the contractors to the customers. In particular, the
automotive entities need to consider the following:

Whether the revenue needs to be recognised over time or at a point in time?

What would be the impact of the standard on the pricing mechanism such as variable
amount?
How to account the different types of warranty coverage offered to the customers?
How to account the distinct vehicle and maintenance services offered?

Conclusion

In sum, the introduction of MFRS 15 has a significant impact on the entities’ financial
reporting where the five-step model framework provides a new and general guideline of
revenue recognition for contract with customers. It is important to understand the
mechanism and requirements of the framework in order to successfully applying the
standard. The application of the five-step model framework requires support and inputs
from all divisions of an entity and at times, involves significant judgement. Furthermore, the
entity should take into account the model framework in drafting future contracts with the
customers in order to mitigate issues arising from MFRS 15 implementation.

ACCA. (2011). Revenue Recognition. Retrieved from

https://www.accaglobal.com/my/en/student/exam-support-resources/fundamentals-
exams-study-resources/f7/technical-articles/revenue-recognition.html

Delloite. (2016). IFRS 15 — Revenue from Contracts with Customers. Retrieved from
https://www.iasplus.com/en/standards/ifrs/ifrs15

Fern, K.S. (2017). MFRS 15 implementation challenges in the telecommunications industry.

Retrieved from https://www.pwc.com/my/en/perspective/mfrs/implementation-challenges-
in-the-telecommunications-industry.html

KPMG. (2014). Impacts on the construction industry of the new revenue standard.
Retrieved from https://home.kpmg.com/content/dam/kpmg/pdf/2014/10/First-
Impressions-O-201409-Impacts-on-the-construction-industry-of-the-new-revenue-
standard.pdf

Ling, T.C. & Ramesh, M. (2017). One step closer to MFRS 15. Retrieved from
https://www.pwc.com/my/en/perspective/mfrs/one-step-closer-to-mfrs15.html
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 MASB. (2015). MFRS 15 Revenue from Contracts with Customers. Accounting Standards,
(September 2015), 727–787. Retrieved from http://www.masb.org.my/

Ramesh, M. (2017). MFRS 15 implementation challenges in the automotive industry.

Retrieved from https://www.pwc.com/my/en/perspective/mfrs/implementation-challenges-
in-the-automotive-industry.html

Silvia, M. (2014). IFRS 15 vs. IAS 18: Huge Change Is Here! Retrieved from
https://www.ifrsbox.com/ifrs-15-vs-ias-18/
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