Although the new international revenue accounting standard, IFRS 15 – Revenue from Contracts with Customers, is only effective for year ends beginning on or after January 1, 2018, it is time to start thinking about the potential impact on your Investment Management company. The key consideration is: will the revenue that your company is recognizing in 2016 and 2017 still meet the same timing and recognition requirements under the new standard?

This new section will replace all existing guidance. The old standards allowed for more judgement, whereas the new standard is more prescriptive. The objective of this new standard is to provide a five-step approach to revenue recognition that includes identifying contracts with customers, identifying performance obligations, determining transaction prices, allocating transaction prices to performance obligations and recognizing revenue when performance obligations are satisfied.

Some examples of how this new standard may have an impact on this sector are as follows:

• Performance-based fees: under the new standard, these fees can only be recognized when it is highly probable that a significant reversal in the amount of cumulative revenue will not occur. The existing revenue recognition standard allows for more judgement in this area. This may result in a change in the timing of recognition of these fees.
• Non-recurring fees: such fees would include new client signing fees. Under this new standard, these fees may have to be deferred and amortized over the expected term that the client will be receiving services from the Investment Management company. Currently these fees are immediately recorded as revenue. It may be difficult to estimate the expected term of a client relationship and, alternatively, companies will have to more specifically identify why and how these fees cover current year costs in order to support immediate recognition.

These possible revenue timing shifts could have further business consequences on Investment Management companies. Management will need to consider the related effects on existing key personnel compensation arrangements, performance measurement ratios, loan covenants and income taxes. In addition, this could impact the regulatory minimum capital calculations and therefore the funding needs of the company.

It’s best to get a head start and refer to the guidance. An excellent place to start is the CPA Canada IFRS 15 Resources page.