How Generative AI can be used in compliance with IFRS 15?

Generative AI can provide substantial support for companies in complying with IFRS 15 (Revenue from Contracts with Customers) through the following ways: -

?

1.????? Automating Contract Review and Interpretation: Generative AI can automatically analyze and understand contracts, identifying important details such as performance obligations, payment schedules, and changes to the contract. It can help pinpoint when revenue should be recognized and suggest ways to comply with IFRS 15.

?

2.????? Identifying Performance Obligations and Allocating Revenue: AI can spot different parts of complex contracts that involve performance obligations and help distribute the price of transactions among these parts. It ensures that money is allocated correctly based on past data, the value of products, and factors specific to each customer.

?

3.????? Predicting Uncertain Revenue Elements: Generative AI can forecast uncertain parts of revenue, like rebates, discounts, or bonuses, by looking at past data. This helps businesses adjust how they recognize revenue based on these unpredictable factors.

?

4.????? Contract Modifications and Adjustments: AI can keep an eye on contracts and find any changes that affect how revenue is recognized. It recalculates the price of transactions and updates the revenue model whenever there are changes in the contract terms, making sure everything is in line with IFRS 15.

?

5.????? Revenue Recognition for Long-Term Contracts: For businesses dealing with long-term agreements, AI can track the progress of projects, calculate how much of the project is complete, and adjust revenue recognition over time. This ensures that revenue is recognized accurately across different accounting periods.

?

6.????? Contract Costs and Expense Capitalization: Generative AI can automatically keep track of costs related to contracts (like sales commissions) and decide when to capitalize them and when to expense them. This makes sure that costs are treated correctly according to IFRS 15.

?

7.????? Predictive Analytics for Revenue Forecasting: AI models can look at patterns of revenue, predict future income, and consider factors like seasonal changes. This leads to more precise revenue forecasts and helps find any issues with the contract's structure.

?

8.????? Scenario Analysis and Sensitivity Testing: AI can create and evaluate different scenarios for revenue recognition based on changes in contracts, customer behavior, or the economy. This allows companies to test how changes might affect their revenue.

?

9.????? Automated Disclosure Reporting: Generative AI can automatically put together detailed reports required by IFRS 15. It looks at contract data and writes explanations about how revenue is recognized, any changes to contracts, and important performance indicators.

?

10.?? Monitoring Regulatory Compliance: AI can watch for updates to IFRS 15 rules and offer advice on how to adjust revenue recognition methods. It makes sure companies stay up-to-date with the changing requirements by pointing out potential risks and suggesting necessary changes.

?

By making processes more efficient, improving accuracy, and ensuring adherence to rules, Generative AI ?can plays a crucial role in making revenue recognition under IFRS 15 smoother.

Here are some simple examples with calculations that demonstrate how Generative AI can help with IFRS 15 compliance, specifically in the areas of revenue recognition and allocation.

1. Identifying Performance Obligations and Revenue Allocation

Scenario:

A software company enters into a contract to sell a package that includes:

- Software license ($1,000)

- Installation service ($200)

- 1-year support ($300)

Total contract price = $1,200

Under IFRS 15, the company must allocate the transaction price to the distinct performance obligations based on their standalone selling prices. However, the total price of $1,200 is less than the sum of the individual selling prices.

AI Assistance:

Generative AI can analyze historical contracts to estimate standalone selling prices and automatically allocate the transaction price.

1. Step 1: Calculate Standalone Selling Prices:

- Software license: $1,000

- Installation: $200

- Support: $300

Total standalone price = $1,500

2. Step 2: Allocate Transaction Price Proportionally:

To allocate the total price ($1,200) to each obligation based on their standalone selling price, AI would calculate:

- Software license: (1,000/1,500 )*1,200 = 800

- Installation: (200/1,500)*1,200 = 160

- Support: (300/1,500)* 1,200 = 240

Allocated transaction price:

- Software license: $800

- Installation: $160

- Support: $240

Revenue Recognition:

- The company recognizes $800 when the software is delivered.

- $160 is recognized when installation is completed.

- $240 is recognized over the 1-year support period.

2. Predicting and Recognizing Variable Consideration

Scenario:

A manufacturing company signs a contract to sell machinery for $500,000 but offers the customer a 10% discount if they purchase more than 10 units during the year. The final consideration will depend on whether the customer reaches the purchase threshold.

AI Assistance:

Generative AI can predict the likelihood of the customer purchasing more than 10 units based on historical data and market trends.

1. Step 1: Predict Variable Consideration:

AI analyzes past sales data and predicts an 80% probability that the customer will purchase more than 10 units, triggering the discount.

2. Step 2: Estimate Expected Revenue:

Based on the probability of the discount:

- Discounted price = $500,000 - (0.10 *500,000) = 450,000

- Expected revenue = (0.80 * 450,000 + 0.20 *500,000 = 460,000)

3. Step 3: Revenue Recognition:

The company recognizes $460,000 based on the expected outcome, with adjustments made later if the actual outcome differs.

---

3. Contract Modification and Revenue Reallocation

Scenario:

A construction company enters into a contract to build a warehouse for $1,000,000. Partway through the project, the customer requests additional work, which increases the contract price by $200,000.

AI Assistance:

Generative AI can quickly identify the contract modification and reallocate the transaction price to the performance obligations.

1. Step 1: Original Contract:

- Original contract price = $1,000,000

- Original performance obligation: Build the warehouse.

2. Step 2: Contract Modification:

The contract is modified to include additional work worth $200,000.

3. Step 3: Reallocation of Revenue:

AI reallocates the total contract price ($1,200,000) to performance obligations:

- Original work (60% complete): $1,000,000 * 60% = $600,000 recognized so far.

- Additional work is considered a new obligation with revenue recognized as it progresses.

The company now needs to recognize revenue for the remaining $600,000 and the new $200,000 as the work progresses.

4. Percentage-of-Completion for Long-Term Projects

Scenario:

A company is building a custom machine over two years for a contract price of $1,000,000. At the end of year 1, 40% of the work is complete.

AI Assistance:

Generative AI tracks the project’s progress and updates the revenue recognized accordingly.

1. Step 1: Calculate Percentage of Completion:

- 40% of work is complete at the end of Year 1.

2. Step 2: Recognize Revenue:

Revenue to be recognized at the end of Year 1 = ( 40*1,000,000 = 400,000 ).

3. Step 3: Revenue in Year 2:

The remaining 60% is recognized in Year 2 as the work is completed:

- Year 2 revenue = ( 60%*1,000,000 = 600,000 ).

---

5. Adjusting for Contract Costs and Expense Capitalization

Scenario:

A company incurs $50,000 in costs to acquire a new contract. The contract has a duration of 5 years, and IFRS 15 allows these costs to be capitalized and expensed over the contract’s life.

AI Assistance:

Generative AI can track contract acquisition costs and automate the amortization of expenses over the contract duration.

1. Step 1: Capitalize the Acquisition Cost:

Total acquisition cost = $50,000

2. Step 2: Amortize Costs Over 5 Years:

Annual amortization = 50,000/5 = 10,000

3. Step 3: Recognize Expense:

Each year, the company will recognize $10,000 in expenses related to the acquisition cost.

6. Predicting Future Revenue from Long-Term Contracts

Scenario:

A telecom company signs a 3-year contract to provide internet services for $300,000. The company needs to recognize revenue over the contract’s duration but also wants to predict future revenue streams.

AI Assistance:

Generative AI predicts customer behavior based on historical data and market trends, helping the company recognize and forecast revenue.

1. Step 1: Calculate Annual Revenue:

The contract spans 3 years, so the company recognizes $300,000 /3 = $100,000 per year.

2. Step 2: Predict Future Revenue:

AI predicts an 80% likelihood that the customer will renew the contract for another 3 years based on similar contracts and market data.

3. Step 3: Adjust Revenue Forecast:

The company forecasts additional potential revenue based on the AI prediction, planning for a possible extension of the contract.

Conclusion:

These examples show how Generative AI can help automate complex processes under IFRS 15, from performance obligation identification and transaction price allocation to variable consideration predictions and contract modification adjustments. By leveraging AI, companies can improve accuracy, compliance, and efficiency in revenue recognition.