WIXLIB

Revenue recognition under IFRS 15A critical evaluation of predefined purposes andimplications for improvementSascha HaggenmüllerA thesis submitted to the University of Gloucestershire in accordance with therequirements of the degree ofDoctor of Business Administrationin the School of Business and ManagementApril 20190

AbstractThis study investigates problems and major challenges that may arise during theimplementation of IFRS 15 and assesses the likely impact on firms’ profitability andperformance. Scientific discussions on IFRS 15 are far from reaching an in-depthunderstanding of the implementation issues and various interpretations of the newstandard as previous research projects were conducted at a point in time that onlyallowed a preliminary and superficial assessment as companies were not yet preparedto implement the new standard. This study aims to provide a significantly deeper levelof detail and profound insights as it was conducted during the time that IFRS 15became effective.The author applies a qualitative approach. Based on a constructivist paradigm,qualitative data is gathered through 15 semi-structured in-depth interviews in Germanywith auditors, mainly certified public accountants with outstanding experience in IFRS15, and accountants involved or in charge of the implementation of IFRS 15 in theircompanies. The interview guide was developed based on the implications from otheraccounting studies, theoretical concepts and knowledge gaps identified in theliterature review. A qualitative analysis of the 2017 annual reports of the German DAX30 companies is conducted to triangulate the results related to the likely impact onfirms’ profitability and performance.The results of the study indicate that IFRS 15 is mainly addressing specific industries,which had difficulties in applying previous IFRS revenue recognition requirements dueto missing or unspecific guidance forcing them to use standards outside of IFRS. Dueto its complexity, however, IFRS 15 also affects companies with simple businessmodels and its implementation may be unexpectedly time-consuming, work-intensiveand difficult without leading to material changes. Although no indication is detectedthat earnings management or manipulation may be related to the adoption of IFRS 15,the standard still requires interpretation and professional judgment that may be subjectto erroneous or divergent accounting for transactions. Although IFRS 15 appears tobe necessary, it is anticipated that it rather represents a complex combination ofvarious existing standards and consequently fails to help the profession. Therefore,the predefined purposes of IFRS 15 formulated by the IASB are, at minimum,questionable from a practical viewpoint.1

Author’s DeclarationI hereby declare that this dissertation entitled “Revenue recognition under IFRS 15 –A critical evaluation of predefined purposes and implications for improvement”,submitted to the University of Gloucestershire in accordance with the requirements ofthe degree of Doctor of Business Administration in the School of Business andManagement, is my own original work and, to the best of my knowledge and belief,contains no material previously published except where acknowledgement is made.I certify that the substance of this dissertation has not, either in whole or in part, alreadybeen or is not currently being submitted for any other degree at this or any otheruniversity.I certify that any help received in preparing this dissertation and all sources used havebeen acknowledged.Signature of Candidate:Sascha HaggenmüllerMaster of Arts (M.A.)Munich, GermanyApril 20192

DisclaimerNote of LiabilityThe information in this dissertation is distributed on an ‘as-is’ basis without warranty.While every precaution has been taken in its preparation, neither the author nor theUniversity of Gloucestershire shall have any liability to any person or entity withrespect to liability, loss, or damage caused or alleged to be caused directly or indirectlyby the information described herein.3

AcknowledgementsAt first, it is most important to note that this research project would not have beencompleted without the support and expertise of various people. Due to anonymityreasons, I cannot individually acknowledge each auditor or accountant whose insightsformed the basis for the research findings and also improved the structure and contentof the interview guide in the course of pilot interviews. These people gave their time,expertise and energy during their participation in the data collection interview. Pleaseaccept my sincerest thanks for your valuable contributions.On an individual basis, I owe an enormous debt of gratitude to my first supervisor, DrKerry Sullivan. At an early stage of this research project, Kerry guided me along thedifficult path of research, rather as a sparring partner than a micro-managingsupervisor ensuring a great degree of freedom and creativity. Secondly, I want to saythank you to my second supervisor, Dr Doaa Aly. Joining the research project at alater stage in fall 2016, she was guiding me through the RD1 process and helping mealong as major questions arose in the course of the project. Their profoundexperience, insights and knowledge, combined with accessibility, short noticefeedbacks and also a good sense of humor, made the journey rewarding andunforgettable.To the DBA staff: Ms Charley Sercombe, Ms Daniela Sommer, Dr Philippa Ward, DrRobin Bown and Prof Dr Volker Wittberg, I sincerely thank you for your assistancereceived over the course of this research.To the other students of Cologne Cohort 5: You became real friends in the past fewyears and made this journey unforgettable. Our great weekends in Cologne, learningmeetings all over Germany and in Cheltenham gave me valuable insights to developmy research project.Finally, I would like to thank my partner Nicole Saleh, who moved from the UnitedStates to Germany so that we could live together, and my parents, Andrea and HansHaggenmüller. The love, support and patience of these people mean everything tome and such a project would not be possible without their backing. Therefore, Idedicate this dissertation to them.4

Table of ContentsAbstract. 1Author’s Declaration . 2Disclaimer . 3Acknowledgements . 4List of Abbreviations . 11List of tables . 141.2.Introduction . 201.1Background and rationale . 201.2Research aim and questions . 221.3Method of study . 251.4Constraints and limitations . 261.5Structure of the thesis . 271.6Remarks on vocabulary . 281.7Conclusion . 29IFRS: History, background, and revenue recognition requirements . 302.1History and background of IFRS . 302.1.1Terminology . 302.1.2History and implementation of IFRS . 312.1.3IFRS development process . 342.2Previous revenue recognition requirements under IFRS . 352.2.1The amount of revenues . 352.2.2Timing of revenue recognition . 362.2.3IAS 11 – Construction Contracts . 362.2.4IAS 18 – Revenue. 382.2.5Related interpretations. 392.3New revenue recognition requirements under IFRS . 412.3.1History of IFRS 15 . 412.3.2Scope of IFRS 15 . 422.3.3Concept of IFRS 15 – The five-step model and disclosures. 422.3.3.1Identification of the contract(s) with the customer . 442.3.3.2Identification of the performance obligations in the contract . 452.3.3.3Determination of the transaction price . 455

2.43.2.3.3.5Revenue recognition when (or as) the entity satisfies a performance obligation . 472.3.3.6Disclosures . 47Conclusion . 483.1Previous IAS on revenue recognition . 513.2Revenue recognition under IFRS 15 . 543.2.1Importance and relevance of IFRS 15 . 553.2.2IFRS 15 readiness . 563.2.3Potential effects of IFRS 15 . 583.2.4IFRS 15 implementation . 61Adoption and implementation of IFRS . 633.3.1Push towards accounting harmonization . 633.3.2Effect on quality as well as profitability and performance . 653.3.3Implementation of IFRS . 673.4Interpretation and judgment within IFRS . 703.4.1Principles-based standards and professional judgment . 713.4.2Language and probability and uncertainty expressions. 733.5Manipulative actions in IFRS . 763.5.1Motivation and incentives for earnings management . 763.5.2Earnings management techniques . 783.5.3Earnings management in the context of IFRS . 803.6Knowledge gap and research questions . 823.6.1Perceptions regarding the implementation of IFRS 15 . 823.6.2Different potential interpretations and manipulation in IFRS 15 . 843.6.3The likely impact of IFRS 15 on firms’ profitability and performance . 873.7Conclusion . 88Theoretical framework. 904.1Institutional theory . 904.1.1Conception of DiMaggio and Powell . 914.1.2Previous studies on institutional theory . 924.2Discussion . 954.2.1Critical assessment of further theoretical concepts . 964.2.2Justification of institutional theory as the theoretical lens . 974.35.Allocation of the transaction price to the performance obligations. 46Literature review . 513.34.2.3.3.4Conclusion . 98Research methodology and design . 1005.1Philosophical foundations and contextualization . 1006

5.1.1The ontological question . 1005.1.2The epistemological question . 1015.1.3The methodological question . 1025.1.4Research paradigms. 1025.1.5Discussion of research paradigms in accounting . 1035.2Research approach and design . 1045.2.1Paradigm . 1045.2.2Research methodology . 1065.2.2.1Quantitative approach . 1065.2.2.2Qualitative approach . 1075.2.2.3Mixed methods . 1075.2.2.4Discussion and justification of the constructivist approach . 1085.2.35.2.3.1Interview types . 1095.2.3.2Discussion and justification of semi-structured interviews for the research . 1115.2.3.3Supplementary document analysis . 1125.2.4Sample size . 1135.2.4.2Sampling technique . 1155.2.4.3Data collection process . 1215.2.4.3.1Pilot study . 1225.2.4.3.2Development of interview guide . 1225.2.4.3.3Scaling . 1415.2.4.3.4Interview process . 1425.2.4.3.5Transcribing and translating data . 1445.2.4.3.6Selection of documents for triangulation purposes . 144Data analysis . 1455.2.5.1Data analysis process . 1455.2.5.2Content analysis . 1475.2.5.3Data presentation . 151Quality criteria . 1515.3.1Reliability and validity in qualitative research . 1525.3.2Implemented measures for validity and reliability . 1535.46.Data collection . 1135.2.4.15.2.55.3Research method . 109Ethical considerations . 1565.4.1Ethics in research . 1575.4.2Ethics framework . 157Analysis and results . 1596.1Previous revenue recognition requirements under IFRS . 1596.1.1Distinction between IAS 11 and IAS 18 . 1617