What all Accounting Ratios does IFRS 15 connects which may get affected?
IFRS 15, which establishes principles for reporting information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer, may impact a number of key accounting ratios used in financial analysis. These include:
- Gross Profit Margin: This ratio could be affected by changes in the timing of revenue recognition, which could alter both the revenue and cost of sales figures used to calculate the margin.
- Operating Profit Margin: This ratio could also be affected by changes in the timing of revenue and cost recognition, which could affect the operating income figure used in the calculation.
- Net Profit Margin: Changes in the timing of revenue and cost recognition, and any potential impacts on tax and other expenses, could affect net income and, therefore, this ratio.
- Return on Assets (ROA): This ratio could be affected if the changes in revenue recognition impact the net income figure. Also, any changes in assets arising from capitalization of contract acquisition or fulfillment costs would affect this ratio.
- Return on Equity (ROE): As with ROA, changes in net income or total equity resulting from the application of IFRS 15 could impact this ratio.
- Current Ratio: If there are significant changes in current liabilities due to changes in deferred revenue (contract liability) or current assets due to unbilled receivables (contract assets), this could impact the current ratio.
- Quick Ratio: Similar to the current ratio, changes in current liabilities or current assets could impact this ratio, which excludes inventory from current assets.
- Days Sales Outstanding (DSO): Changes in the timing of revenue recognition could impact the calculation of this ratio, which measures the average number of days it takes a company to collect payment after a sale has been made.
It's important to note that the impact of IFRS 15 on these ratios will depend on a company's specific circumstances, including the nature of its contracts with customers and the particular accounting policies and practices it applies.