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Standards Issued but not yet Effective |
The standards and interpretations that are issued but not yet effective as of December 31, 2017 are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective.
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IFRS 9 Financial Instruments |
The IASB issued the final version of IFRS 9 Financial Instruments which sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is the new standard for the financial reporting of financial instruments that is principles-based and brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project. IFRS 9 is built on a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics including new impairment requirements that are based on a more forward-looking expected credit loss model that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting. In addition, IFRS 9 addresses the so-called ‘own credit’ issue, whereby banks and others book gains through profit or loss as a result of the value of their own debt falling due to a decrease in credit worthiness when they have elected to measure that debt at fair value.
The Group has determined not to early adopt the standard, and IFRS 9 will be applied from the year ending December 31, 2018. Also, the Group has assessed the impacts of IFRS 9’s adoption on the Consolidated Financial Statement of the Group is immaterial.
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IFRS 15 Revenue from Contracts with Customers |
The IASB issued IFRS 15 Revenue from Contracts with Customers for recognizing revenue. IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer, regardless of the type of revenue transaction or industry, with limited exceptions.
The Group recognizes revenue associated with communication and content sales and with advertising services by reference to the stage of completion. These transactions are satisfied over time and measured by the progress towards complete satisfaction of performance obligations. The Group has assessed that most of the method currently used to measure the progress towards complete satisfaction of these performance obligations will continue to be appropriate under IFRS 15 with some following exceptions.
The Group does not intend to early adopt the standard as it plans to apply from the fiscal year of 2018. Even though the Group disclosed in its 2016 financial statements that the Group intended to use the full retrospective method upon adoption, due to the costs of applying such method, the Group has determined to use the modified retrospective method which is to record cumulative amount of the impact at the beginning balance of the retained earnings upon adoption. The Group has completed the assessment of impact of IFRS 15’s adoption, and related system has been already modified.
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LINE Stickers and Creator Stickers |
The new standard will result in a change to the timing of revenue recognition, whereby revenue will be recognized over an estimated usage period on a straight-line method rather than the current method, which is over time but on an accelerated basis.
Under the current standard, the Group determines that the measuring method which best depicts the progress towards satisfaction of performance based on a contract is the user usage pattern of Stickers which represents the consumption of the user’s benefits, and recognizes revenue during the earlier part of the estimated usage period.
On the other hand, the concept of a service of standing ready is clarified under IFRS 15. IFRS 15 clarified the service of standing ready as to provide services or to make services available to the users for their use as and when the users decide. The Group determines that LINE Stickers and Creator Stickers services which the Group provides to its users are similar to the concept of a service of standing ready. The performance obligation of the Group to the customers which are the users who purchased Stickers is to make the Stickers and Creator Stickers available to the users for their use at any given time. Accordingly, the users receive the benefit of the services and consume such services as the Group makes LINE Stickers and Creator Stickers available to the users for their use. Therefore, the Group determines that its performance obligation is evenly satisfied over time and assessed that a straight-line method over an estimated usage period is the best method to measure the progress towards complete satisfaction of the performance obligation. As a result, the beginning balance of retained earnings, net of tax for the year ending December 31, 2018 has decreased by 967 million yen.
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LINE Sponsored Stickers |
The new standard will result in a change to the timing of revenue recognition, whereby revenue will be recognized over a contract period on a straight-line method rather than the current method, which is over time but on an accelerated basis.
Under the current standard, the Group determines that the measuring method which best depicts the progress towards satisfaction of performance based on a contract is the users usage pattern of Sponsors Stickers which represent its progress of rendering the services, and recognizes revenue based on the users usage pattern of Sponsors Stickers which is weighted towards the earlier part of the period.
On the other hand, under IFRS 15, the definition of a “customer” is clarified and it is defined as “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration”. Also, the contract with “customers” is within the scope of IFRS 15, and IFRS 15 requires to measure the progress towards complete satisfaction of a performance obligation to “customers”.
In the LINE Sponsored Stickers contract, only an advertiser is obligated to pay consideration for Sponsored Stickers service to the Group, and the users who use Sponsored Stickers do not pay any consideration to the Group directly or indirectly. Therefore, the Group determines the advertisers as “customers”. The performance obligation of the Group to the advertisers is to make the Sponsored Stickers available to the users for their use at any time over a contract period. Accordingly, the Group has assessed that a straight-line method over a contract period is the best method to measure the progress towards complete satisfaction of the performance obligation. As a result, the beginning balance of retained earnings, net of tax for the year ending December 31, 2018 has decreased by 760 million yen.
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LINE Point Ad |
The new standard will result in a change to the timing of revenue recognition, whereby the Group will recognize revenue at the time when the LINE Points are issued to the users rather than when the LINE Points are utilized by the users.
Under the current standard, the portion of the revenue of LINE Point Ad service attributable to LINE Points is measured at the fair value of LINE Points, and revenue related to unused LINE Points at the end of the accounting period is deferred, while revenue related to redeemed LINE Points is recognized in accordance with the revenue recognition policy for the virtual item purchased.
On the other hand, the definition of a “customer” is clarified under IFRS 15 as mentioned above. Upon the adoption of the IFRS 15, the Group determines the advertisers as customers for LINE Point Ad services because only the advertisers pay the transaction prices consideration to the Group for the advertising services the Group provides and the users who receive LINE Points, do not pay any transaction prices directly or indirectly. The Group considers its performance obligation in the contract with a customer who is an advertiser, is to be satisfied when the Group issues the LINE Points to the users because the Company does not have any obligations toward the advertisers to manage LINE Points or to provide users other services in exchange for the LINE points, thereafter for the advertisers.
As a result, the Group has preliminarily assessed to recognize revenue at the time when LINE Points are issued to the users.
Also, upon the adoption of IFRS 15, the Group expects to recognize provisions for the expenses expected to be incurred in relation to the consumption of LINE points and such expenses are recognized at the same time as LINE Points are issued to the users and as the Group satisfies its performance obligations. As a result, the beginning balance of retained earnings, net of tax for the year ending December 31, 2018 has increased by 667 million yen.
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LINE advertising and Portal advertising |
For advertising services such as official account, an advertising agency may be involved to obtain contracts from customers and provide, on behalf of the Company, services to customers such as formatting advertisement publication to comply with the Group’s specification or standards of advertisement publication. In such transaction, the new standard will result in a change to the method of revenue recognition, whereby the Group will recognize revenue by the gross recognition where the Group recognizes consideration received from customers including the share of advertising agencies rather than net recognition where the Group recognizes consideration received from customers excluding the share of advertising agency.
Under the current standard, the Company recognizes revenue by excluding the share attributable to the advertising agency from the total consideration received from the customer due to the facts that the share of the advertising agency is identified as an individually identifiable element, that the Company does not directly provide the service and earns revenue at constant rate, and that the Company does not bear credit risks.
On the other hand, IFRS 15 clarifies the evaluation of whether an entity is a principal or an agent based on the identification of performance obligations and transfer of control for the services. Especially, it is stated that “an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer”. Guidance and indicators for whether an entity controls the specified goods or services to be provided by another parties to customers are revised. This revision of the guidance and indicators includes a right to a service to be performed by the other party which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf. Since the service provided by advertising agencies such as formatting advertisement publication is provided to customers based on the Group’s specification or standards of advertisement publication, the Group determined that the Group controls the service provided by the advertising agency and thus the Group is the principal. As a result, the Company determined to change the recognition method of revenue based on the total consideration received from a customer, including the service provided by the advertising agent.
Moreover, in accordance with IFRS 15, the Group recognizes costs of contract which consist of consideration payable to the advertising agency as an asset and will expense as the related revenues are recognized. If the advertising contract is renewed at the end of the original term, another consideration payable to the advertising agency will be incurred, and such cost will be expensed during the period that is the same period which the revenue of the advertising contract is recognized for.
Therefore, there is no effect on the beginning balance of retained earnings for the year ending December 31, 2018 even if the Group applies above treatment instead of the current treatment when such cost is excluded from the revenue.
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IFRS 16 Leases |
The IASB issued IFRS 16 Leases. IFRS 16 governs the accounting for leases and the related contractual rights and obligations. In the future, lessees will no longer make a distinction between finance and operating leases as they have been required to do thus far under IAS17. At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from today’s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, although early adoption is permitted if IFRS 15 is also applied.
The Group has started an assessment of the potential impact on its consolidated financial statements. So far, the most significant impact identified is that the Group will recognize new assets and liabilities for its operating leases of certain office space and stores. In addition, the nature of expenses related to those leases will change as IFRS 16 replaces the straight-line operating expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Group is still assessing the impacts of IFRS 16’s adoption and it is not practicable to provide a reasonable estimate of the financial effect until the management of the Group completes the assessment.
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IFRS 2 Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2 |
The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. The amendments are effective for annual periods beginning on or after 1 January 2018, with early application permitted. The Group has assessed the effect of adopting amended IFRS 2 is immaterial.