A new Australian Accounting Standard, AASB 15 Revenue from Contracts with Customers, has recently been announced and will replace several existing Australian Accounting Standards (including AASB 118 Revenue and AASB 111 Construction Contracts) in establishing a single revenue standard for all entities in all industries.
AASB 15 Revenue from Contracts with Customers will take effect from annual periods beginning on, or after, 1 January 2018. Early adoption is permitted if another new Australian Accounting Standard, AASB 15 Revenue from Contracts with Customers, is also applied. Not-for-profit entities can also defer the adoption of the standard until financial periods commencing 1 January 2019.
The new standard must be applied retrospectively and entities can choose either a full retrospective transition approach (via the restatement of comparatives) or a modified retrospective transition approach (showing the cumulative effect of initially applying the standard as an adjustment to opening retained earnings).
AASB 15 Revenue from Contracts with Customers aims to solve the problem of there being too many different recognition practices in use. This diversity arose because similar transactions have often been accounted for in different ways, due to inconsistencies and other shortfalls in the existing standards.
For most straightforward contracts, there will be few, if any, changes to the amount and timing of revenue recognition. However, for contracts that extend over time or have multiple elements, there could be changes.
A new five step process for recognising revenue:
Step 1: Identify the contract/s with the customer
AASB 15 Revenue from Contracts with Customers defines a contract as:
“An agreement between two or more parties that creates enforceable rights and obligations”.
All of these conditions in AASB 15 Revenue from Contracts with Customers must be met:
- The contract has been approved by all parties
- Each party’s rights can be identified
- The payment terms can be identified
- The contract has commercial substance
- It is probable that payment will be collected
Step 2: Identify the performance obligations in the contract
AASB 15 Revenue from Contracts with Customers defines a performance obligation as:
“A promise in a contract with a customer to transfer to the customer either:
— a good or service (or a bundle of goods or services) that is distinct; or
— a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.”
A good or service is considered distinct when:
- the customer can benefit from it; or
- the promise to transfer the good or service is separate from other promises in the contract.
Step 3: Determine the transaction price
AASB 15 Revenue from Contracts with Customers defines the transaction price as:
“The amount of consideration (fixed, variable, non-cash) an entity expects to be entitled to for the goods or services in the contract.”
Step 4: Allocate the transaction price
If there is more than one performance obligation in a contract, the total transaction price should be set according to the standalone selling prices of the performance obligations. AASB 15 Revenue from Contracts with Customers suggests three approaches to estimating a standalone selling price if it’s not known:
- adjusted market assessment
- expected cost plus margin
Step 5: Recognise revenue when a performance obligation is satisfied
Revenue should be recognised when the customer gains control of the good or service promised in the contract. AASB 15 Revenue from Contracts with Customers requires that at the start of the contract, the entity has to determine whether it will meet its performance obligation over a period of time or at a particular point in time
Aside from the fundamental changes highlighted above, entities also need to be aware of the following consequences:
- Systems and processes may need upgrading and/or changes to systems required due to expanded reporting requirements and additional information needs
- Consideration required in regards to relevant changes required on end-to-end processes and internal controls
- Potential impact on business operations and contracts including whether modifications are required to contracting procedures and legal terms
- Timing of revenue recognition may affect cash tax paid
- Human resources and remuneration structures need to be reassessed in relation to matters such as compensation, short-term incentive plans, communication plans and required levels of training
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