In the past year, many companies have begun recognising revenue from contracts with customers under an entirely new framework in line with AASB 15. While the effective date of the new law was 1 January 2018, accounting systems and processes should have begun catering for these changes from 1 January 2017 due to retrospective restatement.
Why does it apply?
AASB 15 is intended to harmonise with international reporting requirements and deliver more accurate commercial financial reporting.
What is the scope?
AASB 15 will apply to all contracts with customers, except for contracts covered by other Standards, such as leases, insurance and financial instruments.
What is required?
AASB 15 stipulates how and when revenue is recorded, requiring entities to provide users of financial statements with more information and reporting disclosures.
Its core principle is the recognition of revenue for the transfer of goods or services, at a value that reflects the consideration to which the entity expects to be entitled, in return for meeting performance obligations.
To achieve these requirements, this Standard establishes a five-stage model for entities to follow:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognising revenue when (or as) the performance obligations are satisfied.
What does AASB 15 mean for your business?
Applying AASB 15 will have varying levels of impact across organisations and industries. In response, substantial changes to an organisation’s financial reporting systems, accounting processes and contracts will be required from 1st January 2017 due to retrospective restatement.
Entities reporting through general purpose financial statements should expect increased levels of disclosure, some of which will be commercially sensitive and more onerous than those currently being prepared.
To understand the full impact of the AASB 15 on your business, customer contracts should be reassessed using our summary below and if you would like further guidance, please don’t hesitate to contact your local Accru advisor.
AASB 15: Key facts in summary
Superseded Standards
When effective, AASB 15 will supersede the following Accounting Standards:
- AASB 111 Construction Contracts
- AASB 118 Revenue
- Interpretation 13 Customer Loyalty Programmes
- Interpretation 15 Agreements for the Construction of Real Estate
- Interpretation 18 Transfers of Assets from Customers
- Interpretation 131 Revenue – Barter Transactions Involving Advertising Services
The ‘Five-Stage Model’ explained
- Identifying the contract with the customer
- Identifying the performance obligations in the contract
- Determining the transaction price
- Allocating the transaction price to the performance obligations
- Recognising revenue when (or as) the performance obligations are satisfied.
Essentially, an entity should evaluate the probability of receiving consideration in exchange for the goods or services provided, taking into account the customers’ ability and intention to pay (including discounts, rebates, refunds, price concessions, incentives and performance bonuses).
The transaction price should be allocated to the performance obligations based on the proportion of their relative stand-alone prices. Stand-alone price is the price at which an entity will sell the promised good or service separately to a customer.
Costs to fulfil a contract with a customer that are not within the scope of any other Standard are allowed to be capitalised and amortised.
Disclosure requirements
Under AASB 15 disclosure objectives, an entity shall disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. There are detailed disclosure requirements with regard to significant judgements in determining the timing of the satisfaction of performance obligations, the transaction price, amounts allocated to the performance obligations and the assets recognised from costs to obtain or fulfil a contract with a customer.
To fulfil disclosure objectives, an entity shall disclose qualitative and quantitative information about all of the following:
- Particulars of its contract with customers
- The significant judgements, and changes in the judgements, made in applying this Standard to those contracts; and
- Details of capitalised costs in obtaining or fulfilling a contract with a customer.
Transition and effective date
AASB 15 mandatorily applies to annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted and retrospective restatement will be required on transition.
Companies who were prepared would have adopted a transition approach – retrospective or cumulative effect – well before the effective date. However, those business who did not may be struggling.
Should you require assistance with your AASB implementation or the application of other Australian Accounting Standards, please do not hesitate to contact your local Accru advisor.
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