Accounting Standards and Regulations
Part a - AASB 15 Revenue from Contracts with Customers
This accounting standard is addresses organisations’ concerns to recognise, measure and disclose revenue using a five step process. Applicable from January 01, 2014, this standard was issued in May 2014. As per this standard, which will replace AASB 111 and AASB 118, organisations can recognise revenue or income even though the products and services are not yet delivered to customers. In other words, companies can record the recognition of the payment (service income) even when the entity has not yet provided goods and services.
As per this standard, revenue could only be recognised in advance using a five step process after the internal management of an organisation exercises significant judgment concerning different contractual terms, facts and situations. The first step is that revenue could only recognised in advance when rights of all concerned could be identified, delivery of goods/services as well as consideration (payment) is guaranteed and the contract is flexible enough for both the parties to make changes to risk, timing and cash flows.
The second step to recognise revenue in advance is to clearly establish contract terms as well as obligations of parties involved. The third step is to determine the consideration of price of concerned transaction. Such an underlying consideration or price may either be cash or non-cash (such as discounts, rebates, coupons, and vouchers etc). The fourth step is to allocate the consideration to performance obligations determined in the third step. After being satisfied, the management of an organisation can account for revenue in advance under AASB-15 when goods and services are promised or about to be delivered to the concerned customer.
Part b – The Reason for IASB to Issue AASB 15 in Place of the Existing Revenue Standards (118, and 111)
IASB (International Accounting Standards Board) issued this new accounting standard so as to facilitate organisations and their different stakeholder groups to differentiate between contracts that fall under this category as well as disregards the ones that do not qualify as a contract. From a general perspective, AASB 15 requires that only those contracts can qualify under these categories which are either written or verbal. Moreover, if an entity sells, delivers or transfers goods and services by making any arrangement with its customers, this arrangement would be considered a contract if such a sale contract stems or originates from basic/operating activities of an organisation. Apart from this, AASB 15 was issued by IASB in an attempt to categorise valid arrangements into this accounting standard for revenue recognition in advance. If an organisation and its customers are in consistent practice to exchange goods or services and underlying consideration, this arrangement will be considered a contract into this category. Similarly, those contracts in which both the parties have willingness as well as capacity to exchange underlying considerations are considered qualifying arrangements under AASB 15.
In contrast to this, there are certain contractual arrangements that are considered outside AASB 15. In other words, such contracts are disregarded by AASB 15. If any contract pertains to the transfer or sale of goods and services to customers that are not produced out of an entity’s normal business or operating activities, such an arrangement is ignored by AASB 15. In this case, an organisation is bound to defer revenue until all performance obligations to a contract are fulfilled and underlying payment (consideration) is received. Similarly, revenue recognition should be deferred for such contracts until this arrangement is either finalised until total payment is received or terminated.
Important to note is that AASB 15 issued by IASB is going to specifically influence manufacturing, construction, real estate, telecommunications, licensing and software development industries all over the world. In addition to this, arrangements related to insurance and lease agreements are those contracts that are excluded under the category of AASB 15. IASB issued AASB 15 because the board wanted to have a single and widely used system of accounting principles for contracts with customers across industries or sectors that are outlined in this paragraph. Moreover, the purpose for issuing AASB 15 was to account for not only revenue but also costs associated with obtaining qualifying contracts which an entity can recover later from its customers.
Part c - Effects of AASB 15 on Company’s Operations and Financial Statements
As revenue stands as more than just a number for an entity, its recognition whether in advance or deferral can greatly affect an organisation’s operation activities and financial statements. AASB 15 is not just concerned with financial compliance to an accounting standard, but it has a potential to modify an organisation’s starting point of profitability reporting. In other words, AASB 15 issued by IASB would modify the presentation of financial statements while obliging companies to comprehensively disclose the revenue recognised from contracts with customers.
AASB 15 would modify operational activities and presentation of financial statements as well as business’ bottom line because earlier revenue recognition supposed to be earned from contracts with customers will bring dramatic changes to business forecasts and outlook for the future. The profit generation capacity of an organisation comes under detailed scrutiny with the implementation of AASB 15. In the same manner, as majority of the profitability ratios are calculated and interpreted using the figures of sales revenue, Key Performance Indicators (KPIs) may indicate clearer picture of a company’s financial performance and position over time.
Part d – Available Flexibility to Management in Recognising Revenue under AASB 15
For companies that are adopting AASB 15 for revenue recognition, this accounting compliance standard is applicable from January 01, 2019. However, companies are provided with a flexibility to early adopt or implement this standard of recognising revenue with customer contracts at or before the date an organisation applies for implementing AASB 16 (concerned with lease agreements). In other words, early adoption is permitted to every organisation by the IASB.
Apart from this flexibility, the management of any organisation is allowed to recognise revenue from contracts with customers for only those arrangements that are highlighted n part b of this report. Other than these two flexibilities, no other exception is provided to the management of any organisation that implements AASB 15 in its accounting policies. Such exemptions and relaxations will further be highlighted once AASB 15 is implemented by majority of entities all across the world.
References
Boshoff, A., 2016. Contract Costs and AASB 15 Revenue From Contracts With Customers. [Online] Available at: http://www.pitcher.com.au/news/contract-costs-and-aasb-15-revenue-contracts-customers [Accessed 27 August 2016].
