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Accounting Standards Update Part II: AASB 15 (Revenue from Contracts With Customers)

Commencement Date: Reporting periods commencing on or after 1st January 2018

(From 1st January 2019 for Not-For-Profit entities)

AASB 15 is applicable to the following businesses:

The new revenue recognition standard most heavily affects businesses that:

Why it’s important to understand AASB 15

The new revenue recognition standard has been designed to serve as a single, comprehensive framework that clearly stipulates when and how much revenue to recognise. AASB 15 replaces the following standards and guidance:

Main implications of AASB 15

The most significant change under AASB 15 relates to revenue allocation in accordance with the completion of performance obligations contained in a contract. The new standard establishes a five-step process (described below) for compliant revenue recognition and measurement.

  1. Identify the contract(s) with the customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognise revenue when (or as) each performance obligation is satisfied.

 

  1. Identify the contract(s) with the customer

A contract can be accounted for only after all the below criteria are met:

 

  1. Identify the performance obligations in the contract

Performance Obligations = promises, elements and deliverables

 At contract inception, an entity shall assess the goods and/or services promised in a contract with a customer and shall identify each promise as a performance obligation. Promises may appear as:

 

  1. Determining the transaction price

The below graphic contains a simple description of transaction price.

A contract’s transaction price comprises the following:

 

  1. Allocate the transaction price to the performance obligations in the contract

Transaction price should be allocated to each performance obligation (or distinct good or service).

  1. Recognise revenue when (or as) each performance obligation is satisfied

An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e., an asset) to a customer. An asset is transferred when (or as) the customer obtains control of said asset. This can occur at a certain point in time or over time.

In instances whereby an entity transfers control of a good or service over time and satisfies a performance obligation over said time, then the revenue ought to be recognised over time if one of the following criteria is met:

If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation.

Disclosure requirements

Under AASB 15, 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 regarding significant judgements in determining the timing of the satisfaction of performance obligations, the transaction price, amounts allocated to performance obligations, and assets recognised from costs to obtain or fulfil a contract with a customer.

An entity shall disclose qualitative and quantitative information about (i) the particulars of its contracts with customers, (ii) the significant judgements (and changes in judgements) made in applying the standard to those contracts, and (iii) the details of capitalised costs in obtaining or fulfilling a contract with a customer.

Indeed, it is imperative for reporting entities to balance AASB 15’s disclosure requirements with the various risks related to the disclosure of commercially-sensitive information.

Learn more about AASB 15

Ashfords can advise you on how AASB 15 will directly affect your business’ financial statements and provide resources to ensure you comply with the new revenue recognition standard. Contact Ashfords on (03) 9551 2822 to arrange a meeting to discuss how this standard will impact your business.

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