New revenue recognition requirements are expected to significantly influence the way companies recognise revenue
The Australian Accounting Standards Board (AASB) recently issued a new accounting standard on revenue recognition entitled AASB 15 Revenue from contracts with customers. This is consistent with the new international financial reporting standard on revenue recognition. Some industries are expected to be impacted more than others, in particular where goods and/or services are delivered over time and where there is more than one element to the goods/services being delivered.
The new standard will be mandatory in Australia from 1 January 2018 and it will also impact prior year figures.
Some of the key impacts are expected to be as follows:
Customer contracts must include clear payment terms and legally enforceable rights
As part of customer contracts an entity must identify, classify and measure the various relevant performance obligations
The conclusion of a sale must be evaluated from the customer’s perspective, not that of the seller
New requirements with regards to accounting for variable elements of consideration
There is a new requirement to account for credit risk up front as part of revenue determination
The new standard will permit costs incurred in obtaining a customer contract to be capitalised
Bundling of contracts with separate, unrelated customers will not be allowed
The new standard provides guidance on how to treat contract modifications
There will be a significant increase in disclosure requirements for the preparers of general purpose financial statements.
This change could also have practical implications on key ratios and bank covenants, timing of profit and the resulting impact on dividend decisions, bonus and executive remuneration structure and the timing of corporate tax obligations.
When the standard becomes mandatory, it is expected to require changes to systems, processes, contracts and reporting. Many entities have already started preparing implementation plans and assessing how their revenue recognition will be impacted.
If you haven’t already started planning for these changes, we recommend that you start preparing now. We also recommend that you start to consider communicating with stakeholders as soon as possible to ensure there are no surprises down the line.
For more information and to find out how ShineWing Australia can assist you with these changes, contact René Muller, Partner – Assurance and Advisory Services.