With 31 December just around the corner, many finance teams are probably in the throes of preparing for their upcoming reporting periods, whether that be for half year or full year. AASB 15 should be front and centre of these preparations as the new revenue standard impacts almost every revenue-generating business that applies Australian Accounting Standards. Not only is AASB 15 challenging to apply in practice, it also brings with it a host of new disclosure requirements that were not required under the superseded revenue standards, being AASB 118 Revenue, AASB 111 Construction Contracts and a few revenue-related Interpretations.
What has perhaps been missed is that the new disclosure requirements will impact even those entities that have concluded the adoption of the new standard will not affect the measurement and timing of revenue. To meet the extensive new disclosure obligations, entities may need to change the way they present certain aspects of their financial statements and significantly expand the volume of disclosures relating to revenue. Processes and systems to capture and collate the necessary data will most likely have to change in some way or another. All of this will require considered planning and deliberation to ensure that the disclosure objectives of AASB 15 are met without giving away commercially-sensitive information.
ASIC will no doubt continue to focus on the disclosures surrounding the impact of new accounting standards as part of its financial reporting surveillance program, so it is important to give the revenue disclosures the attention they deserve.
Half year reporting
AASB 15 is applicable for annual reporting periods beginning on or after 1 January 2018. Disclosing entities with June year ends will have to make appropriate disclosures about the adoption of AASB 15 in their 31 December 2018 half year financial reports. Such reports are prepared and issued under AASB 134 Interim Financial Reporting. AASB 15 made consequential amendments to AASB 134 which now specifically requires disclosure of the following:
- Recognition or reversal of impairment losses from assets arising from contracts with customers, where these are significant; and
- Disaggregation of revenue from contracts with customers.
Under AASB 134, entities will also have to disclose a description of the nature and effect of any changes to their revenue accounting policies and methods as compared with their 30 June 2018 annual financial statements. This information is not necessarily easy to gather. Finance teams would have to perform an impact assessment of the new standard, update accounting policies accordingly and quantify the impact of these changes to meet this disclosure requirement.
Entities will have to apply judgement in determining the extent of the disclosures to be made in the half year reports. A few factors to consider are:
- Expectations of investors and other stakeholders
- Requirements of local regulators such as ASIC
- The qualitative and quantitative significance of the changes
- The extent of judgement used by management in applying AASB 15
It may be useful for entities to consider whether any of the detailed disclosures required by AASB 108 and AASB 15 (summarised below) would be helpful in complying with the requirements of AASB 134, although these disclosures are not compulsory for interim reporting.
Full year reporting
Disclosing entities with 31 December year ends would have gone through the half year reporting requirements at least once and are hopefully prepared for what is expected in the full year financial statements. The full year presentation and disclosure requirements of the new revenue standard are substantially more explicit and detailed compared to legacy revenue standards.
Presentation: Contract Assets and Contract Liabilities
The revenue model under AASB 15 is based on the premise that a contract asset or contract liability is generated when either party to a contract performs, depending on the relationship between the entity’s performance and the customer’s payment at the reporting date. Such contract assets and liabilities are required to be presented separately in the statement of financial position.
- Contract asset: Recognised when the entity has transferred a promised good or service as of the reporting date but the customer has not yet paid, and the entity’s right to payment is conditional on something other than the passage of time.
- Receivable: Recognised when the entity has transferred promised goods or services as of the reporting date but the customer has not yet paid, and the entity’s right to payment is conditional only on the passage of time.
- Contract liability: Recognised if the customer has paid consideration, or if payment is due as of the reporting date, but the entity has not yet satisfied a performance obligation by transferring a promised good or service.
The distinction between a contract asset and receivable is important as it provides information about the risks associated with the entity’s rights in a contract to the users of the financial statements. While both are subject to credit risk, a contract asset is also subject to other risks such as performance risk.
The table below provides a summary of the disclosures required under AASB 15. Disclosures in orange indicate the disclosures that are not required under the Reduced Disclosure Requirements.
Contracts with customers
§ Revenue recognised from contracts with customers separately
from other revenue sources
§ Impairment losses from contracts with customers separately from other impairment losses
Disaggregation of revenue
§ Disclose categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors
§ Sufficient information to enable users to understand the relationship between disaggregated revenue and revenue information disclosed for reportable segments under AASB 108
§ Opening and closing balances of receivables, contract assets and contract liabilities (if not presented separately)
§ Revenue recognised in the period that was included in the contract liability balance at the beginning of the period
§ Revenue recognised in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods
§ Explanation of relationship between timing of the satisfaction of performance obligations and payment
§ Explanation of significant changes in contract asset and contract liability balances during the reporting period
§ When performance obligations are typically satisfied
§ Significant payment terms
§ Nature of goods and services
§ Obligations for returns, refunds and similar obligations
§ Types of warranties and related obligations
For remaining performance obligations at period end: *
§ Aggregate amount of transaction price allocated to remaining performance obligations that are unsatisfied
§ Explanation of timing of revenue relating to unsatisfied performance obligations disclosed above
§ Judgements made in assessing the timing of satisfaction of performance obligations
§ Methods used to recognise revenue for performance obligations satisfied over time, and explanation
§ Judgements made in determining transaction price and the amounts allocated to performance obligations (including estimating variable consideration, adjusting for time value of money and assessing if variable consideration is constrained)
Assets recognised from the costs to obtain or fulfil a contract
§ Judgements made in determining costs capitalised
§ Method used to determine amortisation for each reporting period
§ Closing balances of assets by main category of asset
§ Amortisation expense and impairment losses recognised
* Not required if the performance obligation is part of a contract that has an original expected duration of one year or less, or the entity applies the expedient to recognise revenue at the amount it is entitled to invoice when this corresponds directly with value to the customer from entity’s performance completed to date
Entities have two choices when applying AASB 15 for the first time: ‘full retrospective’ adoption or ‘modified retrospective’ adoption. The transition disclosures will differ depending on which approach is followed. The table below summarises the disclosures required under AASB 108 and AASB 15 that will only need to be made in the year AASB 15 is first adopted and not be repeated in subsequent years:
§ Title of the Australian Accounting Standard
§ State that the change in accounting policy is made in accordance with its transitional provisions
§ Nature of the change in accounting policy
§ Description of the transitional provisions
§ Transitional provisions that may impact future periods
§ For the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
o for each financial statement line item affected;
o if AASB 133 Earnings per Share applies to the entity, for basic and diluted earnings per share
§ Amount of the adjustment relating to periods before those presented, to the extent practicable
§ If retrospective is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied
§ Amount by which each financial statement line item is affected in the current reporting period by the application of AASB 15 as compared to legacy revenue standards
§ Explanations for significant changes
Full retrospective and
§ Practical expedients used by the entity
§ Qualitative assessment of the estimated effect of applying each of those expedients (to the extent possible)
In addition to the above disclosures, entities that apply the full retrospective method will have to provide a third balance sheet as at the beginning of the preceding period (so 1 January 2017 for 31 December 2018 year ends) under AASB 101 Presentation of Financial Statements if retrospectively applying the new revenue standard results in a material restatement of the opening balance sheet.
Should you have any questions or wish to learn more, contact your HLB Mann Judd audit representative.