The clock is ticking on the new AASB 15 revenue standard

A new standard is coming. Make sure you are ready.

 Organisations must be operating under the new AASB 15 Revenue from Contracts with Customers (AASB 15) from 1 January 2018 – but some businesses and their accountants are not close to being ready.

By Jan McCallum

Ready or not, from now on businesses must be preparing for the new Australian Accounting Standard AASB 15 on how revenue from customers is recognised and recorded.

Accounts and finance departments will have to change systems and accounting practices soon, so they are ready by 1 January 2018 for the new standard taking effect for annual reporting periods starting from 1 January 2018 (deferred to 1 January 2019 for not-for-profit entities).

Australian financial reporting expert David Hardidge FCPA says people are reading summaries about the standard rather than diving into the whole document.

This is perhaps understandable when the standard and application guide is 42 pages, the accompanying illustrative examples run to another 67 pages and the basis for conclusions takes 140 pages.

Hardidge says, however, that accountants and reporting entities do need to become familiar with how AASB 15 will affect reporting because it will have a major impact on some organisations.

California-based senior director of product management for Oracle Financials Cloud, Seamus Moran, is leading the software group’s response to AASB 15 and its international counterparts IFRS 15 and ASC 606. Moran says he is seeing a lot of managers in denial about the standard’s impact on their business.

“They look at it and say your sales are still your sales, it doesn’t matter to me. Well, it really does matter to them. Even the simplest sale can be impacted.” 

Why is there a revised accounting standard for revenue?

AASB 15 is designed to ensure revenue is recognised accurately – with an amount recorded that reflects what the entity expects to be paid in exchange for goods and/or services provided.

Hardidge says it replaces a standard “that said you had to do something but didn’t tell you how”. 

Download Oracle's free eBook, Who is affected by the new AASB 15 accounting standard?

The new standard establishes principles, and includes disclosure requirements for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Revenue must be recognised only when the good and/or service to the customer is provided.

The major issues around AASB 15

Oracle’s Moran is seeing issues in:

  • Understanding where the performance obligations are and how they are modelled to an individual business. “People are looking for black and white compliance with it, but it’s not like that,” he warns.
  • Determining stand-alone selling prices, because many businesses that bundle services don’t have them.
  • Understanding whether the correct data is being captured to enable compliance.

Accountants and AASB 15

Moran’s message to accountants is that they must take clients on the journey from “this is what we do today, this is how we book a sale” to compliant reporting.

“They have to be able to turn that into a review at the inception of the contract, how they look at what the performance obligations are, whether contracts are related and how they are going to price and allocate the price over time particularly – using the notion of SSP [stand-alone selling price] and ESP [estimate of selling price].”

“They also have to deal with their clients and the notion of estimating at inception and following up on that estimation and fixing it as an accrual fix, as an estimation fix, and not mixing that up with true contract modifications.”

Hardidge says contracts need to be checked so accounting departments understand how to recognise revenue over time as the benefit is transferred to the buyer and costs are recovered and profit margin is earned.

Could performance over time lead to inaccuracies creeping into the process?

“The standard is really very friendly,” says Moran.

“The difficult part is getting there from here. The notion of performance obligation and accounting for performance obligation is quite straightforward when you can get to it – when you can ride that bicycle.”

Moran says the standard is forgiving enough that inaccuracies will not matter too much for businesses that value contracts fairly and ensure they are adjusted to a fair valuation over time.

It will be important that the business records enough revenue later – when the service or good is transferred to the customer – rather than allowing an earlier revenue figure to creep high. 

“That’s when the inaccuracies will come,” notes Moran.

Judgements around recognition and timing

Moran says that by allowing an organisation to define a performance obligation the standard allows managers to develop models for their business – and they should approach the problem in that manner, using typical timing and scheduling.

This makes more sense than “as most people are doing now”, avoiding the notion of performance obligations and focusing strictly on the outcome around the timing, and around debits and credits.

Bearing in mind the purpose of AASB 15 and its international counterpart standards is to provide more accurate reporting of revenues from customers, Moran says his key piece of advice is to “embrace the standard” because the thinking behind it is straightforward.

“Look at your deals in advance. What were you thinking when you signed this deal? Break it down into what you have committed to the customer and when you are going to deliver it then allocate the price to it on a fair basis so that you spread the revenue out appropriately over the life of the deal.

“And that’s it – that’s really all the standard is saying.”

This sponsored content was brought to you by Oracle. Download Oracle's free eBook, Who is affected by the new AASB 15 accounting standard? 

Read next: Everything you need to prepare for IFRS 15

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