New Revenue Recognition Rules are upon us
The new accounting standard for recognising revenue (AASB 15) is now effective. If you have not uncovered the impacts of the new standard, you are probably not alone, but it’s time to start. December 2017 and June 2018 financial reports should disclose the impact on your business.
The new accounting standard for recognising revenue is here. AASB 15 Revenue from Contracts with Customers is effective for reporting periods beginning on or after 1 January 2018.
If you have not uncovered the impacts of the new standard as yet, rest assured, you are probably not alone. But don’t relax, it’s time to get moving. Last year you may have got away with a generic disclosure that you hadn’t fully assessed the impact. The regulators have been quite vocal about their expectations for disclosing the impact of the new standard. ASIC have even stated that it’s not unreasonable for users to expect quantitative information in financial reports. For a December reporter, the first financial report under the new standard will be December 2018 (for June reporters, June 2019). That’s this year. Not to mention, the opening comparative date of that report is 1 January 2017 which has already passed.
Within the industry, the revenue standard appears the least popular of the three new standards that will become mandatory over the next two years. Unlike the Leases standard, where the major impact on financial statements is easily identified, the revenue standard is much more complicated and the impacts are not immediately identifiable.
While many tout that the new revenue standard will not impact their existing revenue recognition, most of these have not performed a full assessment. Like most new accounting standards, the devil is in the detail. For entities that only report annually, it is possible that there is only a small impact, but there is a lot of work and consideration that goes into determining this.
Many entities will incur a significant impact. For some it brings revenue forward, for others revenue is being deferred. It’s not black and white and there is no ‘one size fits all’ impact of the standard. In the past, revenue was often recognised when it was received because this was when the risks and rewards were passed. Now revenue is recognised when the entity has performed its obligations under the contract. Even that simple sentence is littered with complexities… What’s an obligation? When/how is it performed? What is the contract?
Take, for instance, upfront joining fees. These may have been recognised upfront in the past because there was nothing further for the entity to do to earn this fee. The new standard identifies that the customer has not obtained a good or service upon joining and therefore in most instances, no revenue is recognised at this time. Instead, the consideration received is assessed with the other goods/services that the customer will receive over the period of membership. In many cases, the revenue is deferred and recognised over the average life of the member.
Don’t brush it off, seek assistance if you are unsure where to start – we are here to help. At Findex, we have a specialist team working through the requirements and training staff to assist clients with the new standards. Our annual Financial Reporting Update is a great way to get you and your staff up-to-date with the new accounting standards, or we can provide advice directly to your organisation.
So where to from here? The standard comes with 63 illustrative examples of how it applies to revenue transactions. There is also a lot of published guidance on how to apply the standard. Dig out some papers, read the standard or published guidance and dive in. You don’t have to do it alone, speak to your auditor or adviser to assess the impact on your business.