AASB 15 summary and five-step model explained

Many companies are well on the way to recognising revenue from contracts with customers under an entirely new framework in line with AASB 15. The effective date of the new law was 1 January 2018, so your accounting systems, processes and contracts should now be catering for these changes.  Our AASB 15 summary below explains the new standard, and our slide-share further down gives a quick explanation of the AASB five step model.

AASB 15 applies to all contracts with customers, except for contracts covered by other Standards, such as leases, insurance and financial instruments. AASB 15 was introduced to harmonise with international reporting requirements, overcome weaknesses in the previous revenue standards, deliver more accurate commercial financial reporting and a single revenue recognition model for investors to understand and compare the revenue of different companies.

AASB 15 stipulates how and when revenue is recorded, requiring entities to provide users of financial statements with more information and reporting disclosures. Its core principle is the recognition of revenue for the transfer of goods or services, at a value that reflects the consideration to which the entity expects to be entitled, in return for meeting performance obligations.

AASB 15 mandatorily applies to annual reporting periods beginning on or after 1 January 2018, with your company’s year end determining the first period applicable:

AASB 15 will have the most impact on businesses which involve:

The new Standard establishes a five-stage model for entities to:

To understand the full impact of the AASB 15 on your business, customer contracts should be reassessed against the superseded standards and thefive-stage model. For a quick explanation of the 5 steps involved in this model, play the slide-share:

Essentially, an entity should evaluate the probability of receiving consideration in exchange for the goods or services provided, taking into account the customers’ ability and intention to pay (including discounts, rebates, refunds, price concessions, incentives and performance bonuses).

The transaction price should be allocated to the performance obligations based on the proportion of their relative stand-alone prices. Stand-alone price is the price at which an entity will sell the promised good or service separately to a customer.

Costs to fulfil a contract with a customer that are not within the scope of any other Standard are allowed to be capitalised and amortised.

All entities reporting through general purpose financial statements should expect increased levels of disclosure.

Under AASB 15 disclosure objectives, an entity must 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.

See our article AASB 15 Revenue Recognition, 1 January 2018 for information about the disclosure requirements and other useful background.

Companies who were well-prepared for AASB 15 would have adopted a transition approach – retrospective or cumulative effect – well before the effective date. However, some businesses may not have the necessary skills and resources inhouse for implementation.

Accru Felsers assists many clients with AASB implementation and the application of other Australian Accounting Standards. Please contact your local Accru Felsers advisor if you would like our help to ensure a smooth and compliant transition of your accounting systems.