Revenue recognition
Research School of Accounting 1
Revenue recognition
Research School of Accounting 2
Revenue recognition
AASB 15 Revenue from Contracts with Customers
Objective:
“to establish the principles that an entity shall apply to report useful
information to users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising from a
contract with a customer” (Paragraph 1)
The standard shall be applied to all contracts with customers, except:
• lease agreements
• insurance contracts
• financial instruments and other contractual rights or obligations
• non‐monetary exchanges between entities in the same line of
business to facilitate sales to customers or potential customers.
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The definition of income and revenue
AASB 15 defines income as
“increases in economic benefits during the accounting period in the
form of inflows or enhancement of assets or liabilities or decreases of
liabilities that result in an increase in equity, other than those relating to
contributions from equity participants” (Appendix A)
Definition of income in the conceptual framework:
4
Previous definition of income
Increases in economic benefits during
the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity, other than those
relating to contributions from equity
participants.
Revised definition of income
Increases in assets, or decreases in
liabilities that result in increases in
equity, other than those relating to
contributions from holders of equity
claims.
A – L = E
The definition of income and revenue
AASB 15 defines revenue as
• “income arising in the course of an entity’s ordinary
activities” (Appendix A).
5
The key characteristic of revenue is “ordinary activities”
- Ordinary activities are not defined in the conceptual framework or in
AASB 15
- Subject to entities’ interpretation, such as activities relating to their
core business operations
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Step 1 Step 2 Step 3 Step 4 Step 5
5
steps
The steps in recognising revenue
• AASB 15 identifies five steps in recognising revenue:
1. Identify the contract or contracts with the customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance
obligation.
5. Recognise revenue when (or as) the entity satisfies
a performance obligation.
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Step 1: Identify the contract or contracts with the customer
AASB 15 defines a contract as:
• “An agreement between two or more parties that creates
enforceable rights and obligations” (Appendix A).
• For example, a contract for goods and services establishes rights
and obligations for both the seller and the buyer.
8
Seller
Obligation: to deliver goods and services
Rights: to receive payment when goods
and services are delivered
Buyer
Obligation: to pay for the goods and
services when delivered
Rights: to receive goods and services
A contract does not exist if each party to the contract has
the unilateral enforceable right to terminate an unperformed
contract without compensating the other party (Paragraph 12).
Step 2: Identify the performance obligations
in the contract.
A performance obligation is defined in AASB 15 as:
“a promise in a contract with a customer to transfer to the
customer either:
a) a good or service (or a bundle of goods or services)
that is distinct; or
b) a series of distinct goods or services that are
substantially the same and that have the same
pattern of transfer to the customer.” (Appendix A)
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Step 2: Identify the performance obligations
in the contract.
AASB 15 specifies two criteria that must both be met for a
good or service to be distinct:
a) the customer can benefit from the good or service on its
own or together with other readily available resources;
and
b) the entity’s promise to transfer the good or service to
the customer is separately identifiable from other
promises in the contract.
(Paragraph 27)
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Step 3: Determine the transaction price
• When a performance obligation is fulfilled, an entity shall recognise
as revenue the amount of the transaction price related to that
performance obligation.
AASB 15 defines the transaction price as:
“The amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties” (Appendix A).
• Consider the followings in determining the transaction price:
• variable consideration
• deferred consideration
• exchanges or swaps
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Step 3: Determine the transaction price
Variable consideration
• Examples include rebates for large quantity of purchase,
discounts, price concession, refunds etc.
• Two methods of estimation:
– Expected value – “the sum of probability-weighted amounts in a
range of possible consideration amount” (Paragraph 53)
– The most likely amount
• Variable consideration can only be included in the
transaction price if it is highly probable that its inclusion
will not result in a significant reversal when the
uncertainty is resolved.
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Step 3: Determine the transaction price
Deferred consideration
• A financing component in the contract
• E.g. an interest-free credit period to customers
• Need to adjust for the consideration amount for the effect of the time
value of money (ie, discounted present value)
13
Loftus et al. (2020) Example 15.1
Chaise Ltd sells furniture and offers an interest-free period of 12 months to customers.
Customer G purchases furniture on 30 June 2022. The current cash sales price of the
furniture is $20 000. Customer G will pay $20 000 on 30 June 2023. Chaise Ltd
determines that an appropriate discount rate for imputing interest to the transaction is
4% per annum. It determines that the present value of $20 000 to be received in 1
year’s time is $19 230.
At 30 June 2022, Chaise Ltd would
record the following entries:
Dr Receivable 20 000
Cr Revenue 19 230
Cr Deferred interest 770
At 30 June 2023, Chaise Ltd would record
the following entries:
Dr Deferred interest 770
Cr Interest revenue 770
Dr Cash 20 000
Cr Receivable 20 000
Step 3: Determine the transaction price
Exchange or swaps
• Non-cash consideration
– Measure at fair value
– If fair value cannot be reasonably estimated, then measure by
reference to the stand-alone selling price of the goods and
services
• Consideration payable to customer
– As a reduction of the transaction price, and therefore, of revenue
unless it is for a distinct good and service.
14
Loftus et al. (2020) Example 15.2
Switchy Ltd swaps a container of milk (with a value of $100) with Dairy Ltd in
exchange for a container of cream (with a value of $120). Switchy Ltd also pays $12
cash to Dairy Ltd.
Switchy Ltd would record the following entries:
Dr Inventories – cream 120
Cr Revenue 108
Cr Cash 12
Dr Cost of sales 100
Cr Inventories – milk 100
Step 4: Allocate the transaction price to the
performance obligation
• When multiple performance obligations are identified in a
contract with a customer, the entity must allocate the
transaction price to each performance obligation.
• This is necessary because the revenue might be
recognised at different times for various performance
obligations.
• AASB 15 requires the transaction price to be allocated to
the performance obligations in the contract by reference
to their relative stand‐alone selling prices (Paragraph 74).
– That is, the price at which an entity would sell a promised good
or service separately to a customer.
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• The best stand-alone selling price is the observable price
of a good or service when it is sold separately in similar
circumstances and to similar customers.
• If a stand-alone selling price is not directly observable,
an entity shall estimate such a price.
• Methods for estimating stand-alone prices can include:
– adjusted market assessment approach
– expected cost plus a margin approach
• If the transaction price of a package of goods and
services allows for a discount, the discount is allocated
on the basis of relative stand-alone selling price.
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Step 4: Allocate the transaction price to the
performance obligation
Example: multiple-element arrangements
Customer A signs up a 2-year contract with X Ltd for a bundled service
which includes phone call service and data access service. Customer A
pays $1200 upfront. The price for each service if sold separately is:
phone call service $900, and data access service $400.
Calculate the allocation of discount.
17
The stand-alone selling price of each service is a total of $1300.
The transaction price of the contract is $1200. The discount is $100.
The discount is allocated to each component of the contract based on the
relative stand-alone price:
Stand-alone
prices $
Allocation of discount
$
Allocated
amount $
Phone call 900 100 x 900/1300 = 69 831
Data access 400 100 x 400/1300 = 31 369
Total 1300 1200
Step 4: Allocate the transaction price to the
performance obligation
Journal entry at inception of the agreement:
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Dr Cash 1200
Cr Deferred revenue – phone service 831
Cr Deferred revenue – data access service 369
- The deferred revenue will be recognized when the services are
delivered.
- As the services are available to the customer continuous over the
2-year contract period, the revenue is recognized using a straight-
line basis over 2 years in accordance with the accounting
standard.
Each year, at financial year end, the following entries are made:
Dr Deferred revenue – phone service 415
Dr Deferred revenue – data access service 185
Cr Revenue 600
Step 5: Recognise revenue when (or as) the
entity satisfies a performance obligation
• Revenue is recognised when control passes to the
customer.
• AASB 15 defines control as:
– “the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the
asset” (Paragraph 33).
• Performance obligations may be satisfied (and the
control is transferred) at a point in time or over time.
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BUSN7050
Corporate Accounting
Lecturer:
Dr Xiu-Ye Zhang
Lecture 2
Presentation of financial statements
(Chapter 17)
Accounting policies and other disclosures
(Chapter 19)
Related party disclosures
(Chapter 22)
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Corporate reporting and disclosure
Sub-topics:
• Annual reporting requirements
• General purpose financial statements
• Notes to the financial statements
• Disclosure of accounting policies
• Disclosure of accounting estimates
• Correcting errors
• Materiality
• Events occurring after the reporting period
• Related party disclosures
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• The annual report prepared by a company should
include (s314(1)):
– An annual financial report.
– An annual director’s report.
– An annual auditor’s report.
1. Annual reporting requirements
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• Components of an annual financial report (s295(1)):
1. The financial statements for the year.
2. The notes to the financial statements.
3. The directors’ declaration about the statements and
notes.
1.1. Annual financial report
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1. Financial statements (AASB 101):
– Statement of financial position as at the end of the year.
– Statement of comprehensive income for the year.
– Statement of changes in equity for the year.
– Statement of cash flows for the year.
– Consolidated accounts if applicable.
2. The notes to the financial statements (s295(3)):
– The notes must contain all information needed
to ensure that the financial report provides a true and fair
view of the financial position and performance of the company
or consolidated entity (i.e. that the financial report is
reasonably correct).
1.1. Annual financial report
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3. The directors’ declaration about the statements and
notes must include (s295(4)):
• A statement of whether the fin. statements
and notes are in accordance with the
Corporations Act (and the accounting
standards);
• A statement of compliance with IFRSs (if the entity has in
fact complied with such requirements), and
• A statement of whether in the director’s opinion, there are
reasonable grounds to believe that the company is solvent
— that is, able to pay its debts as and when they become
due and payable.
1.1. Annual financial report
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1.2. Annual director’s report
• Annual financial report must be accompanied by a
director’s report that normally includes two main parts:
– General information (s299) including:
• Review of operations and results thereof.
• Details of significant changes during the year or
after reporting date.
• Likely future developments.
• Entity’s performance in
environmental regulations.
– Specific information (s300):
• Information about dividends, directors, options
and indemnities, unissued shares.
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1.3. Annual auditor’s report
• The auditor must form an opinion as to whether (s307):
– financial report is in accordance with Corporations
Act and AASB accounting standards.
– financial report gives a true and fair view.
– auditor has been given all necessary
information and explanations.
– company has kept financial records to
enable a financial report to be prepared and audited.
– company has kept registers and records required by the
Corporations Act.
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Other reports
• Concise financial report (s314(2)):
– An alternative annual report
– Summarises the main points of an annual report.
– Content governed by AASB 1039 Concise Financial Reports.
– Statements must be identical to main report but notes are
effectively replaced with a ‘discussion and analysis’ report.
• Half-year financial report (s302):
– In addition to the annual report.
– Only required by disclosing entities.
– Content governed by AASB 134 Interim Financial
Reporting.
– Also includes directors’ and auditor’s reports for
the half-year.
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2. General purpose financial statements
(GPFS)
• As per AASB 101 Presentation of Financial Statements,
a financial statement should have the following features
(paragraphs15-46):
1. Fair presentation and compliance with AASB and
IFRSs.
2. Going concern.
3. Accrual basis of accounting.
4. Materiality and aggregation.
5. Offsetting.
6. Frequency of reporting – at least annually.
7. Comparative information.
8. Consistency of presentation.
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2.1. General features of GPFS
1. Fair presentation & compliance with AASB and IFRSs
• A set of financial statements are required to
present fairly an entity’s financial performance,
financial position and cash flows.
• Applying IFRSs (with additional disclosures
where necessary) is presumed to result in a
fair presentation.
• According to AASB 1054 Australian Additional
Disclosures, entities must explicitly state their
compliance with AASB and IFRS accounting standards
in a note to the financial statements.
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2.1. General features of GPFS
2. Going concern
• There is an assumption that all entities adopt the going
concern basis of accounting.
• Exception applies where management
intends to liquidate or cease trading,
when a liquidity basis is adopted.
3. Accrual basis of accounting
• Except for cash flow information, the financial
statements are required to be presented using the
accruals basis of accounting.
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2.1. General features of GPFS
4. Materiality and aggregation
• Each material class of similar items must be presented
separately.
• Items of a dissimilar nature or function must be
presented separately, unless they are immaterial (in
which case, they are aggregated).
5. Offsetting
• Assets/liabilities and income/expenses are not to be
offset, unless required or permitted by accounting
standards.
• Offsetting is appropriate when netting any income with
related expenses arising from the same transaction.
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2.1. General features of GPFS
7. Comparative information
• Comparative information for the immediately preceding
reporting period must be disclosed for all amounts.
8. Consistency of presentation
• Financial information must be consistently presented
from one period to the next, unless:
− There has been a significant change in the
entity’s operations.
− A change in presentation or classification will
provide more relevant information or is required
by an accounting standard.
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2.2. Statement of financial position (SOFP)
• The SOFP is the prime source of information about an
entity’s financial position.
• No prescribed format in AASB 101, but
assets and liabilities are classified as:
− Current/non-current (based on the
normal operating cycle)
or
− In order of their liquidity (commonly
used by banks).
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2.3. Statement of profit or loss and other
comprehensive income (SOPLOCI)
• The SOPLOCI is the prime source of information about
an entity’s financial performance.
• Comprehensive income has two components:
1. Profit or loss (P&L):
2. Other comprehensive income (OCI):
− Changes in a revaluation surplus.
− Actuarial gains and losses on defined benefit plans.
− Gains and losses arising from the translation of
financial statements of foreign operations.
− Gains and losses on remeasuring AFS financial
assets.
− The effective portion of gains and losses on hedging
instruments in a cash flow hedge.
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2.4. Statement of changes in equity (SOCE)
The following is disclosed on the SOCE:
• For each component of equity:
– Changes in accounting policies
– Corrections of errors required by AASB 108
– A reconciliation between opening and closing balances showing
changes resulting from:
• Profit/(Loss);
• Other comprehensive income;
• Transactions with equity holders.
• Total comprehensive income for the period
attributable to:
– Equity holders of parent; and
– Non controlling interests.
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3. Notes to the financial statements
• Notes enhance the understandability of the other
statements.
• Each item in the statements is cross-referenced to any
related information in the notes.
• The order of notes is:
− Summary of accounting policies and accounting
estimates.
− Supporting information for items in statements.
− Other disclosures:
• Dividends;
• Company details;
• Auditor remuneration.
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4. Disclosures of accounting policies
• Accounting policies are the principles, bases or rules
adopted by a company in preparing and presenting its
financial reports.
• AASB 108 Accounting Policies, Changes in Accounting
Estimates and Errors deals with:
– Setting accounting policies;
– Changing accounting policies;
– Disclosures concerning accounting policies.
• Accounting policies are disclosed in a note (Note 1) to
the financial statements.
– The contents of the accounting policy note is outlined in AASB 101.
– Details may be prescribed by other accounting standards or be
a matter for management judgement.
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4. Disclosures of accounting policies
The following information should be disclosed about the
accounting policies:
1. A statement that the financial statements
are general purpose financial statements
and identification of the financial reporting
framework applied in their preparation.
The note must state whether the statements are
prepared in accordance with:
– accounting standards;
– interpretations of accounting standards.
2. The measurement basis or bases used in preparing
the financial statements.
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4. Disclosures of accounting policies
3. A description of accounting policies:
– AASB 101 states that the information provided
should allow users to understand how transactions
and other events are reflected in the reported
financial performance and position.
– In many cases other accounting standards
prescribe the information to be disclosed about
accounting policies.
• e.g. AASB 102 Inventories requires disclosure of the
accounting policies adopted in measuring inventories
including the cost formula used.
– Otherwise management judgement is required to
decide what additional information to disclose.
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4. Disclosures of accounting policies
4. Judgements, apart from those involving
estimations, that management has made in the
process of applying the entity’s accounting policies that
have the most significant effect on the amounts
recognised in the financial statements.
– e.g. the classification of leases as financial or
operating.
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4. Disclosures of accounting policies
5. Information about assumptions made concerning the
future
– e.g. sources of estimation uncertainty that have a
significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the
next financial year.
– Commonly includes:
• provisions subject to the future outcome of litigation
in progress,
• long-term employee benefits such as
superannuation obligations,
• recoverable amount of specialised classes of PPE.
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4. Disclosures of accounting policies
• If an entity changes an accounting policy and the
effect of the change has a material effect on the
financial statements disclosures must include:
– the nature of the change in accounting policy;
– to the extent practicable, the amount of the
adjustment for the current and previous periods to
each financial statement line item affected;
– the amount of any adjustment to periods prior to
those presented to the extent practicable.
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5. Disclosures of accounting estimates
• Notes shall include details on accounting estimates
about:
– Their nature;
– Their carrying amount as at the reporting date.
• Examples include future interest rates and useful lives of
non-current assets.
• Accounting estimates are regularly changed as new
information arises.
• Changes in accounting estimates require prospective
application.
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6. Correcting errors
• Errors may arise as a result of an mathematical error,
misinterpretation of information, mistakes in applying
accounting policies or fraud.
• an entity shall correct material prior period errors
retrospectively in the first set of financial statements
authorised for issue after their discovery by:
– restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
– if the error occurred before the earliest prior period
presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period
presented.
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7. Materiality
• All accounting information is assessed against the
concept of materiality.
• Immaterial errors may not be corrected, or
immaterial facts may not be reported as the
immaterial errors and omissions don’t render the reports
misleading.
• AASB 108 paragraph 5 states that information is
material if its omission or misstatement could affect
users’ economic decisions.
• Materiality assessments require judgement and apply to
both the nature and amounts of misstatements.
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7. Materiality
• The previous version of AASB 1031 Materiality provided
guidelines to help determine whether the amount of an
item is material:
1. Select appropriate base amount;
2. Calculate error/omission amount as a % of the base;
3. If error/omission > than 10% of base = material
If error/omission < than 5% of base = immaterial
If between 5 and 10% – apply judgement.
• Remember these are ‘guidelines’ only and are no
substitute for professional judgement.
• Some items are material regardless of their amount
due to their nature – e.g. related party transactions.
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8. Events occurring after the reporting period
• AASB 110 Events after the Reporting Period defines an
after reporting date event as those events favourable
and unfavourable that occur between the end of the
reporting period and the date when the financial
statements are authorised for issue.
• Such information or event must be:
– material, and
– provide a clearer picture of the company’s situation at
reporting date or since.
• The standard requires action with respect to such events
in the interests of more relevant and reliable reporting.
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8.1. Adjusting events after the reporting period
• Adjusting events after the reporting period are those
which provide more information about conditions that
existed at the end of the reporting period.
• Example: Settlement of a law suit which had been in
process at the end of the reporting period.
• Also, if after the end of the period there is an indication
that the entity is no longer a going concern (AASB 110)
financial statements are no longer to be prepared on the
going-concern basis—retrospective adjustments required.
• AASB 110 requires that an adjustment to the financial
statements be made for such events: this could involve
recognising an amount, adjusting a balance, reclassifying
an item or a change in disclosure.
50Research School of Accounting
8.2. Non-adjusting events after the reporting
period
• Non-adjusting events after the reporting period are
those which do not relate to conditions existing at the end
of the reporting period but which are material to an
evaluation of the reports prepared at that date.
• These relate to events that are indicative of conditions
that arose after the reporting date.
• Example: an uninsured flood which destroys the
company’s manufacturing plant after the reporting
period.
• AASB 110 requires information about such events to be
disclosed in the notes attached to the financial statements.
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8.3. Adjusting or non-adjusting events?
• A decline in market value of investments between
the reporting period and the date the financial report is
authorised for issue.
• Bonus payments that are part of an existing agreement
with employees determined after the end of the
reporting period.
• Land Co Ltd is being sued over damage to farmland
as a result of an accident in which poisonous chemicals
were mixed with fertiliser. At the end of the reporting
period, there was no information about the court
decision and a contingent liability had been disclosed.
Subsequent to this date, the court handed down its
decision and upheld a substantial claim for damages.
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8.3. Adjusting or non-adjusting events?
• Yandalup Ltd has a series of outback cattle stations.
Subsequent to end of the reporting period, it is discovered
that flooding before this date has destroyed several
farm buildings, equipment and some stock.
• Fruitcorp Ltd has been negotiating a merger with a
company that is currently its major supplier.
Subsequent to end of reporting period, the merger
agreement is finalised.
• Management of Utopia Ltd has become aware after the
end of the reporting period that a major customer is
insolvent. The customer apparently went into receivership
before the end of the period and owes Utopia a material
amount for inventory purchased during the period.
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9. Related party disclosures
• A related party is a person or entity that is related to the
entity that is preparing its financial statements.
• The objective of AASB124/IAS 24, paragraph 1, is to:
– Ensure that an entity’s financial statements contain the
disclosures necessary to an understanding of the
potential effect of transactions and outstanding
balances and commitments with related parties.
• the major issues to be considered are:
a) identifying related party relationships and
transactions
b) identifying outstanding balances, including
commitments, between an entity and its related
parties
c) identifying the circumstances in which disclosure of
the items in (a) and (b) is required
d) determining the disclosures to be made about
those items.
9. Related party disclosures
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9. Related party disclosures
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9. Related party disclosures
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9. Related party disclosures
9. Related party disclosures
59Research School of Accounting
9. Related party disclosures
• Minimum disclosures are addressed in AASB 124/IAS 24
paragraph 18.
• A major focus of the disclosure requirements of AASB
124/IAS 24 are directed towards revealing the
remuneration arrangements made for KMP.
• Examples of related party transactions that must be
disclosed include:
– the purchases or sales of goods or services
– the acquisition or disposal of assets
– leases
– transfers
– finance arrangements
– provision of guarantees or collateral.
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