AASB 15 revenue: Time to act is (almost) over

Reporting entities that are producing general purpose financial statements should now be adopting the requirements of AASB 15 Revenue from Contracts with Customers as it applies for financial years commencing 1 January 2017 (i.e. 31 December 2018 and 30 June 2019 financial statements).

Recently, there was a timely reminder of the significance that AASB 15 can have over the former AASB 118 Revenue accounting standard with media comment on Big Un which was suspended from its ASX listing some six months ago following significant adverse media comment on its business structure and operations.

Big Un has now released financial statements for the six months ended 31 December 2017 and has adopted AASB 15 early. It blames the adoption of AASB 15 as the reason why its cash flows have deteriorated with the particular statistic that its positive operating cash flow of $4.2 million under AASB 118 is actually a negative operating cash flow of $8.6 million.

Interestingly, unlike some other companies that (after some Australian Securities & Investments Commission (ASIC) questioning) have early adopted AASB 15, Big Un’s explanation for the difference between the two accounting standards is all about the definition of a customer as its major sponsor can no longer be claimed as a customer. Big Un also confessed to five other accounting errors, including its definition of cash.

Grant Chatham’s Clarity article mentioned the requirement in AASB 15 of determining whether a contract exists with your customers, although the focus from the International Accounting Standards Board (IASB) that issued IFRS 15 which has been re-badged by the Australian Accounting Standards Board (AASB) as AASB 15, was the need for a performance obligation to be met. Specific examples where the old AASB 118 differed from AASB 15 included Upfront fees, Performance Fees, Awards and penalties, and Variations of contracts.

ASIC has also been critical of companies’ loose accounting under the former AASB 118 and this has led to a number of companies early adopting the more precise requirements of AASB 15 following ASIC review. Particular examples are: Academies Australia reducing revenue relating to the provision of tuition income over the period that the tuition is provided rather than upon enrolment; and Genworth Mortgage Insurance Australia changing its recognition of premium revenue, having regard to the pattern of historical claims.

Whilst ASIC has generally only taken action via media releases to date on accounting standards, the mood following the on-going Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry, suggests that ASIC may be prepared to take punitive legal action where there is non-compliance with the law and that includes accounting standards.

It is definitely worth having a chat with your local PKF audit team on how your AASB 15 implementation is working.

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