Get Instant Help From 5000+ Experts For
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing:Proofread your work by experts and improve grade at Lowest cost

And Improve Your Grades
myassignmenthelp.com
loader
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Guaranteed Higher Grade!
Free Quote
wave

Focus and approach followed

The present report deals with the context and application of AAS 15 (Accounting for revenue from the contract with customers). The standard was an amendment to all the previous standards which dealt with the revenue from contracts. The standards which were replaced by this new standard were AASB 111 (Construction contracts), AASB 118 (Revenue) and AASB 1004 (Contributions). The report explains the major dissimilarities in accounting treatment between the conventional and the present day standard for revenue accounting. There were some industries in the country which were extremely affected by the modification in the standards and some in which the effect was negligible. The report also specifies such industries. Some examples from various companies have also been cited for reflecting the type of transactions which are likely to be influenced by the new standard. The companies which have been assessed for the same are Australia Career Networks, Wesfarmers, Sonic HealthCare and Dexus Property Group.

The standard was formulated under section 334 of Corporation Act 2001. The objective of the Standard was to establish general guidelines to be applied by an entity for reporting pertinent information to the financial statement users.  The content to be stated according to the standard was the type, amount, time and uncertainty of the cash flows and revenues which arise out of a contract entered by the entity with its customers. For this purpose, the entity shall identify the revenue sources for depicting the transmission of the goods or services promised to any customer for the exchange of an amount or consideration, which the entity is entitled. This standard can be applied to all the customers with whom the company wishes to enter into a contract (Australian Accounting Standards Board. 2015).

Base

Old revenue Accounting

New Revenue Accounting

Focus and Approach Followed

According to the study of McGregor-Lowndes and et.al. (2014), an approach to integration was followed by the conventional standards for revenue recognition. The focus was on the type of transaction entered into by the company and then accounting them as per suitable standards.

The guidelines in new standard follow a contract-based approach in which more focus is placed on assets and liabilities created when the entity enters into a contract.

Standards used for  accounting

The old system of accounting for revenue prescribed separate accounting standards for revenue from customers by the sale of goods and services (AASB 118), revenue from constructional contracts (AASB 111) and revenue from contributions (AASB 1004). This meant dissimilar accounting treatment for economically identical companies.  

 As per the views of Mission (2014), the new system of accounting for revenues prescribed single accounting standard for all these criteria.  This provides greater compatibility in the financial reports. The reliability is also improved with this aspect.

Additional and supplementary disclosure requirements

According to Weil, Schipper and Francis (2013), the old system of accounting did not require additional disclosures for any modification made by the entity to the contract.

Transactions such as contract modifications and service revenue were more comprehensively dealt in this standard. The standard required supplementary disclosures for such transactions.

Concept followed for revenue recognition

Under the old accounting system, the concept of “risk and reward” was used for the purpose of revenue recognition. This concept was the main determinant for revenue recognition.

As per the study of Wagenhofer (2014), under this system, apart from the concept of risk and reward, transfer of control from the company to the customer is also used as a determinant for the revenue recognition.

Methods used for accounting of contracts

According to the views of Jin, Shan and Taylor (2015), common methods used for accounting for contracts were percentage completion method, cost-to-cost-method and completed contract method.

The method of completed contracts will no longer be used under the contemporary system for revenue recognition for construction approach. Rest all the methods will remain unchanged.

Variable revenue consideration

Under this method, the order which is un-priced is recognised as revenues after adding the profit margin if the company is sure of the recovery.  Unapproved changed orders and claims were recognised when the price was estimable only to the extent of the cost incurred.

As per Ahmed, Neel and Wang (2013), for recognising the variable revenue, the expected value is estimated by using the method of profitability weight or the best estimate method.  Under this method, the consideration of variable revenue allows the contractor to recognise more income as compared to the old standard. The amount is realised if the contracting company is certain about the approval of price and if the constraint of reversal is overcome.

The new standard has its implications for almost all the companies except where the revenue is not contract driven mineral companies (Holland, 2016). This industry is not likely to be affected by the new model for revenue recognition. Apart from this sector, all the others sectors are likely to be affected by this new standard for revenue recognition. It is very difficult to judge the possible impacts of the standard until the companies follow the guidelines in practical. The companies which follow a complex revenue determination model like real estate, healthcare, technology, media and entertainment and construction, the standard will bring in a uniform approach and will eliminate many inconsistencies which were previously very common in these sectors.  

Standards used for accounting

The change in the method for revenue recognition from risk and reward to transfer of control, has impacted the below listed industries in a way that now it is mandatory for the entities to estimate the amount which they expect to receive after necessary adjustments for concessions and change in price and thereafter recognize their revenue when there is actual transfer of product to the customer. This becomes complicated for entities which are currently working on a different revenue recognition model like sell-through or when-payment-is-due (Dakis, 2016). All of the cost of the product has to recognise in the accounts when there is a transfer of control even if there is a partial recognition of revenue in actual. Thus there can be a discrepancy between the revenue and the cost of goods sold. Some of the companies affected by this provision are

  • Healthcare Companies
  • Industrial product companies
  • Banking and securities sector
  • Chemical industries
  • Power and mining sector
  • Mining sector

Apart from the timing issue of the revenue and profit recognition, there certain industries which are also affected by other provisions of the act. The consumer product industry is one of them. This industry does not only face a financial reporting issue. The industry also needs to prepare the market analysis on the implications of the new standard, as the consumer industry mainly works on market research. Other implications which the industry needs to consider are changes in the cash payments of tax, profits available for distribution, bonus and compensation plans (Capalbo and Sorrentino, 2013).

The standard will have a major impact on revenues as this standard is emphasising on a core principle that revenue will be ascertained on the basis of the transfer of promised products to the customer in an amount that replicates the consideration which is expected by the entity in exchange (Annual Report of Red Hill Education Ltd, 2016). The transactions which will be affected due to this standard in Sales to external customers as now after June 2018; revenue from the contract with customers will be ascertained in accordance with amended standard.

The standard will be applicable to all the contract with customer except lease, financial instruments and insurance contracts. However, the group is expecting that there will be no significant impact on its financial statements. Transactions like the sale of land and properties will be affected; but the main income i.e. property income will be accounted in the same manner as the amended standard is not applicable for property income relating to lease and rentals (Annual Report of Dexus Property Group, 2016).

Additional and supplementary disclosure requirements

After the application of new standard revenue will be recognised when control of good or service is transferred to customers, and the same will replace AASB 118. The transactions which will be affected are relating to Medical service revenue account and other accounts relating to it (Annual Report of Sonic HealthCare, 2016.).

Reporting of a transaction relating to a contract with customers will be reported in accordance with the new standards established by amended AASB 15. The major impact will be observed in revenue from entities contract with customers. Transactions which be impacted due to same are sales of goods and related accounts. Presently revenue is recognised at fair value of the consideration received at the criteria developed by the management for sale of goods and service, but after application of the standard, the same will be in accordance with the amount expected to received in exchange of goods (Annual Report of Wesfarmers, 2016).

References

Ahmed, A.S., Neel, M. and Wang, D. 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research. 30(4). Pp.1344-1372.

Capalbo, F. and Sorrentino, M. 2013. Cash to Accrual accounting: Does it mean more control for the public sector? The case of revenue from non-exchange transactions. Risk Governance & Control: Financial Markets & Institutions. 3(4). Pp.28-35.

Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.

Holland, D. 2016. Simplifying income recognition for not-for-profit entities. Governance Directions. 68(11). P.666.

Jin, K., Shan, Y. and Taylor, S. 2015. Matching between revenues and expenses and the adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal. 35. Pp.90-107.

McCarthy, M. and McCarthy, R. 2014. Financial statement preparers' revenue decisions: Accuracy in applying rules-based standards and the IASB-FASB revenue recognition model. Journal of Accounting and Finance. 14(6).  Pp.21.

McGregor-Lowndes, M. and et.al. 2014. Defining and Accounting for Fundraising Income and Expenses: Executive Summary: ACPNS Current issues Information Sheet 2014/2.

Mission, A.C.P.N.S. 2014. Defining and Accounting for Fundraising Income and Expenses Executive Summary.

Wagenhofer, A. 2014. The role of revenue recognition in performance reporting. Accounting and Business Research. 44(4).  Pp.349-379.

Weil, R.L., Schipper, K. and Francis, J. 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Online

Annual Report of Red Hill Education Ltd. 2016. [PDF]. Available through < https://www.redhilleducation.com/upload/modules/file_storage/FY2016>.  [Accessed on 10th April 2017].

Annual Report of Dexus Property Group. 2016. [PDF]. Available through < https://www.dexus.com/investors>.  [Accessed on 10th April 2017].

Annual Report of Sonic HealthCare. 2016. [PDF]. Available through < www.sonichealthcare.com/investor-information/annual-reports/>. [Accessed on 10th April 2017].

Annual Report of Wesfarmers. 2016. [PDF]. Available through < www.Wesfarmers.com/investor-information/annual-reports/>. [Accessed on 10th April 2017].

Australian Accounting Standards Board. 2015. [PDF]. Available through < https://www.aasb.gov.au/>. [Accessed on 10th April 2017].

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2022). AAS 15 - Accounting For Revenue From The Contract With Customers Essay.. Retrieved from https://myassignmenthelp.com/free-samples/7101afe-financial-accounting-theory-and-practice/banking-and-securities-sector-file-A86095.html.

"AAS 15 - Accounting For Revenue From The Contract With Customers Essay.." My Assignment Help, 2022, https://myassignmenthelp.com/free-samples/7101afe-financial-accounting-theory-and-practice/banking-and-securities-sector-file-A86095.html.

My Assignment Help (2022) AAS 15 - Accounting For Revenue From The Contract With Customers Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/7101afe-financial-accounting-theory-and-practice/banking-and-securities-sector-file-A86095.html
[Accessed 29 March 2024].

My Assignment Help. 'AAS 15 - Accounting For Revenue From The Contract With Customers Essay.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/7101afe-financial-accounting-theory-and-practice/banking-and-securities-sector-file-A86095.html> accessed 29 March 2024.

My Assignment Help. AAS 15 - Accounting For Revenue From The Contract With Customers Essay. [Internet]. My Assignment Help. 2022 [cited 29 March 2024]. Available from: https://myassignmenthelp.com/free-samples/7101afe-financial-accounting-theory-and-practice/banking-and-securities-sector-file-A86095.html.

Get instant help from 5000+ experts for
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing: Proofread your work by experts and improve grade at Lowest cost

loader
250 words
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Plagiarism checker
Verify originality of an essay
essay
Generate unique essays in a jiffy
Plagiarism checker
Cite sources with ease
support
Whatsapp
callback
sales
sales chat
Whatsapp
callback
sales chat
close