Impact Of AASB 15 On Revenue Recognition And Tax Essay For Food-Pro Ltd.

Main Weakness of Old Revenue Standards

1.Revenue Recognition

The new accounting standards on revenue, AASB 15 Revenue from contracts with customers replaces AASB 118 Revenues and AASB 111 Construction contracts and it will have significant impact on financial statements of many companies. The new standard is designed to be industry-neutral: all industries will have to apply the same model and there is no industry-specific guidance. However, as the nature of contracts is different for different industries, specific parts of the model might have more significant impacts for some industries than for others

Required

a) Discuss the main weakness of the old revenue standards and the ways in which the new revenue standard overcome these weaknesses. 

b) From the Australian Security Exchange (ASX) website, select two companies’ 2017 annual reports (preferably from different industries) and discuss how the new accounting standard is going to affect the revenue recognition by providing comparison of their notes to the financial statement and other disclosures

Food-Pro Ltd is a special food processing company. For the financial year ended 30 June 2018, FoodPro Ltd made a profit before tax of $607,500. 

The following items of income and expenses are included in the calculation of its profit for the year:

An extract of the company’s balance sheet for the financial year ended 30 June 2018 together with comparative figures for 2017 is given as follows:

Additional Information: 

• Rent revenue will be taxed on cash basis.

• Entertainment expenditure is not allowed as a tax deduction.

• Because of changing technology, Food-Pro Ltd decided to sell one of its specialized plants, which it purchased three years ago. The original cost of the plant was $160,001, and it was sold on 30 June 2018 for $72,000.

• For accounting purpose, Food-Pro Ltd depreciates the acquisition cost of plant at 15% per annum using the straight-line method. For tax purpose, however the plant cost is depreciated at 20% straight line.

• Doubtful debts expenses are not deductible for tax purpose unit the company actually incurs
bad debts

 • Employee entitlements such as annual leave and long service leave are not allowable as tax deduction until paid to the employee.

• Insurance expense is treated as an allowable tax deduction when paid in cash.

• A tax deduction of 125% can be claimed on Research & Development expenditure paid.

• The tax rate for the year ended 30 June 2017 and 30 June 2018 was 30%.

Required

a) Calculate the taxable income/loss of Food-Pro Ltd for the year ended 30 June 2018. 

b) Using deferred tax worksheet, calculate the deferred tax asset (DTA) and deferred tax liability (DTL) balance as at 30th June 2017 and 30 June 2018 (Create columns for carrying amount, tax base, assessable temporary difference and deductible temporary difference). 

c) Prepare the tax-effect journal entries for Food-Pro Ltd for the year ended 30 June 2018.

d) Justify your treatment of Accounts receivable and Provision for annual leave in your deferred tax worksheet

1.a.The requirements of both existing Australian standards on revenue recognition and the newly issued international accounting standards by the IASB (International accounting standards board) are the same. There were certain drawbacks in the existing standard on revenue recognition which has resulted in an inconsistency between the company’s reported revenue. To be more specific when the company recognized revenue of the long-term contracts (example construction contract) and also those contracts that combine both goods as well as services (example- a combination of a telephone service with a network service). It becomes difficult for the users of the financial statement to carry out a proper analysis so they have asked for more information so that they can study and know more about the company’s performance (Pitcher partners, 2018).

The new accounting standard that has been issued by IASB is intended to deliver a more appropriate and accurate financial reporting than before. There is a five-stage model that has to be followed by all the companies. The first step is to identify the contract that is held by the customer and secondly the performance obligation has to be identified. In the third step, the company shall engage itself in determining the transaction price (Pitcher partners, 2018).  Fourthly, the company must allocate the transaction price that has been determined in the third step to the performance obligation. Lastly, the company may recognize revenue when it is observed that the performance obligation is fulfilled.

The disclosure requirements according to the new accounting standards are: the company must disclose the particulars of the contract with the customer, it must disclose the judgements and implication of adopting this new standard while preparing its financial report and also a disclosure of capitalised cost that has been done for obtaining or satisfying the performance obligation has to be mentioned by the company (Peirson et. al, 2015).  The new accounting standards disclosure is such that it will help the users to know everything in detail such as the nature, amount and uncertainty of the revenues and cash flows that are expected to be derived from the contract.  

It was observed that the reporting done by the companies were inconsistent under the existing Australian standards. But it was a known fact that even if the companies made better use of these standards and enforce them more appropriately still there would lie some inconsistency (Needles & Powers, 2013). However, there are some entities that provide useful information in relation to the revenues but this information are cannot be compared with the reports of other entities. This was the reason why a new accounting standard was required. This accounting standard would help the company to reduce the inconsistency in the revenue recognition and increase the amount of useful information demanded by the users. The regulatory action and its need have been discussed in more detail in RIS Section 2 which includes the details of the action taken by the IASB to issue a new accounting standard AASB 15 Revenue from contracts with customers in the place of existing accounting standard. This new accounting standard was issued in order to overcome the shortcomings that are mentioned above. The new introduction AASB provides ample advantages to the end users. The measures of revenue happen when there is a requirement of entitlement (Peirson et. al, 2015).

Five-Stage Model of AASB 15

When it comes to AASB 18, the revenue was ascertained with the help of fair value when it was receivable or over received. But, in the scenario of AASB 15, the revenue is measured when the company wants it to be entitled.  The disclosure of the financial statement is enhanced with the help of AASB 15 and it becomes easier to have an access to other revenue.  The main aim of the financial statements is to provide financial information to them and with the aid of the new accounting standard AASB 15, there is a huge opportunity to remove the constraints of international capital flows by reduction of the complexities. Further, AASB 15 will have an alteration on the change in the revenue timing when compared with the current practice. Further, it will need fundamental changes in the processes, as well as system so that the information can be captured to recognize revenue in tune to the 5 step model that is present in AASB 15 instead of invoicing the amount to the customer. Hence, revenue recognition can be tagged as an accounting exercise that is confined to the finance department. AASB has led to providing ample benefits and selection of the revenue happenings that is totally based on the performance satisfaction provided in the sales contract. however, the application of AASB is matched with higher cooperation in terms of cross-departmental across the business.

1.b.AASB 15 mainly aims to be a single revenue recognition framework that is comprehensive in nature with a clear explanation of the approaches of revenue recognition and guidelines of elaborated nature on different streams. Such changes are vital and entities having revenue transactions with complex traits like fluctuations in the selling price, rebates, etc are bound to be influenced.

In the case of Woolworths, the application of AASB 15 that is revenue from contracts has been observed.  It develops a principle-based approach that is related to goods, services and construction contracts.  in tune to this, it needs the proper identification of the performance that is discrete in nature with a transaction and a transaction price that is linked or associated.  The major benefit that accrues in this regard is that the recognition of the revenue happens only when the performance obligation is a meet and there is a transfer of the goods and services majorly at the point of sale (Woolworths limited, 2017).  For Woolworths, the accounting standard AASB 15 is effective for annual reporting that pertains to the period 1 January 2018. The application of this will be incorporated and seen beginning 25 June 2018. Before, the application of this standard an evaluation has already been done that is the effect on the current revenue streams. As per the evaluation is done by the company it is witnessed that the standard AASB 15 will have a material influence on the consolidated statement of the company. Further, it is not determined by the group as to which transition method needs to be undertaken. The application of AASB 15 is assumed to have a high level of impact across the different organization, as well as industries. As is seen in the annual report of Woolsworth, that the financial items are huge and hence, prone to complexity, judgment and needs disclosure (Woolworths limited, 2017). However, there are few organization that can benefit from the simpler implementation. The presence of AASB 15 is an additional advantage because it will lead to an enhanced level of disclosure and meets the current requirements with ease and flexibility.

Disclosure Requirements under AASB 15

The second that has been undertaken is that of Rio Tinto, a pioneer in the field of mining. In the case of Rio Tinto, the presence of AASB 15 will ensure that the entity recognizes revenue that is linked to the transfer of promised goods or services when the control of the goods or services moves to the end consumers (Rio Tinto, 2017). The benefit of this standard is that the amount of the revenue that is recognized will project a consideration to the point the entity expects to be entitled in return for the goods and services. In the case of Rio, AASB will help in describing the features that need to be applied while measuring, as well as recognizing the revenue. It will be done at an amount that projects the consideration that is entitled in return for the goods that are transferred or services provided to a customer.

The presence of AASB 15 will help in providing more guidance and ensure that the identification of the performance can be done in the contract. Apart from this, Rio is engaged in mining and exploration hence having AASB 15 will lead to the identification of the performance obligation in the contract. Moreover, it can be made clear that whether a performance obligation can be satisfied over a larger time frame (Rio Tinto, 2017). An entity is not allowed to recognize as an asset any cost that is incremental and incurred to obtain a contract with a customer that the entity does not require it to collect from the cash flow that is generated under the contract, However, with the aid of AASB 15, capitalized costs can be recovered. Therefore, Rio can avail this advantage.  Further, to assess for the yearly impairment, the costs that are incurred or fulfilled needs to be amortized on a systematic basis that is in tune with the transfer of the goods to which the assets relates. Moreover, having this standard in practice will enable Rio to save cost and hence a control can be developed. This means it will support the organization both in terms of disclosures and cost savings.  Hence, AASB 15 will enable Rio to enhance the revenue comparability and can lead to effective results (Rio Tinto, 2017). Overall, it can be seen that the implementation and adoption of the new standard that is AASB 15 will produce productive results and will ensure better disclosure. This will help in the process of understanding and will lead to the benefit of the related parties.

a.

c.

d.The rule for arriving at accounting profit and taxable profit is different for certain items. Due to these differences, there arises a difference in the accounting and taxable profit. In order to bridge the gap of taxation between these two profits, deferred tax is calculated. The tax rules in certain cases state that few expenses will be allowed for deduction only when they are incurred, that is, these expenses are allowed on a cash basis. The companies are required to make a few provisions based on estimates. Sometimes these are tools as tools by the management in order to write-off profits. In order to avoid these write-offs, the tax provisions lay that the amount of provision claimed as a deduction shall only be permissible if only actual losses have incurred. The provision for doubtful debt and annual leaves are such expenses, these expenses are allowed as a deduction to the extent of cash outflows (Melville, 2013). Therefore, in order to arrive at the deferred tax calculation for the given situation, the actual cash flow made for annual leaves and actual bad debt expenses are calculated to account for deductions.

References

Pitcher partners. (2018) Contract cost & AASB 15 revenue from Contracts with Customers. Retrieved from https://www.pitcher.com.au/news/contract-costs-and-aasb-15-revenue-contracts-customers

Melville, A. (2013)  International Financial Reporting – A Practical Guide. Pearson, Education Limited, UK

Needles, B.E. &  Powers, M. (2013) Principles of Financial Accounting. Financial

Accounting Series: Cengage Learning.

Peirson, G, Brown, R., Easton, S,   Howard, P. and Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.

Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online] Available from: https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2017.pdf  [Accessed 29 August 2018]

Rio Tinto. (2017)  Rio Tinto Annual Report and accounts 2017 [online]. Available from: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 29 August 2018]

Williams, J. (2012)  Financial accounting. New York: McGraw-Hill/Irwin.