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Requirements of Recognition and Measurement

Question:

Discuss about the Revenue and the Company.

The topic chosen for the discussion is the “Revenue” and the Company chosen to showcase its disclosure is the Ford Australia. The AAS 15 is also chosen as the standard to deliberate on the requirements of measurement and recognition of revenue as well as the disclosure. The AAS 15 presents a comprehensive information on how revenue should be measure and recognized. According to AAS15, the revenue has to be measured in Fair Value (FV) of consideration as well as contributions received as well as receivable. AAS 15 also provides that recognition should be done where gains of economy will accrue to the business. Ford Australia has complied with AAS 15 disclosure requirements. It has revealed information on revenue from royalty, commodities, rents, as well as interest.

Requirements of Recognition and Measurement

These two revenue requirements are based on AAS 15 “Revenue”. In paragraph one of the AAS 15, it is applicable to the all-purpose reports that are financial-base of every unit that report to which the ‘Accounting Standards’ (AS) functioning as outlined in Corporation Law is inapplicable (Bruhn and Miller 2014). The AAS 15 is also applicable to the reports which are classified as all-purpose financial reports by a non-reporter unit, and to which the AS functioning under the Corporation Laws are inapplicable. As reflected in paragraph 2 (scope) of the AAS15, the Standards is applicable to all the revenues including those revenues emerging from, selling goods, offering services, forgiveness of liabilities, contribution of assets, disposal of assets except goods as well as revenues of an entity when used by other people which yield rents, royalties, dividends, and interest (Colson et al. 2010). However, AAS15 is inapplicable to the proceeds drawn from securitisation of such properties as receivable factoring and deb defeasance. It does also apply to the measurement of properties and obligations at present or market values. It does not apply to recognizing the alteration in such values in the profit as well as loss or other operating statement when they happen. AAS 15 does not apply as well to the dividends from the units that are accounted for utilizing the equity method in compliance with the AAS 14 “Accounting for Investment in Associates” (Schulzke 2013).

In par. 5,  this it provides (para. 5.1) that the measurement of revenues be undertaken at their fair value of both consideration as well as contributions received as well as receivable (Moerman 2012). It provides that revenue emerging from business be normally ascertained via an agreement between a company and its customers. It is examined using the ‘fair value (FV)’ of the ‘contributions’. It is also estimated based on the consideration ‘receivable’ while considering the amount of both discounts given in exchange as well as refunds allowable by a firm.’ A ‘consideration’ is often given in terms of cash a ‘receivable’. Nevertheless, where the inflow of cash or its equivalents as well as cash equivalents are late, the consideration’s fair value may fall below the cash receivable nominal amount (Ruder, Canfield and Hollister 2004). In paragraph six which describes the recognition of both disposal and selling of product, the AAS15 provides that the revenue is emerging from the sale of goods and disposal of other assets be recognized solely where, certain condition are met (Fisher 2014).  A condition is that a business has to meet the regulation of goods alongside supplementary assets to consumers. Also it has showcase likelihood that the benefits of economy encompassing consideration will stream to businesses. The last condition to be satisfied is that the revenue amount has to be reliably measured for it to be recognized (Herz and Petrone 2004). The determination of revenue level is always achieved through estimating as well as succeeding amendment of approximations.

Measurement of Revenue in AAS 15

However, in supreme cases, the utilization of the assessment methods will offer measurements that are adequately trustworthy to allow it to be recognized. Such an amount of revenue, in rare occasions, may fail to be measured dependably and hence it will not be recognized pending the criterion satisfaction. Paragraph (6.1.4) of the AAS 15 indicates that the revenue will be recognized where it is possible that the economic welfares linked to the operation will accrue to the firm. In certain occasions, this may fail to happen pending the receipt of consideration or unless the uncertainty is eliminated. In cases where uncertainty emerges about the collectability of the amount of the revenue already recognized, the “uncollectable” amount of revenue or the sum in regards to which retrieval has halted to be likely is recognized as expenses instead of as a modification of the revenue amount initially recognized. This case is different from the one in which the revenue is assessed and subsequently modified upwards or downwards depending on more dependable data especially when revenue from the selling the mineral is approximated precedes the eventual examination. An alteration is viewed as a modification to the levels of revenue after recognition.

In paragraph 7 of the AAS 15 (rendering of services), the Standards provides a condition for recognizing the revenue drawn from the contract outcome based on reliable estimation. As provided for in paragraph 7.1 the AAS 15provides that in case an outcome of a contract to offer certain facilities can be reliably projected, the revenue emerging from such a contract has to be recognized by inferring to the phase of conclusion of the agreement when, and only when; all these subsequent benchmarks are met. Firstly, a business must control the privilege to be compensated after offering services. Another condition is that it must be probable that the economic gains including the compensations will be flowing to the firm, and lastly, the amount of revenue has to be reliably measured (Starczewski and Ingersoll 2013). The phase of the conclusion of any deal must also be dependably estimated for these income ascending from service provision to be recognized. Proportion of completion mechanism is used in recognizing proceeds by reference to the achievement of transactions stage. Where such a mechanism is utilized, reporting phases recognize service provision.

The entity provides essential information when determining the revenue under this method on the degree of the service action as well as presentation during the era of reporting. As provided for in paragraph (7.1.2) of the AAS 15, the revenue arising from rendering a service will solely be recognized where it is likely that the economic gains connected to the transaction will flow to the firm. In this case, the recognition will include the recognition of revenue that emerged in the previous which was never beforehand recognized because of unfavorable likelihood assessment. Nevertheless, where the uncertainty emerges regarding the “collectability” of the sum already recognized as revenue initially, the “uncollectable” quantity or the sum in regards to which the retrieval has stopped to be likely, will be recognized as expenses, instead of as a modification of the revenue amount initially recognized. For such revenue from rendering service to be recognized, the firm has to reliably examine once it is concurred with the parties to the deal based on the following conditions. Individual’s enforceable privileges linked to services must be given as well as received by all the participants. Consideration must be swapped, while payment conditions and means must be consented to.

Recognition Requirements under AAS 15

Paragraph eight details condition in which for recognizing rents and dividends. It also provides the information on circumstances under which royalties and interest are recognized.  Paragraph (8.1) provide that revenues which are emerging from the utilization of the firm’s assets that yield rents, royalties, dividends or interest be recognized in compliance with the paragraph (8.2) when, and only when certain conditions are met. Businesses have to control rights regarding consideration payable for the ventures as well as asset provision. Again, it has to be likely that gains in economy encompassing “consideration” will accrue to companies. Moreover, revenue levels must be estimated reliably (Lamoreaux 2012). The recognition of rent revenue must reflect AAS 17 and that the interest revenue has to be recognized on a time proportionate foundation which considers the actual yield on the financial property. Royalty revenue has to be recognized on an accrual framework in compliance based on pertinent contract whereas the revenue from the dividend has to be recognized where the right of the firm to receive payment is created.

Measurement and Recognition Disclosure

The Company that this paper discusses is the Ford Australia, a motor vehicle multinational corporation. The review of the current status of financial reporting of the Corporation shows compliance with AAS 15’s provision on revenue disclosures (Schaub 2004). The firm has disclosed the policies of accounting embraced for the revenue’s recognition alongside the methods embraced in the determination of the stage of completion of contracts which involve the rendering of services as provided for in paragraph 12. The company has also complied with the provision of paragraph 12.1 (b) of the AAS 15 by disclosing the value of individual classification of revenue recognized throughout the reporting time alongside selling goods (vehicles), and offering services. Ford Australia has also recognized asset contribution (both cash alongside non-cash monetary properties). The corporation’s financial reporting has also adhered to the provision of paragraph 12.1 (c) by disclosing the revenue volume emerging from trade in commodities integrated into the revenue category.

The company is also in compliance with paragraph 12.2 (both a. and b.) of AAS 15 by disclosing the information regarding the revenues arising from the internal operating activities and outside the operating activities respectively (Ahmed and Alam 2012). The Corporation has also adhered to the paragraph 13 of AAS 15 (comparative information) by disclosing the necessary information for the previous conforming report duration that matches the needed disclosures by AAS 15 for the present reporting period.

References

Ahmed, K. and Alam, M., 2012. The effect of IFRS adoption on the financial reports of local government entities. Australasian Accounting, Business and Finance Journal, 6(3), pp.109-120.

Bruhn, A. and Miller, M., 2014. Lessons About Best Interests Duty. Australasian Accounting Business & Finance Journal, 8(4), p.23.

Colson, R.H., Bloomfield, R.J., Christensen, T.E., Jamal, K., Moehrle, S.R., Ohlson, P., James, A., Penman, S.H., Previts, G., Stober, T.L. and Sunder, S., 2010. Response to the Financial Accounting Standards Board's and the International Accounting AAS 15Board's Joint Discussion Paper Entitled,'Preliminary Views on Revenue Recognition in Contracts with Customers'. Accounting Horizons, 24(1), pp.2013-682.

Fisher, K., 2014. A New Model for Revenue Recognition: Key Changes to Generally Accepted Accounting Principles. Available at SSRN 2438118.

Herz, R.H. and Petrone, K.R., 2004. Internaitonal Convergence of Accounting Standards-Perspectives from the FASB on Challenges and Opportunities. Nw. J. Int'l L. & Bus., 25, p.631.

Lamoreaux, M.G., 2012. A new system for recognizing revenue. journal of Accountancy, 213(1), p.30.

Moerman, L.C., 2012. Book Review Buckley, R.(2011) Debt-for-Development Exchanges: History and New Applications. Australasian Accounting, Business and Finance Journal, 5(4), pp.145-147.

Ruder, D.S., Canfield, C.T. and Hollister, H.T., 2004. Creation of world wide accounting standards: convergence and independence. Nw. J. Int'l L. & Bus., 25, p.513.

Schaub, A., 2004. Use of International Accounting Standards in the European Union, The. Nw. J. Int'l L. & Bus., 25, p.609.

Schulzke, K.S., Berger-Walliser, G. and Marchini, P.L., 2013. Lexis Nexus Complexus: Comparative Contract Law and International Accounting Collide in the IASB-FASB Revenue Recognition Exposure Draft. Vand. J. Transnat'l L., 46, p.515.

Starczewski, L. and Ingersoll, B., 2013. Revenue recognition: Ten top changes to expect with the new standard. Bloomberg BNA, 1.

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