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The Relevant Principles And Provisions In Relation Of AASB

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Questions:

a) Outline how Companies are required to Account for Revenue under the New AASB 15.

b) Explain why the IASB has Issued AASB 15 in place of the Existing Revenue Standards.

c) Report the Possible Impacts that the New Recognition Criteria will have on your Chosen Company's  Current Operations and Financial Statements.

d) Evaluate the Flexibility Management has available in the Accounting Choices related to Revenue Recognition under the New Standards.
 
 

Answers:

Introduction

With the IASB paving way for the amendment in the revenue recognition with IFRS 15, the AASB followed suit with the release of AASB 15. It is expected that the implementation of AASB 15 would have significant implications for businesses not but for financial systems but also the operating mechanism as well. In this backdrop, the objective of this report is to analyse the relevant clauses of AASB 15, the need for introducing the same and the impact of this new accounting standard on Qantas which is the leading airline company of Australia.

Discussion

The revenue recognition from contracts in AASB 15 is essentially a five step process as indicated below (Deloitte, 2016).
 

Further, AASB 15 also provides detailed principles guidelines with regards to the above steps.

For instance, with regards to recognition of contract, AASB 15 (para.9) advocates that recognition of contract takes place when each of the five conditions mentioned below are met (AASB, 2015).

 


The contracting parties have provided their approval for the contract and want to fulfil the respective contractual obligations.

It is possible for the entity to identify the right of each party with regards to the transfer of goods and services.

It is possible for the entity to identify the terms of payment for the transfer of goods and services,

The contract must have commercial nature

It is fair to conclude that the concerned entity would be able to gain some consideration on the basis of the transfer of goods and services.

With regards to the identification of obligations regarding performance, it is necessary that when the contract is executed, there is identification of the performance obligations with regards to the goods and services transfer which relate to either distinct goods and services or those which are distinct but may be considered to be similar and therefore would be driven by similar obligations in relation to performance (para. 22). Besides, the transaction price has been defined as the consideration amount which a goods and services provider expects to recover to the transferee on account of the exchange done in relation to good and services promised to the other party or the customer (para. 47). When the concerned entity manages to fulfil the performance obligation mutually decided at the time of the contract by ensuring service or goods transfer, then the relevant revenue arising from the same may be recognised (para. 31). Further, the transfer of goods or service is assumed to have happened when the customers gain control over the given asset (i.e. product or service) (AASB, 2015).

 


2.The various reasons for which IASB issued a new standard for revenue replaced the older ones are highlighted below (IFRS, 2014).

Glaring inconsistency and loopholes in the existing revenue standards - The previous revenue standards offered limited guidance on a number of subjects which led to proliferation in the practices surrounding revenue recognition. Also, the limited guidance that indeed was provided was of little help to deal with the complex nature of transactions occurring in reporting entities. In order to supplement the limited guidance, the reporting entities started the application of US GAAP in a selective manner. However, under US GAAP the concepts related to revenue recognition were broad which when combined with specific requirements pertaining to the industry and transactions. The net result of this practice was that similar transactions had very different accounting treatment. Also, as new transactions emerged, the existence regulations and standards in this regard were find to be grossly insufficient.

Inadequate disclosure requirements – The existing standards and regulations in regards to revenue recognition led to information disclosures which were found to be wanting by the investors with regards to understanding the revenue of the company. In this regard, a particularly disturbing trend was there was no relation established between the revenue recognition and the relationship with financial statements. Thus, the isolated nature ofrevenue stating coupled with limited disclosures regarding management assumptions made the existing practices irrelevant.

 


The IFRS 15 and consequently AASB 15 tend to address the above issues and leads to the following advantages (PwC, 2014).

There would be improvement in comparability in customer revenue as there would be standardisation of recognition of revenues and costs from contracts.

This would reduce the need and utility for interpretative guidance as the same would no more be required because of reduced ambiguity.

There would be a drastic improvement in the overall disclosures and thus lead to prudent decision making by investors.

3.With regards to an airline company such as Qantas, AASB 15 would have significant implications. The focus areas in this regard are listed below (E&Y, 2015).

Accounting of loyalty programs

In accordance with AASB 15, the various loyalty programs would be treated as specific goods and services for which payment is extracted from the customers and the underlying consideration should be recognised as revenues as and when the performance obligations are fulfilled. This would lead to the revenue recognition from such programs being deferred into the future and thus would adversely impact revenue. The exact extent of impact for the company needs to be reviewed through an impact assessment.

Interline Transactions

Qantas has core sharing agreements with various operators and revenue recognition arising from these would change. Currently, the revenue collected from customer is realised only on a net basis after deducting the revenue portion of the other airline (Qantas, 2016). However, with the implementation of AASB 15, the company would need to recognise the complete amount taken from the customer as revenue. The amount paid to the other airline would be regarded as a cost and hence presentation in the income statement would undergo a change.

Ancillary Services

Currently, the revenue collected from the ancillary services is separate from the ticket revenue. Under the new standard, it would be imperative for the company to recognise every given ancillary service as different from each other. Further, performance obligation would need to be identified for each of these services and hence revenue recognition would be done only with the realisation of these obligations irrespective of whether the company is providing these services for charge or free. Hence, there would be a marked change in the revenue pattern for the company.

 

Breakage revenue from passenger ticket

The revenue from unused tickets would now be recognised after considering the rights that been unexercised and hence the proportion of revenue realised would be impacted. Hence, for companies which follow the redemption method the impact would be minimal but for companies like Qantas which follow the expiration method, the impact would be significant (Qantas, 2016).

4.One of the key features of the AASB 15 is the flexibility available to management in applying the discretion so as to enable complete and accurate recognition of revenue. This discretion would be required considering the vast ambit of complex transactions that the AASB 15 aims to apply to. Due to the differing nature of the industries, underlying business models, scale of operation, there would be subtle differences with regards to the practices followed and while ensuring comparability and greater disclosure, it ought to provide the requisite flexibility as a narrow interpretation of the clauses and their implementation would be severely curtailing and defeat the original purpose at hand. However, there needs to be regulatory mechanism put in place so as to ensure that this flexibility is not abused by the management to serve various ulterior motives (KPMG, 2015).

Conclusion

It is fair to conclude that AASB 15 provides a elaborate set of principles in relation to revenue recognition arising from contractual relationship. However, it provides the requisite flexibility which is required to implement the same while ensuring greater comparability and disclosure. Going forward the implications of AASB 15 would be profound in terms of accounting treatment of loyalty programs, ancillary services, interline transactions and breakage revenues from ticket.  The company needs to carry out a thorough impact assessment in order to understand the same.

 

References

AASB 2015, Revenue from Contracts with Customers, Australian Accounting Standards Board, [Online] Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14_COMPoct15_01-18.pdf [Accessed April 2, 2017]

Deloitte 2016, AASB 2015:Revenue from Contracts with Customers, Deloitte Website, [Online] Available athttps://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-aasb-navigator-191216.pdf[Accessed April 2, 2017]

E&Y 2014, The new revenue recognition standard — airlines, E&Y Website, [Online] Available atwww.ey.com/...airlines.../technicalline_bb2817_revenuerecognition_airlines_28augus[Accessed April 2, 2017]

IFRS 2014, IFRS 15 Revenue from Contracts with Customers, International Financial Reporting Standards, [Online] Available athttps://www.ifrs.org/Current-Projects/IASB-Projects/Revenue-Recognition/Documents/IFRS-15/Revenue-from-Contracts-Project-summary-Feedback-Statement-May-2014.pdf[Accessed April 2, 2017]

KPMG 2015, Implementing the new revenue recognition standard AASB 15, KPMG Website, [Online] Available athttps://assets.kpmg.com/content/dam/kpmg/pdf/2015/09/implementing-revenue-standard-aasb15-15-sep-2015.pdf[Accessed April 2, 2017]

PwC 2014, New revenue rules Is your business impacted?,PwC Website, [Online] Available athttps://www.pwc.com.au/assurance/ifrs/assets/new-revenue-rules-may14.pdf[Accessed April 2, 2017]

Qantas 2016, Annual Report 2016, Qantas Website, [Online] Available at https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf [Accessed April 2, 2017]

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