AASB 15 Revenue from Contracts with Customers is now applicable. Our series of articles explore some of the issues you should be considering as part of your implementation project. This article discusses situations when a contract might be partially in the scope of the new revenue standard and partially in the scope of another standard.
The new revenue standard is a residual standard. It picks up any contracts with customers that are left after you have identified any other standards that might apply first. Most commonly this other standard could be AASB 117/ AASB 16 Leases but it could also be others such as AASB 9 Financial Instruments or AASB 4 Insurance Contracts. For example, a company may be renting out a building and also providing cleaning and maintenance services to the tenant. The rental would be accounted for under the leases standard, whilst the cleaning and maintenance services would be captured by the new revenue standard. Typically you first apply the guidance in the other standards to work out how you separate the parts that are in scope of that standard and what is left is in the revenue standard.
It’s tempting to think that splitting a contract into its different components really isn’t that important. Especially if both elements have similar revenue profiles i.e. part straight-line operating lease revenue and part over-time service revenue like the rental example discussed earlier. Whilst that is true, it is important to remember that the new revenue standard also introduces a whole suite of new disclosure requirements.
The disclosure requirements in the new revenue standard only apply to contracts to the extent that they are within the scope of the standard. Therefore if you do not split the contract and assume it’s all in scope of the new revenue standard, then you may end up providing more disclosures about the whole contract, than you would have had to if you had split the contract into the revenue and other component parts. Having said that, when you do separate a contract into its components you will need to provide the appropriate disclosures for the other parts of the contract as well, e.g. leasing or financial instruments disclosures.
There may also be instances where the timing of recognition of revenue could be different. For example if part of the arrangement is a financial instrument, the treatment of cash flows received will be different to that under the new revenue standard. In another example, a service provider might use a dedicated machine to provide a service to a customer, and also provide a maintenance services for the machine across the contract life. Whilst the rental income on the machine may be recognised straight line as an operating lease, the revenue allocated to the maintenance services might be recognised each time they are provided not straight-line, resulting in different revenue recognition profiles for the two components.
To work out what is in the scope of each standard, you start with the other standards first. If financial instruments are involved it may be that after you have recognised any financial assets or liabilities at fair value, there is nothing left to be scoped into AASB 15.
If leases are involved, once you have adopted the new leases standard, that standard tells you to use the normal ‘standalone selling price’ principles in the revenue standard to allocate revenue between the lease and revenue component.
Allocating between various standards can be more complex than allocating revenue between performance obligations as you must deal with requirements and interactions of a number of different standards. For example, contract lengths due to renewal options may be interpreted differently under the leasing and revenue standards, potentially impacting the total of revenue/income to be recognised and identification of different promises in the contract. You will need to carefully consider the interplay between standards carefully. Therefore this is not something that should be attempted last minute but needs to be systematically thought through.
If you wish to discuss this further, or any other aspects of the implementation of AASB 15, please contact your KPMG adviser or the contacts on this page.