AASB 15 Revenue from Contracts with Customers is now applicable. Our series of articles explore issues to consider as part of your implementation project. This article discusses the level of detail which will be required with the new qualitative disclosures in your annual financial statements.
A significant reason why we have a new revenue standard is the perceived lack of disclosures about revenue under the old standard, even though it is a key line item in most entities’ financial statements. In contrast entities must now disclose information for users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Even where there has been no change in the timing or amount of revenue recognised, we are expecting an increase in revenue related disclosures.
To meet the objectives of the new disclosure requirements, revenue disclosures should tell your entity’s revenue story. Accordingly boiler plate disclosures taken from example financial statements issued by accounting firms, will not be acceptable. Disclosures need to be tailored to your entities’ specific circumstances including translating generic terms such as ‘transfer in control’ to tangible terms to demonstrate when control passes. For example, a miner might say: ‘revenue is recognised when the ore is loaded onto the ship at which point it is deemed that the customer controls the ore’.
Telling the revenue story requires that disclosures explain how your billing cycle interacts with the revenue you recognise. You need to explain why you have contract assets (where consideration is yet to be received) or contract liabilities (consideration received in advance of providing the good or service). This may be as simple as saying: ‘we bill our customers quarterly in advance for our services, which results in a contract liability that is recognised as revenue straight line over the over the quarter as we provide the service’.
If your revenue recognition results in a contract asset, you should also take that disclosure a step further to clarify at what point the contract asset moves to a trade receivable. Amounts should only be transferred to a receivable when the right to consideration becomes unconditional and it is only the passage of time before payment is received. For example if you sell machinery and receive a bonus 6 months after installation based on the machine meeting KPIs you may disclose something like: ‘balances are transferred from contract asset to trade receivables once KPIs and the final consideration are agreed.’
Finally, beyond updating your accounting policies, you should consider whether your significant judgements and estimates also need updating. Where there areas that took more time assessing and applying when transitioning to the new revenue standard? It is probably going to be areas such as variable consideration, over-time revenue recognition or complex estimates of stand-alone-selling price, as these are rarely straightforward.
Even where there has been no change to your recognition of revenue, it is essential to reconsider your associated disclosures in the lead up to this year-end. Really sit back and consider whether you have explained in plain English the nature, amount, timing and uncertainty of revenue and cash flows arising from your contracts. These are great disclosures to get ahead with and agree with your auditors before you plunge into the busy July reporting season.
If you want to explore more about the new revenue disclosures our previous article in this series discussed the new quantitative revenue disclosures required by AASB 15. Alternatively, if 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.
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