The new revenue standard AASB 15 is finally effective. Issues are arising during implementation which we explore in our series of articles on AASB 15 Revenue from Contracts with Customers. This article specifically discusses complexities with determining when control of a good or service transfers to the customer and when revenue can be recognised.
Recognising revenue on transfer of significant risks and rewards to the customer under the old revenue standard was a widely understood concept. However, recognising revenue on transfer of control of a good or service to a customer as required by AASB 15 is new and could result in differences in the timing of when revenue is recognised.
Control, assessed from the customer’s perspective, is the ability to direct the use of and obtain substantially all of the remaining benefits from an asset1. Although this might sound straightforward, in practice complexities arise in determining whether the customer:
Control can pass to a customer continuously with revenue recognised over time or it can pass at a single point in time with revenue recognised at that point.
For example, a solar panel manufacturer selling panels to an installer could recognise revenue on sale date if, the manufacturer is unable to transfer the solar panel to a different installer to meet the needs of the end customers, i.e. the customer can prevent others (including the seller) from using the asset. However, if the manufacturer were able to transfer the solar panel between installers, revenue is likely to be recognised later, on installation.
Consider another example, a gas company delivers natural gas to customers for on-demand consumption. As the customer benefits from the gas on a continuous basis as they need it, revenue is recognised over-time. However, if gas is delivered to the customer’s storage facility, control would transfer at the point the gas is placed in storage as the customer does not obtain benefits from the gas until it is in their facility.
An asset may be sold, physically and/or legally in the customer’s possession but might be subject to an agreement where the asset can or must be repurchased by the seller. The asset to be repurchased can be either the original asset, substantially the same asset, or another asset of which the asset that was originally sold is a component.
The standard starts from the basis that where the seller has an obligation or a right to repurchase the asset, the customer does not have control of that asset. This is because the customer is limited in its ability to direct the use of and obtain the benefits from the asset, despite its physical possession.
On the flip side, if the customer has a right to require the seller to repurchase the asset, it is possible for the customer to obtain control of the asset and revenue recognised.
Therefore, if you have arrangements where you have committed to repurchase an asset from your customer, then these will need to be looked at closely when performing the control analysis. For example, are you a food wholesaler who has sold a customer a raw material that will be used by that customer in the manufacture of the end food product the wholesaler then buys back, or a real estate developer who has sold property subject to call and/or put options.
Assessing revenue recognition on the basis of transfer of control can be complex. Further, don’t assume the timing of when significant risks and rewards transfers to a customer coincides with when control transfers and that the timing of revenue recognition will be the same under the new revenue standard. If you have not re-assessed revenue recognition using the control criteria, then this is a must do.
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.
1.AASB 15.33: Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services).