Under the old revenue standard, revenue had to be reliably measured to be recognised. In contrast, the new revenue standard (AASB 15 Revenue from Contracts with Customers), allows a minimum amount of revenue from variable consideration that is not highly probable of reversing to be recognised. This would be the case even if the entire possible amount of revenue cannot be reliably estimated.
This change to limiting the amount of revenue to be recognised rather than precluding it in its entirety, could result in some entities recognising revenue from variable consideration earlier under the new standard. Previously, for example, many fund managers, waited to recognise performance fees until all the hurdles were known (i.e. reliably measured). Now, if any amount can be estimated and it is highly probable it won’t reverse then some performance fee is recognised when the investment management service is provided.
Variable consideration could exist even when the price appears fixed. If price can change due to the occurrence or non-occurrence of future events, such as liquidated damages in a construction contract, the price includes both fixed (e.g. total amount less maximum amount of liquidated damages that could be paid) and variable consideration (e.g. the liquidated damage that will not be paid). For example a $10m development contract, with a $2m penalty if not completed on time has an $8m fixed and a $2m variable component.
Other examples to be wary of include: transaction price based on a fixed percentage of an underlying value (e.g. net assets) or a fixed amount per usage, price protection clauses, and anticipated price concessions.
When variable consideration is identified, one of two methods can be used to estimate the amount to be included in the transaction price and recognised as revenue. The method used should be the one most appropriate to the variable consideration being measured:
Once variable consideration is calculated the amount is ‘constrained’. The constraint is applied so that revenue recognised is not reversed in future periods. It introduces a higher threshold (i.e. highly probable) for recognising revenue than the previous revenue standard1 (i.e. probable assuming the variable consideration is reliably measurable). Continuing with the above construction contract example, the entire $10m would only be recognised as revenue over the construction period if it is highly probable that the liquidated damages will not be paid. Under the old standard, these penalties may have been considered ‘cost of construction’ and not impact the amount of revenue recognised.
While the standard articulates determining the amount of variable consideration to recognise as a two-step process, in practice many entities may measure and apply the constraint in a one-step approach.
As variable consideration is an estimate, each reporting period, it should be re-assessed and any change in the amount recognised. If variable consideration recognised in the current period relates to services provided in previous periods, the amount related to the previous period is required to be separately disclosed in the financial statements.
The assumptions and methods used in measuring variable consideration that involves significant judgement are also disclosed.
Have you assessed whether your contracts contain variable consideration? Have you begun estimating the amount of variable consideration that can be recognised? Have you thought about the impact to your disclosures? If not, start now!
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.
 AASB 118 Revenue – the old standard for recognising revenue
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