Revenue Recognition AASB 15 – What companies need to consider and DO NOW!

Author: Carmen Ridley, Principal – Australian Financial Reporting Solutions (www.afrs.com.au).
Member of the AASB, and a specialist consultant for Caseware Australia & New Zealand.

The panic has finally kicked in

I have been presenting about the changes to the revenue accounting standard AASB 15 for a number of years, since IFRS 15 was issued in May 2014 (followed by AASB 15 in December 2014). My key theme was ‘don’t delay’ looking at the impact of this standard, since revenue recognition is fundamental to most businesses.  You can’t assume that your current policies are in compliance with AASB 15, as the devil is in the detail.

Unfortunately, most entities focussed on the effective date of 31 December 2018 and 30 June 2019 which seemed a long way ahead. We can’t stop time, and now have ended up in the situation where AASB 15 has been effective for for-profit entities since 1 January 2018 for December year ends and 1 July 2018 for June year ends, yet overall, very little work has been done to consider the impact of the changes of AASB 15 and the correct recognition of revenue.

A realisation of the impact of AASB 15 is now generating significant activity.

I have been waiting for the realisation to dawn, and in the last couple of months have finally received the panic phone calls where finance teams have become fully aware that time has run out and they have not considered even the basic fundamentals of this standard in relation to business impacts such as:

  • Do we need to restate comparatives?
  • Can our systems cope with the new standard?
  • Do our contracts need to be changed?
  • What about management accounts/budgets?
  • How do I prepare the opening balance sheet?
  • What are the tax implications?
  • Will changes in revenue recognition cause breaches of bank covenants?
  • How will bonuses which are linked to revenue be affected?
  • What about earn-out clauses in existing contracts that refer to revenue?

Auditor concerns: Companies that have not planned sufficiently for AASB 15 might receive qualified revenue audit opinions

Based on a number of discussions with auditors, businesses are in the potential reality of having December 2018 and June 2018 financial statements which are qualified in relation to revenue. In my view, if your financial statements are qualified on revenue, then the financial statements are essentially useless since there are flow-on impacts to the balance sheet – the correct application of AASB 15 will likely result in more asset/liabilities.

So what do you need to do….

Ensure that consideration of AASB 15 is at the top of your to-do list. You will need to understand your:

  • revenue streams
  • customary business practices
  • contracts
  • existing revenue recognition practices.

Effectively, you need to start with a blank piece of paper and determine the correct accounting treatment under AASB 15 before you compare it with what happens now.   You also need to consider non-financial impacts such as systems, contracts, bank covenants, earn-out clauses, bonus schemes etc.

Other articles of interest:

If you don’t have the expertise/resources in your finance team then talk to your advisors or an expert in Accounting Standards and get some help. You can’t wait any longer and panic isn’t productive!

For further information about anything in this article, please contact Carmen Ridley via email: cridley@afrs.com.au.