What’s your transition approach to accounting standard change?

There are two new accounting standards on the horizon, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases, which will significantly affect your financial reporting from 1 January 2019. Higher education providers will need to decide on how to transition to the new standards given that both standards provide two transition options. The two options that are given in the standards are a full retrospective approach and a modified retrospective approach. The federal Department of Education and Training have suggested, in their 2017 “Draft Financial Statement Guidelines for Higher Education Providers”, that Higher Education Providers adopt the modified retrospective transition method for both standards.


So, what is the modified retrospective transition method?

The modified retrospective method does not require a re-statement of prior period numbers, but will require revenue and leasing transactions to be accounted for under the new standards starting 1 January 2019. Any differences between your current accounting method and the new standards will result in an adjustment to the opening balance of retained earnings at 1 January 2019.

This contrasts to the full retrospective model, where you would need to restate prior period comparatives.

For the revenue standard, this means that you will not need to restate prior period figures but will recognise revenue transactions in accordance with the new standard from 1 January 2019. For the leases standard, this means that you will not have to record each lease as if the standard was always applicable – going back to the original lease commencement date. The modified retrospective approach allows you to reflect the changes to your balance sheet and income statement in the year of adoption.


What are the advantages of the modified retrospective transition method?

The good news is that this transition method is considered to be the simpler and less time intensive method compared to the full retrospective approach as prior periods do not need to be restated.


What are the drawbacks?

Comparability between reporting periods may be affected due to the use of different accounting methods. To combat this, additional disclosures will need to be provided under both standards. Under the revenue standard, you will need to disclose revenue under both the new and old standards in the year of transition. For leases, you will need to present a reconciliation between your lease commitments disclosure in the comparative year, and the new lease liabilities recognised on transition to the new standard, explaining any differences between these figures.


Is there anything else to think about in determining the transition approach?

Lessees have a policy choice under the modified transition method for how they initially measure right-of-use assets. Specifically they can choose to measure the right-of-use asset recognised on transition either:

  1. at an amount equal to the lease liability (less any accruals or prepayments), or
  2. as if AASB 16 had been applied at lease commencement (but using the incremental borrowing rate at transition).

This choice can be made on a lease-by-lease basis. The approach selected can significantly affect the amount capitalised for the right-of-use asset, and future depreciation expense. Typically, depreciation will be higher under the first option than under the second, but the first option will also be easier to apply.

Next steps…

As you work through your implementation projects over the coming months, you should start to consider whether the impacts will be material and how the transition approach will affect your financial statements in the year of adoption.

Contact us

Gordon Thomson

Partner - Capital Markets and Accounting Advisory Services, PwC Australia

Tel: +61 3 8603 3574

Alyssa Vokey

Senior Manager - Capital Markets and Accounting Advisory Services, PwC Australia

Tel: +61 3 8603 5284

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