New Revenue Standard - AASB 15

With the new Revenue standard already in use, here’s an overview of what Audit Committee members need to know to be aware of to ensure compliance.

Margot Le Bars Partner, Capital Markets and Accounting Advisory Services

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New Revenue Standard - AASB 15

November Edition, Many Hats: Audit & Risk Insights

What's the background to the new revenue standard?

The new standard reflects regulatory changes at the global level to address concerns about inconsistencies and weaknesses in the existing rules for revenue recognition. There was also a concern that the existing rules were failing to keeping pace with the growing complexity of customer transactions we see today.

The new standard provides a 5-step model to revenue recognition with very detailed guidance behind each step. In essence, the standard requires that businesses look at separate elements of a transaction, allocate the transaction price to the elements based on their relative stand-alone value, and recognise revenue for each element when or as control of each element is transferred to the customer.

While this might sound similar to the framework we use today, in reality it is quite a different model and requires you to think differently about revenue recognition.


What are the financial impacts?

The impact on financial performance can be grouped into three key areas: changes in timing of revenue recognition, changes in the amounts of revenue recognised and changes to costs capitalised for customer contracts.

Timing of revenue recognition

The timing of revenue recognition could change due to new guidance on how we account for bundled offerings; variable consideration, which might include rebates, discounts, success fees and performance fees; and the new point in time versus over time recognition criteria, which is based on control rather than our historical model of risks and rewards (and is probably one of the more significant changes).

Amounts of revenue recognised

The amounts of revenue recognised could change due to new guidance on accounting for financing; refreshed guidance on principal versus agent, which determines whether you record revenue on a gross or a net basis; and new guidance on payments to customers, which will typically reduce the amount of revenue you recognise.

Costs capitalised for customer contracts

The costs capitalised for customer contracts could change due to new guidance on capitalisation of contracts costs, such as commissions and set-up costs. For some companies  this may mean more costs are capitalised and for others less, depending on what their existing practices are.


What are the operational impacts?

From an internal perspective, the changes introduced by the new revenue standard may affect company controls, processes and system designs. Companies may need to consider changes to their employee compensation or bonus plans, and think about dividend and tax planning strategies.

From an external perspective, contracts based on a revenue or profit amount (eg. debt covenants, contingent consideration, rent or other expenses based on turnover or profits) could all be affected. Some of these arrangements may need to be renegotiated before implementation.

Is there an impact on existing contracts?

Some companies have identified instances where their customer contract terms don't reflect the intended commercial objective, and have used their transition projects as an opportunity to revisit contractual terms or streamline their contracting process

While this might sound similar to the framework we use today, in reality it is quite a different model and requires you to think differently about revenue recognition.

What about interaction between other new standards?

The new revenue standard states clearly that any revenue from contracts with customers that fall into another standard should be accounted for under that standard (eg. leasing, insurance or financial instruments standards), with the rest being accounted for under the revenue standard. Consequently, we've seen, for example, property owners needing to split lease and revenue components in their rental contracts as lessors. This can be a complex process.

Some revenue-like items accounted for under other standards also refer to the new revenue standard for guidance; for example, if companies have sold some property, plant and equipment or some intangible assets, the new principles in the revenue standard around transfer of control now apply to those sorts of transactions as well.

Finally, companies should watch out for any business combinations they might have done in the period just before adoption: there can be some complexities in this area, particularly if there are significant amounts of accrued revenue or if there is a significant change in revenue recognition policies under the new standard.


What questions should Audit Committees ask?

  • Have we set up a governance structure for the adoption of the new revenue standard?
  • Has the finance team done a robust accounting impact assessment and benchmarked those outcomes with the industry peers?
  • Has management assessed and addressed potential operational impacts?

November Edition, Many Hats: Audit & Risk Insights

Contact us

Margot Le Bars

Margot Le Bars

Partner - Capital Markets and Accounting Advisory Services, PwC Australia

Tel: +61 3 8603 5371

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