Impact Of New Revenue Recognition Standard On Australian Companies

Shortcomings of the Old Standard

When the new revenue recognition standard is being implemented, the same be complex as well as challenging to reciprocate in the existing affairs of the business. It can drastically change the way in which the financial reporting is being done. This new standard would be effective from 1^st January 2018 for the profit making entities and from 01^st January 2019 for the non-profit organizations (Belton, 2017). The new standard is very integrated as well as very comprehensive and sets up a five-step procedure in order to recognise revenue in the books of accounts. There steps have been described below in brief:

1. Identification of the contract from the customer, which can be in written form, oral, or verbal or even implied. All the terms and conditions would be clearly stated in the contract.
2. The second step in the process is the identification of the performance to be done in respect of the contract. The same can be in the form of the delivery of goods or the provision of services or both of these. These may again be divided into a number of sub parts or different components of goods delivery or services levels within a given period.
3. The 3^rdstep in the process is the determination of the transaction prices. For this, several aspects are taken into consideration like the discount, refund, bonus, concession, etc. Once the entire final contract price has been determined, it also needs to be seen that what will be the scenario in case of escalation in prices (Alexander, 2016).
4. The fourth step in the process is the allocation of the transaction price to the different components of the contract. This needs various estimates, assumptions and supporting in terms of cost incurred on each component.
5. The fifth and the last step as per the new revenue standard is recognition of the revenue in the books when the Performance is completed(Dichev, 2017).

Uniformity and comparable status: Before the new standard, several guidance’s processes and standards were being used for revenue recognition in different countries. This led financial statements to be incomparable and thus missing one of the qualitative characteristics of conceptual framework. However, AASB 15 proposes to remove all these inconsistencies and giving flexibility in the hands of the auditors and accountants while preparation and presentation of financial statements.

Disclosure requirements: The new revenue standard warrants for more detailed disclosure in respect of revenue line item, which is shown just as a single line item in the profit and loss account. This will help the user of the financial statement in understanding the nature, extent and timing of the revenues recorded and if at all there is any uncertainty in the collection of revenues. It will also help the user in understanding the estimates, judgements of management and what are the terms of major contracts (Choy, 2018).

Focus shift from income statement to the balance sheet: The previous standard on revenue used to focus only on the income statement aspect for recognizing revenue in books, as if the same should have been realized, realizable as well as earned. The new standard does away with this rule and focuses on whether the goods and services, which were promised to the customer, have been delivered or rendered and whether the entity expects to receive payment in respect of that. The new standard will require the companies to move the asset out of the books and the pay off the liabilities in order to recognize revenue.

In addition to the above-mentioned points, it can be said that the new standards are fundamentally balanced and do away with the inherent deficiencies in the old standard. The old standard measured the revenue at the fair value whereas the new standard recognizes the revenue based on assets and liabilities approach. Even though the contractual; delivery of the goods has happened or not, irrespective of the same, the revenue can be booked in the P&L under the new standard if the net assets have increased. Few of the advantages with new standard are as follows:

The old concept was based on the principle of prudence whereas the new concept is based on neutrality concept and hence it will help the company to show the true and fair view of the books of accounts (Das, 2017).

The new standard also does away with the concept of deferred revenue, which is against the definition of liability.

Advantages of the New Standard

This development will also eliminate the different approaches being used by the accountants in revenue accounting based on industry. This will ensure uniformity and comparability of financials throughout the world (Trieu, 2017).

For analysing the impact of new revenue accounting standard on the Australian companies, two companies have been chosen, both listed on the Australian Stock Exchange. The companies are namely Telstra Limited and Wesfarmers Limited. Telstra is the largest telecommunication company in Australia serving millions of customers and engaged in construction, operation and maintenance of the telecommunication networks including broadband services, mobile, internet, voice media and several other services. Out of the many impacts due to the introduction of the new revenue recognition standard, some of the major impacts are listed below:

1. The long term contracts which were usually bundled under the old standard can no more be bundled and have to be separated between the hardware and services component upfront while entering into the contract and the revenue on account of each component would also be divided and fixed upfront so that there is no ambiguity later on(Saeidi, 2012).
2. In the earlier standard, discount was given to the customers in case of the bundled contracts but now the same will be required to be allocated or apportioned in between the services and goods going forward.
3. Earlier revenue standard allowed for deferred payment terms in the contract but as per the new standard, the finance portion in the contract will be required to be separated using an appropriate discounting factor and the basis of the calculation would need to be disclosed.
4. Furthermore, in case of telecommunication industry like Telstra, the treatment of few types of costs like the activation costs, customer acquisition cost and the contract fulfilment cost may change in greater proportion(Raiborn, et al., 2016).
5. At present, in the telecommunication industries, concept of residual method is being followed but with the elimination of concept of “contingent revenue cap” under the new standard, additional revenue will be required to be allocated to products which are being sold at discounted prices or free of cost.
6. The new set of standards are not only applicable on the new contracts but also on the existing contracts and portfolio of performance obligations, thus this is bound to increase the complexities in accounting and reporting for a while. In addition, since the restated number s would also be required to be reported, it will increase the workload as else the data would be incomparable with the last year.
7. The goods and services, which were earlier being offered as free samples, gifts etc. will now be required to be reported as distinct goods and services.
8. It can be seen that the telecommunication companies offer a number of services through a single contract like usage of, access to, data and other network facilities like data, media, internet, etc. Under the new rules, the classification would be required to be made under the different heads and it can be complex task(Kuhn & Morris, 2016).

The second company, which has been selected, is Wesfarmers Limited, which is the largest conglomerate in Australia. It is the largest Australian company in terms of revenue as well as employability and deals in products like chemicals, fertilizers, and mining business. It majorly operates in New Zealand and Australia and has presence in several other countries. As per the past annual report of the company, it has been disclosing the revenue recognition process and the assumptions with regard to the same but with the introduction of new revenue recognition standard, there will be several changes mentioned below:

1. There will be separate disclosures in few aspects in the annual report like the estimates, judgements and assumptions with respect to unbilled revenue, customer acquisition cost like the upfront fees and sales commission now need to be separately disclosed.
2. Since in the mining industry, there can be different stages of development of mine and the production stage, this might have an impact in the form of different performance obligations and therefore the revenue may be recognised at different times, which can be either deferred or even accelerated.
3. Reversals and claims have an impact of reducing the revenue; therefore, going forward, the revenue will be recognised in the books only when it is certain that the reversal will not happen(Werner, 2017).
4. Due to the underlining shipping term, the freight revenue may have to be deferred.
5. Due to the implementation of the new leasing standards, it is expected that the liabilities of Wesfarmers to be doubled as now the operating leases will also be reported as liabilities.
6. Furthermore, there are a number of costs, which are required for acquiring a contract or fulfilling a given contract. Going forward, the same needs to be established by the company that these costs belong to a given contract before reporting the same in financial statements. These costs should be reported in the books if at all it is increasing the overall resources of the company and is expected to be recovered back(Vieira, et al., 2017).

Food Pro Ltd.
Profit and loss statement for year ended 30 June 2018
Particulars	Amount ($)	Amount ($)
Profit before tax		607,500
Less: Actual rent revenue	60,000
Add: rent received in cash	64,800
Add: Entertainment Exp – not allowed as deduction	29,880
Add: Depreciation for accounting purposes @ 15%	96,000
Less: Depreciation for taxation purposes @ 20%	128,000
Add: Provision for doubtful debts	33,600
Add: Loss on sale of plant	16,001
Add: Annual leave expense – not allowed as deduction	87,990
Less: Bad Debt	38,400
Less: Annual Leave actual expense	72,990
Add: Insurance Expenses	57,600
Less: Insurance paid in cash	69,600
Add: R&D expenditure in P&L	72,000
Less: Expenditure allowed for R&D expenditure	360,000	(271,119)
Profit as per taxation		336,381
Tax @ 30%		100,914

 

Rent Revenue A/C
Particulars	Amount ($)	Particulars	Amount ($)
Balance b/d	13200	Cash received (B.F.)	64800
Profit & Loss A/C	60000	Balance c/d	8400
	73200		73200
Prov for doubtful debt A/C
Particulars	Amount ($)	Particulars	Amount ($)
Bad debt (B.F.)	38400	Balance b/d	43200
Balance c/d	38400	Profit & Loss A/C	33600
	76800		76800
Prov for annual leave A/C
Particulars	Amount ($)	Particulars	Amount ($)
Actual expense (B.F.)	72990	Balance b/d	120000
Balance c/d	135000	Profit & Loss A/C	87990
	207990		207990
Prepaid Insurance A/C
Particulars	Amount ($)	Particulars	Amount ($)
Balance b/d	60000	Profit & Loss A/C	57600
To Bank	69600	Balance c/d	72000
	129600		129600
R&D costs
Particulars	Amount ($)	Particulars	Amount ($)
Balance b/d	60000	Profit & Loss A/C	57600
To Bank	285600	Balance c/d	288000
	345600		345600

The deferred tax asset and the deferred tax liability calculation as on 30^th June 2017 and 30^th June 2018 has been shown below:

The requisite journal entries have been shown below:

The provision for annual leave has been added back to the profit and the annual leave amount being actually paid to the employees has been deducted as these expenses are allowed in taxation on payment basis (Linden & Freeman, 2017). This is justified from the deferred tax point of view as the deduction is allowed on the payment basis and not the accrual basis as this may then be misused by those who want to avoid or defer the taxes by including a non-existent provision in the books (Jefferson, 2017).

The same treatment has been done for accounts receivables from the taxation perspective. In the calculation for the deferred tax, the provision for bad and doubtful debt has been added back to the accounting profit to arrive at the taxable profit and no benefit has been given on the same. On the other hand, actual bad debt expenses has been allowed as deduction for calculating the taxable profit as this is also allowed on actual basis (Kew & Stredwick, 2017).

Thus, treatment of both provision for annual leave and doubtful debt is the same and is justified as per the taxation laws.

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. second ed. London: Chartered Institute of Personnel and Development.

Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.

Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African Journal of Business Management, 6(23), pp. 7031-41.

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).

Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.ac