Revenue Recognition

This article discusses the implementation of AASB 15 Revenue from Contractors with Customers for TPG Telecom Ltd, Metcash Ltd and National Australia Bank limited. It includes the five-step model for revenue recognition and the differences between income and revenue. The article also highlights the challenges faced by entities in preparing their financial statements under the new framework.

Revenue Recognition

Abstract
Three separate reports have been prepared for TPG Telecom Ltd, Metcash Ltd and National
Australia Bank limited by following the new Australian Standard AASB 15 Revenue from
Contractors with Customers. It includes the core principles, objectives and scope of AABS 15
for these three organisations. The reports also describe the implementation of the five-step
model to recognise revenue in AASB15for three different companies that are from different
industries. It also includes the differences in definition and recognition criteria for ”income”
and “revenue”.
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Table of Contents
Abstract.................................................................................................................................................1
Introduction...........................................................................................................................................3
Literature Review..................................................................................................................................3
Part A................................................................................................................................................3
TPG Telecom Ltd..........................................................................................................................3
Metcash Ltd...................................................................................................................................4
National Australia Bank Ltd..........................................................................................................6
Part B.................................................................................................................................................7
Definition of income......................................................................................................................7
Recognition criteria for income.....................................................................................................7
Definition of revenue.....................................................................................................................8
Recognition criteria for revenue....................................................................................................8
Conclusion.............................................................................................................................................8
References.............................................................................................................................................9
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Introduction
AASB 15 Revenue from contracts with customers has replaced its existing accounting
instructions and introduced a model for revenue recognition focusing on upgrading the ability
to compare revenue identification operations across industries, practices, capital markets and
jurisdictions. It has changed the financial reporting and the way that entities use to recognise
revenue (Aasb, 2014). Significant changes to the financial reporting have been noticed after
the adoption of IFRS and these changes are being represented by AASB 15 with AASB 16,
AASB 9, Lease and Financial instruments. The changes seem to be complex and affecting the
accounting treatment. Most of the entities are facing challenges while preparing their
financial statements by following the latest accounting standards.
Literature Review
Part A
TPG Telecom Ltd
Revenue Recognition Policy
The revenue recognition policy of TGP should consist of revenues related to the
telecommunication services provided to the corporate, wholesale customers and consumer.
The organization has different telecommunication services plans that are operated on many
networks and utilizes a number of multi-level subsystems and automated billing systems for
recognizing revenue. AASB 15 should be applied for the recognition of revenue (TPG, 2017).
The revenue policy should examine bill revenue streams, average revenue per user, revenue
from major customers and corporate and new plans. The estimation and depiction of true
revenue value are considered to be very much important for the organization.
Objective, core principle and scope
AASB 15 main objective is to provide useful information to the stakeholders about the
amount, uncertainty, timing and nature of cash flows and revenue arising from the contract
with the customer. TPG has to recognize revenue for depicting the transfer of the services or
products to the customers. The revenue needs to be recognized associated with the
telecommunication services that are being provided to the corporate, wholesale customers
and consumer.
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The core principle is that the term contract and all the relevant circumstances and facts also
need to be considered by the organization. TGP should identify different performance
obligations under the contract, recognition of revenue after the satisfaction of performance
obligations and allocation of the total price of the contract (Horngren and Harrison, 2015).
TGP should apply AASB 15 to all the contracts with the customers. However, there is an
exception which needs to be taken into account by the organization. The standard cannot be
applied to the lease contracts as per AASB 117 leases and non-monetary exchanges between
organizations in the same business line for facilitating sales to potential customers. The
standard can only be applied by the organization when the contract is being made with the
customers (Britton and Waterston, 2013). If other standards explain how to measure or
separate more or one part of the contracts then the organization should apply the
measurement or separation requirements in that standard. The standard shows accounting for
the increasing obtaining costs of a contract with the customer (Griffin et al., 2014).
Five-step model for RR
The five-step model for revenue recognition in AASB 15 needs to be applied by TGP. The
model consists of determining contract with the customers, determining performance
obligations in the contract, determining transaction price, allocating transaction price to
performance obligations and revenue recognition after the satisfaction of the performance
obligations (Vengadasalam, 2018). A detailed review needs to be carried out by TGP that is
as follows:
 Examining material contracts for determining transaction price and considering
proper allocation of transaction prices to performance obligations.
 Determining costs incurred during obtaining the new contracts.
 Determining costs which qualify as the fulfilment costs.
 The organization should determine and examine the connection costs and revenue that
are being charged to the customers.
Metcash Ltd
Revenue Recognition Policy
The revenue recognition policy needs to be implemented by Metcash Limited as per the
AASB 15. The revenue should be recognized by the organization to the extent that the
financial benefits would flow into the group and revenues would be measured reliably. The
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recognition of the revenue from the sale of predicts is to be done when the significant rewards
and risks of ownership of the products have passed to the customer. It is accepted usually
after the delivery of the products. The revenue generated from the promotion activities also
needs to be recognized during the occurrence of the promotional activities (Metcash, 2016).
Objective, core principle and scope
AASB 15 directs that Metcash Limited should provide all the useful information to the users
of the financial statements. The users should get information regarding the uncertainty,
timing, amount and nature of the cash flows and revenue generated from the contract with the
customer. Metcash Limited main objective would be recognizing revenue which is generated
from the sale of the products to the customers (Holton, 2012).
The core principle of AASB 15 states that Metcash should recognize the revenues for
showing the transfer or delivery of the products or services to the customers. The sale amount
needs to be reflected after the exchange of the products or services. The financial statements
of the organization should depict the recognition of the revenue in an appropriate manner.
AASB 15 should be applied by Metcash but there is also an exception which need to be taken
into consideration. It cannot be applied to the lease contracts as per AASB 117 leases and
non-monetary exchanges between the organizations in same business line facilitating sales to
the potential customers. The standard is to be applied when the products or services are
transferred or delivered to the customers (Copeland, 2014). If other standards explain how to
measure or separate more or one part of the contracts then the organization should apply the
measurement or separation requirements in that standard. The standard shows accounting for
the increasing obtaining costs of a contract with the customer.
Five-step model for RR
The five-stage model for Metcash as per AASB 15 is as follows:
 The determination and evaluation of the contract with the customer. The existence of
the contract needs to be there which means the goods need to be sold and delivered to
the customers.
 The implicit and explicit promises in the contracts for delivering the products or
services to the customer (Hardidge, 2018).
 The transaction price needs to be determined which is being payable by the buyer.
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 The determination of the allocation of the transaction price of the products and
services.
 The recognition of revenue should be based on when the products or services are
being transferred to the customer.
National Australia Bank Ltd
Revenue Recognition Policy
The revenue recognition policy of National Australia Bank Limited needs to be implemented
as per AASB 15. The policy should determine and evaluate contracts with the customers and
business models consisting of contingent pricing arrangement, contracts that provide products
and services, licensing arrangements, delivering products or services on time and other
complexities arrangements (National Australia Bank, 2016). The five-step model of AASB
15 needs to be followed for recognising revenue. The revenue received from the sale of
products and services to the customers needs to be recognised and depicted in the statements.
Objective, core principle and scope
The main objective of National Australia Bank Limited would be to provide useful and
significant information to the stakeholders with the help of AASB standard. The stakeholders
should know the amount, nature, uncertainty and timing of cash flows and revenue arises
from the contract with the buyer (Correia et al., 2015).
The core principle of the model is that the organization should recognize revenue for showing
the transfer of the products or services to the customers. The amount needs to be reflected
showing the exchange of the products and services. All the terms of the contract need to be
considered by the organization (Eun and Resnick, 2014).
AASB 15 is to be applied to all the contracts with the customers but it cannot be applied for
the contracts within the scope of the other standards like insurance, financial instruments and
leases. The standard is to be applied when the products or services are transferred or
delivered to the customers. If other standards explain how to measure or separate more or one
part of the contracts then the organization should apply the measurement or separation
requirements in that standard. The standard shows accounting for the increasing obtaining
costs of a contract with the customer.
Five-step model for RR
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The five-step model for revenue recognition of National Australia Bank Limited is as
follows:
 The identification of contract with the customers.
 The identification of obligations to contract performance.
 The estimation of the price of the transaction.
 The allocation of the price of the transaction to products and services.
 The recognition of revenue when the product or service is being transferred to the
customer.
Part B
Definition of income
The definition of income is surrounded by gain and revenue. Any ordinary activities of an
entity can emerge revenue and these activate include different names such as fees, sales,
dividends, interest, rent and royalties. There are other items that meet the definition of
income and these items are being represented by gains. Gains also show the increased value
in economic benefits that are not different from revenue in terms of nature. Thus, they cannot
be considered as a different element according to the IFRS Framework. Income can be
considered as the growth in economic interests during the period of accounting. It improves
the assets or reduces the liabilities that may cause growth in equity (Parrino, 2015).
Recognition criteria for income
Income is getting identified in the income statement itself. When growth in future economic
interests connected to growth in an asset or a reduction arises in a liability that can be
regularly reliable. As an effect, the identification of income arise the identification of growth
in assets or shrink in liabilities. This refers that once the asset is being identified or liability is
getting decreased or not being recognised as per the Conceptual Framework's asset, income
will be identified concurrently. A key purpose has been mentioned in IAS 18 to recognise
revenue in case it is not getting identified. Revenue will be identified only when the future
economic interest will move towards the entity; these interests could be constant reliably
(Pandey, 2015).
Definition of revenue
A new framework has been provided by AABS 15 to identify revenue and to calculate it by
following a five-step approach. AASB 15 Revenue from contracts with customers has
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replaced its existing accounting instructions and introduced a model for revenue recognition
focusing on upgrading the ability to compare revenue identification operations across
industries, practices, capital markets and jurisdictions. It has changed the financial reporting
and the way that entities use to recognise revenue. Significant changes to the financial
reporting have been noticed after the adoption of IFRS and these changes are being
represented by AASB 15 with AASB 16, AASB 9, Lease and Financial instruments.
Recognition criteria for revenue
Revenue can be identified when all performance commitment is completely satisfied by
shifting power of a guaranteed good service to the customer. The contractor at the time of the
contract need to decide whether the power of the good or service going to be transferred to
the customer or not. This decision should not be changed until the end of the contract.
Revenue will be identified at a point in time for all other commitments towards the
performance. In order to identify the revenue, an organisation requires evaluating the
progress to the absolute satisfaction of the production commitment with the aim of
identifying revenue. Revenue is realizable when the existence of convincing proof of an
arrangement can be found and the delivery of a product or services has been given (Dlabay
and Burrow, 2008).
Conclusion
The new framework of AASB 15 to recognise revenue does not seems to be a convenient
framework for the organisations as most of the entities are having challenges in order to
prepare their financial statement. The changes that have been implemented seem to be
complex and the accounting treatment is getting affected by it.
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References
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2019].
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Copeland, L. (2014). Exchange rates and international finance. 11th ed. Harlow: Pearson.
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management. 11th ed. Lansdowne: Juta.
Dlabay, L. and Burrow, J. (2008). Business finance. 10th ed. Australia: Thomson/South-
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Eun, C. and Resnick, B. (2014). International finance. 8th ed. Maidenhead, Berkshire:
McGraw-Hill Education.
Griffin, R., Ebert, R., Starke, F., Dracopoulos, G. and Lang, M. (2014). Business. 8th ed.
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Hardidge, D. (2018). Revenue—the Five Step Model for AASB 15. [online] Queensland Audit
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[Accessed 19 Jan. 2019].
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Horngren, C. and Harrison, W. (2015). ACCOUNTING. 8th ed. Sydney: Pearson Australia
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Metcash (2016). Annual Report. [online] Annualreports.com. Available at:
http://www.annualreports.com/HostedData/AnnualReportArchive/m/ASX_MTS_2016.pdf
[Accessed 19 Jan. 2019].
National Australia Bank (2016). Annual Financial Report. [online] Annualreports.com.
Available at:
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http://www.annualreports.com/HostedData/AnnualReportArchive/n/ASX_NAB_2016.pdf
[Accessed 19 Jan. 2019].
Pandey, I. (2015). Financial management. 12th ed. New Delhi: Vikas Publishing House PVT
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Parrino, R. (2015). Corporate Finance. 10th ed. Singapore: John Wiley & Sons.
TPG (2017). TPG Telecom Limited. [online] Tpg.com.au. Available at:
https://www.tpg.com.au/about/pdfs/FY17%20Annual%20Report.pdf [Accessed 19 Jan.
2019].
Vengadasalam, V. (2018). AASB 15 summary and five-step model explained - Accru. [online]
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[Accessed 19 Jan. 2019].
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