When it comes to financial reporting in Australia, it's important to have a good grasp of accounting standards. This article aims to make things easier by breaking down AASB 15, which is the Australian Accounting Standard created by the Australian Accounting Standards Board (AASB) for recognising revenue from customer contracts.
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What is AASB 15?
AASB 15 Summary
AASB 15, also known as the Australian Accounting Standard for revenue recognition from contracts with customers, was introduced to improve comparability across various entities and industries. It provides a standardised model for recognising revenue and is in line with international reporting standards.
AASB 15 is based on IFRS 15 revenue from contracts with customers, which was developed and amended by the International Accounting Standards Board (IASB).
It was built with IFRS 15 revenue from contracts with customers, created and amended by the International Accounting Standards Board (IASB), as its base. AASB 15 includes Australia-specific amendments, these amendments can be identified by them having the prefix “Aus”.
What are the Core Principles of AASB 15?
A core principle of AASB 15 is to acknowledge revenue when goods or services are exchanged at a value that represents the expected payment. This is done in return for meeting performance obligations. The guideline covers all customer contracts except for those already addressed by other standards like leases, insurance and financial instruments.
Other objectives of AASB 15 include:
- Standardisation - AASB 15 aligns with international reporting requirements, which helps consistency in financial reporting across borders.
- Overcoming weaknesses - The standard addresses shortcomings in past revenue standards to help provide a better framework.
- Accurate reporting - AASB 15 framework allows for accurate and consistent financial reporting.
- Single framework - The introduction of a single revenue recognition framework makes things easier and helps with understanding and comparison of revenue across multiple companies.
Exploring the Five-Step Revenue Recognition Framework
At the heart of AASB 15 is the understanding that companies need to recognise revenue based on considerations received for delivering goods or services to a customer.
AASB 15's five-step model offers a methodical approach to achieving this. The steps are:
Step 1. Identifying the Customer Contract
The first step involves determining the existence of a contract and assessing whether it meets AASB 15's criteria. This assessment is carried out on a contract-by-contract basis, although entities have the option to apply this evaluation to a cluster of similar contracts for practical reasons.
All parties must approve the contract, outlining each party's rights and payment terms with commercial significance, and it should be likely that the entity will receive payment. Contracts can take two forms (written or oral) and must be legally enforceable. The contract duration is also evaluated, including whether it is fixed or renewable.
Step 2. Identify the Performance Obligations in the Contract
Once a contract is made, the next step is to pinpoint the tasks that need to be completed within the deal. These tasks could involve providing goods or services that are different from others in the contract.
Step 3. Determine the Transaction Price
Determining the price of the contract involves evaluating what the company expects to receive from the customer in return for fulfilling its duties under the contract. This includes factors like variable payments, adjustments for discounts, time value of money and any payments made to customers.
Step 4. Allocate the Transaction Price to Each Performance Obligation
Once the total price is set, it needs to be divided among each task in the contract based on their individual selling prices. This step ensures that revenue is recorded correctly for each and every task.
Step 5. Recognise Revenue When Performance Obligations are Satisfied
Revenue is recognised when control of goods or services is transferred to customers. This transfer can happen gradually or at a specified time, depending on how tasks are being completed.
AASB 15 in Practice
Builders Edge Pty Ltd, a construction company, is contracted by Urban Developments Pty Ltd, a property developer, to construct a residential apartment complex. The contract details the project scope and milestones, with a total price of $10 million payable in stages.
Here’s how AASB 15 would work in this scenario:
- Contract Establishment - Both parties finalise a contract outlining their rights and obligations, meeting all AASB 15 requirements for legality, time, and payment terms.
- Identifying Performance Obligations - Builder's Edge identifies obligations like site preparation, construction, utility installations, and finishing touches.
- Determining Transaction Price - The total price is confirmed at $10 million, incorporating any adjustments for discounts and ensuring any extra considerations are clear.
- Allocating Transaction Amount - The $10 million is allocated among performance obligations based on their individual selling prices, aligning revenue recognition with fulfilling obligations.
- Revenue Acknowledgment - Revenue recognition commences as Builders Edge progresses through its construction milestones, ensuring revenue is recognised timely and accurately.
AASB 15 Made Simple with QuickBooks
AASB 15 plays a role in regulating revenue recognition procedures, especially for tradespeople and contractors. QuickBooks can help you by aiding in contract management, automating revenue recognition processes, generating financial reports and offering features tailored to your needs.
By using QuickBooks, Tradies can streamline how they manage their revenue and uphold transparency in their financial reporting. If you’re a Tradie who needs guidance with revenue recognition, sign up for QuickBooks Online today with a free 30-day trial.
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