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Revenue is a crucial number to users of the financial statements in assessing a companys performance and prospects. US GAAP consists of broad revenue recognition concepts around which numerous industry and transaction of specific requirements have evolved to deal with individual types of contracts. IFRSs contain fewer standards, but the two main standards can be difficult to apply to complex transaction. The report discusses the history of Australia's policy for accounting for revenue from contracts with customers before the adoption of IFRS; the approach taken by Australian IFRS on the question of recognising revenue from contracts with customers, and the reasoning behind this approach; and the future global developments relating to changing the IASB's current accounting standard for recognising revenue from contracts with customers and how they might affect Australian reporting entities. The objective of the project is to clarify the principles for recognising revenue from contracts with customers. It applies to all contracts with customers except leases, financial instruments and insurance contracts. The main objectives of the project are to remove inconsistencies and weaknesses in existing revenue recognition standards by providing clear principles for revenue recognition in a robust framework, to provide a single revenue recognition model which will improve comparability over a range of industries, companies and geographical boundaries and to simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer. The key changes in the revised Exposure Draft, as compared with the June 2010 version, primarily concern application of the proposed model and implementation of the five steps to recognise revenue. It addresses a number of areas of concern, as raised by constituents during the consultation process, by clarifying or adding guidance, particularly in the areas regarding the criteria for determining distinct goods or services, determination of the transaction price, transfer of control, constraint on revenue recognition and heavy performance obligations.
Revenue is defined in IFRS as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants". The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) began their mutual project on revenue recognition to clarify the principles for recognising revenue. The boards are developing a model to improve financial reporting by providing clearer guidance on when an entity should recognise revenue, and by reducing the number of standards to which entities have to refer.
History of Australia's policy before the adoption of IFRS
In July 2004, the AASB 118 was issued. AASB 118 Revenue is equivalent to IAS 18 of the same name as issued by the International Accounting Standards Board. AASB 118 has a specific purpose which was to recommend the accounting treatment of revenue from certain types of transactions. Entities are allowed to practice the standard for yearly reporting periods which begins on or after 1 January 2005. Paragraphs 9 and 30 were amended by AASB 2007-2 and was applicable to annual reporting periods on or after 28 February 2007, whereas AASB 2007-4 amended paragraph 21 and was applicable from 1 July 2007; both of which considers early adoption from 1 January 2005. Amendments regarding the disclosure of information about segment assets in AASB 8 and in AASB 118; which was acting as a principal or agent were made in May 2009 by the AASB 2009-5 Amendments to Australian Accounting Standards that stimulated from the Annual Improvements Project. Finally in October 2010, AASB 2010-5 Amendments to Australian Accounting Standards made editorial amendments to AASB 118 and applied to annual reporting periods commencing 1 January 2011. An Exposure Draft 222 Revenue from contracts with customers was issued by the Australian Accounting Standards Board (AASB), and an Exposure Draft 2011/6 was developed with the same name issued by the International Accounting Standards Board (IASB) in union with the US Financial Accounting Standards Board (FASB) in mid-November 2011. A new Exposure Draft was released replacing the version that was released in 2010 (IASB ED 2010/6) with the intention of exchanging IAS 18 Revenue and IAS 11 Construction Contracts, creating a single revenue recognition standard common to both IFRS and US GAAP.
Approach taken by Australian IFRS
The passage towards IFRS in Australia that took place on 1 January 2005 was seen as an immense shift in financial reporting, as a new reporting regime was to be replaced with the Australian Generally Accepted Accounting Principles (GAAP). As Picker (2003 cited in Deegan 2010, 23) claimed: "Within a very short period of time, all Australian reporting entities, whether listed, unlisted, public or private will be required to prepare financial statements in accordance with international accounting standards." Adoption of IFRS for revenue recognition prompts greater ¬‚exibility than the older practise of the GAAP. IFRS guidance with respect to revenue recognition is much less in depth than U.S. GAAP. The guidance around accounting for multiple element arrangements is one of the areas with potentially signi¬cant effects. IFRS is much more principle-based as compared to U.S. GAAP which provides detailed guidance and rules around the accounting for these types of arrangements. Hence, companies will have to re-examine their existing revenue recognition guidelines in adopting IFRS to conclude whether they are consistent with the underlying principles in IFRS. IFRS practices the concept of accounting for non-cash consideration at fair value for the goods or services received. Non-cash consideration is measured at the fair value of the goods or services given up when this amount cannot be measured reliably. Costs related to future activities, such as costs of materials that have been delivered to a contract site or set aside for use in a contract, but not yet installed, would not form part of the assessment of costs incurred to date. When installed, these would be included in the costs incurred to date. IFRS permits recognition of contingent consideration, but only if it is probable that the economic benefits associated with the transaction will flow to the entity and the amount of revenue can be reliably measured.
Future global developments and how they might affect Australian reporting entities
The IASB and the FASB have issued a second exposure draft of their converged revenue model that is closer to current IFRS and GAAP than their 2010 proposal. The proposed model would apply to revenue from contracts with customers in all entities in all industries and all of the revenue standards and interpretations in IFRS would be replaced. The Exposure Draft indicates the accounting is for all revenue arising from contracts with customers. All of the entities that enter into contracts to provide goods or services to their customers will be affected. Sale of certain non-financial assets will provide as a model for the measurement and timing of recognition of gains and losses. Moreover, the ED outlines the principles an entity would apply to report decision-useful information about the measurement and timing of revenue and the related cash flows. There are five steps to follow which are by identifying the contracts with a customer, identifying the separate performance responsibilities in the contract, determine the transaction fee, assign the transaction price to the separate performance obligations and recognise revenue when the entity satisfies each performance obligation. An entity would be required to implement judgement when considering the terms of the contract(s) and all surrounding facts and conditions, including any implied contractual terms. An entity will also have to consistently apply the requirements of the proposed model to contracts with similar characteristics and in similar circumstances.
Anderson and Yohn (2002) concluded through their research that "when there are problems in a company's financial statements, investors are more concerned about revenue recognition than any other reporting issue" (Colson, et al., 2010). Therefore, revenue recognition is considered one of the most important, however most difficult accounting concepts. Thus, it is vital to take the necessary time to follow to the convergence's due process and thoroughly reflect upon the implications that will result if the new proposal in endorsed.