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 principles for recognising revenue are clarified by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) when both of the boards have affiliated. The boards are forming a new 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
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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 ï¬‚exibility than the older practise of the GAAP. IFRS guidance with respect to revenue recognition is much less in depth than U.S. GAAP. For different element arrangements, the guidance for accounting is the areas that will be possibly have the significant 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. Due to that, existing revenue recognition guidelines must be re-examined by the companies in adopting IFRS to determine 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. When the amount cannot be measured reliably, non-cash consideration is measured at the fair value of the goods or services. 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 be endorsed for the use of organisations in all type of industries and the interpretations in IFRS and revenue standards will be substituted. 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. The terms of the contract and related facts and circumstances including any implied contractual terms will require an organisation to contribute their opinions. Besides, an entity will also have to consistently apply the requirements of the proposed model to contracts with similar characteristics and in similar conditions.
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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.