Before IFRS in Australia AASB was responsible for setting accounting reporting standards for Australian firms. The accounting standard setting process was overseen by the Financial Reporting Council (FRC) which provided the relevant Federal Government Minister with advice on the process (Whittred et al, 2004). A decision was made by the FRC to adopt IFRS in 2005. This was supported by the AASB as a way of improving the quality of financial reporting in Australia (Goodwin, Ahmed & Heaney, 2007).Under AASB 1009 (AASB, 1997) revenue from construction contracts was to be measured at fair value of the consideration received or receivable by the reporting entity. In long term contracts the stage of completion method was used to recognise revenue relative to the completion stage of the work that would have been performed in the current period. The stage of completion method employed various methods of measuring the completion stage of a contract. One was to use the proportion of costs incurred as a way of measuring the relative completion stage of the contract. The other method was to do a physical survey of the work performed and give a relative measure of the completion stage of the given contract. The third method was to recognise a completion stage as a proportion of the physical work completed under the contract. The main purpose of this standard was to require specific disclosures to be made about construction contracts by contractors.
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Under AASB 118 revenue recognition, revenue is recognised when it is probable that economic benefits will flow benefits between entities as goods and services are exchanged and it can be reliably measured (AASB, 2009). This is in line IAS 18 standards which recognise revenue when certain prescribed conditions that are dependent on the revenue are performed by an entity (Deloitte, 2013). In addition under current IFRS, revenue is recognised as the risks and rewards of ownership are transferred between entities (Pricewaterhouse Coopers, 2011)). The current IFRS approach allows an entity to recognise revenue on the condition that it can be reliably measured and there is a high probability that economic benefits will flow between entities. Under this approach the timing of revenue recognition was as goods and services are delivered or when contractual obligations are performed. However (Stevenson, 2012) argues that the core principle of the IFRS approach was to recognise revenue with the transfer of goods and services at a reliably expected price which an entity can measure. This was also done to take into account the prevalence of credit risks in some cases where economic benefits do not flow to an entity due to customers being unable to fulfil payment obligations. However a criticism of this model was that it may have allowed entities in some cases to recognise amounts in financial statements that do not fully represent economic phenomena (Nelson, 2011) p422. This was due to the fact that the transfer of goods was an integral part of revenue recognition which in some cases is not instant. As a result firms can recognise such items as inventory (assets) even though they no longer have control of the good. This was seen to be inconsistent with IASB's definition of an asset which depends on the control of a good ((Nelson, 2011)).
However, under AASB 111 construction contracts revenue from contracts is recognised to the extent that it is received or deemed receivable by the contractor (AASB, 2010). Under this framework the fair value recognition criteria and the reliable measurement criteria of revenue recognition also has to be taken into account when recognising revenue from contracts. As a result companies would also have to account for and increase or decrease in revenue expected during the term of the contract (AASB, 2010). Under this framework the stage of completion method of revenue recognition was allowed by the AASB. Under this method, entities can recognise revenue as a proportion of performance measures that are allowable under the framework. The percentage of performance can be measured either as a proportion of costs incurred, surveys of work performed or completion of a physical proportion of the contract work.
Under the IASB/FASB joint project for revenue recognition revenue should be recognised to the extent to which an entity expects to be entitled to consideration for goods or services performed (Lamoreaux, 2012). The IASB and FASB joint project on revenue recognition was designed to develop a more common and consistent standard for revenue recognition criteria. Under the new criteria firms reporting under IFRS and USGAAP would now have a common standard that would improve on the consistency of revenue recognition, improve the completeness of financial information and improve the comparability of information in different capital markets (IFRS, 2013). In addition it is also meant to ensure that the recording process is simpler with fewer requirements for entities to refer to. According to (Ernst & Young, 2012) in application this means that an entity would have to:
Always on Time
Marked to Standard
Identify the contracts with the customer
Identify separate performance obligations in contract
Determine transaction price
Allocate transaction price to separate performance obligations
Recognise revenue when each performance obligation is satisfied
This according to the IASB and FASB represents an approach that is more consistent with the conceptual framework of revenue recognition as a function of transfer of control of goods and not the risks and rewards under current IFRS (Pricewaterhouse Coopers, 2011). As a result the potential impact will be in relation to the timing of revenue recognition as the focus shifts to control of goods rather that the transfer of risks and rewards. For contracts this will mean timing of revenue recognition will be related to performance obligations being satisfied and allow organisations to have a more reliable measure of revenue from contracts that are longer term in nature.