AASB 15 Revenue Recognition using the Five-Step Model

Our AASB 15 Revenue Recognition summary below deals with customer contracts and evolving business models with the basis requiring organisations to consider:

  1. Whether a contract exists;
  2. The explicit and implicit promises in the contract to deliver goods and/or services to a customer;
  3. The transaction price payable by the customer;
  4. How to allocate the transaction price to the goods and services; and
  5. When to recognise revenue based on when ‘control’ over the good or service transfers to a customer.

What is AASB 15?

AASB 15 is the Australian Accounting Standard for revenue recognition from contracts with customers which introduced a comprehensive revenue recognition model aimed to enhance comparability across entities and industries.

The Standard should be applied to all contracts with customers, except for contracts covered by other Standards, such as leases, insurance and financial instruments.

The AASB 15 Standard was introduced to harmonise with international reporting requirements, overcome weaknesses in the previous revenue standards, deliver more accurate commercial financial reporting and a single revenue recognition model for investors to understand and compare the revenue of different companies.

AASB 15 stipulates how and when revenue is recorded, requiring entities to provide users of financial statements with more information and reporting disclosures. Its core principle is the recognition of revenue for the transfer of goods or services, at a value that reflects the consideration to which the entity expects to be entitled, in return for meeting performance obligations.

Effective Date and Impact

AASB 15 mandatorily applies to annual reporting periods beginning on or after 1 January 2018 and has had the most impact on businesses which involve:

  • Bundled products and services;
  • Significant warranties/rebates;
  • Variability in revenue collectability from contract to contract;
  • Contracts where consideration varies; and
  • Renegotiation of scope/consideration of contracts.

The Five-Step Model to achieve AASB 15 requirements

This Standard establishes a five-stage model for entities to:

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognise revenue when (or as) the performance obligations are satisfied.

Essentially, an entity should evaluate the probability of receiving consideration in exchange for the goods or services provided, taking into account the customers’ ability and intention to pay (including discounts, rebates, refunds, price concessions, incentives and performance bonuses).

The transaction price should be allocated to the performance obligations based on the proportion of their relative stand-alone prices. Stand-alone price is the price at which an entity will sell the promised good or service separately to a customer.

Costs to fulfil a contract with a customer that are not within the scope of any other Standard are allowed to be capitalised and amortised.

Disclosure Obligations

All entities reporting through general purpose financial statements should expect increased levels of disclosure.

Under AASB 15 disclosure objectives, an entity must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

Our financial reporting professionals assist many clients with the application of Australian Accounting Standards and please contact your local Accru advisor if you require any assistance in meeting your financial reporting obligations.

About the Author
Steven Zabeti , Accru Felsers Sydney
Steven communicates with his clients regularly, offering business support and practical solutions. He’s known for building good working relationships and providing consistent professional service with an entrepreneurial flair that adds value to engagements.
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