Deloitte au audit revenue matters is australia ready aasb 15 10 0816 PDF

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Revenue matters Is Australia ready for AASB 15?

What would your reaction be if we told you that the most important number in your financial statements was about to change and no one in your business had prepared for it? Many may find such a fact hard to believe. That’s why we find it so surprising that revenue recognition under AASB 15, Revenue from Contracts with Customers (AASB 15 or the Standard), is not yet on the agenda of many Australian boardrooms. AASB 15 is a new accounting standard that provides a revised framework for revenue recognition and measurement following a five-step approach:

Step 1: Identify the contract with the customer

Step 2: Identify separate performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to separate performance obligations

Step 5: Recognise revenue when each performance obligation is satisfied

Although the new model may appear simple at first glance, each step is supported by a comprehensive set of rules and principles that require the determination of numerous estimates and extensive use of management judgement (many of which require disclosure). Further, resulting systems and business impacts may require significant lead times to assess and address. Deloitte recently conducted a national survey across a broad range of finance professionals to assess how far along the AASB 15 journey organisations are. With almost 100 responses covering Australia’s most significant industries and organisations of every size, the results of the survey are telling.

Key takeaways from the Deloitte AASB 15 survey • Deloitte surveyed almost 100 finance professionals across multiple industries and organisations to assess how far along the AASB 15 journey Australian companies are • The majority of companies surveyed had not yet commenced their impact assessment of AASB 15 as many survey participants believe the Standard will have limited impact on their revenue accounting. This view is surprising in light of the complexity of the new guidance and the fact that most survey participants acknowledge that they are only familiar with the high level requirements of the Standard • Expected areas of concern as identified by survey participants include determining the appropriate timing of revenue recognition, increased disclosure requirements, identifying distinct performance obligations and accounting for contract modifications • Many companies could face a challenging implementation as AASB 15 is more than just a financial reporting compliance issue. It could impact an organisation well beyond finance and changes to existing processes, systems, internal controls and other business elements will take time to develop and test • Time is running out. Ignoring early adopters, organisations with December year ends have between 10 and 22 months to plan and implement AASB 15 (subject to the transition approach selected on adoption). In addition, organisations need to be mindful of other new accounting standards such as AASB 9, Financial Instruments, and IFRS 16, Leases1, that may place additional pressure on an organisation’s resources and bring their own implementation challenges 1 IFRS 16 was issued by the International Accounting Standards Board in January 2016. It will be considered by the Australian Accounting Standards Board for adoption at its February 2016 meeting.

• A diagnostic assessment of AASB 15’s impact across an organisation, including areas outside of finance, is an effective first step for those that haven’t yet commenced their implementation efforts. Deloitte has developed an interactive diagnostic tool to assist organisations assess the risks and exposures of the new Standard across their business and plan for a successful implementation. For more information, please contact one of our team members listed on page 12

Revenue Matters Is Australia ready for AASB 15? 1

Summary of survey participants by industry2: 18%

23%

7%

11% 14% 4% 23% Energy and Resources Telecommunications, Media and Technology Financial Services, Banking and Wealth Other

Real Estate and Construction Wholesale, Retail and Manufacturing Public Sector

Summary of survey participants by AUD revenue per annum: 10% 28%

10%

20% 12%

20% $0–$10m $200m–$500m

$10m–$50m $500m–$1bn

$50m–$200m Greater than $1bn

Deloitte recently released consistent results of a comparable survey in the United States highlighting adoption and transition insights gathered from over 170 individuals across various industries. For more information, visit www.iasplus.com/en/publications/us/heads-up/2016/issue-2

2 The Standard is currently applicable to for-profit organisations only. To address revenue accounting for not-for profit organisations, the Australian Accounting Standards Board issued Exposure Draft 260, Income of Not-for-Profit Entities in 2015 for comment, and a final standard is expected towards the end of 2016. 2

While most practitioners are aware of AASB 15 and the new five-step revenue recognition model to come, 83% of survey respondents had not yet come to grips with the underlying complexity and detailed guidance underpinning the Standard, noting they were only familiar with the high level requirements of AASB 15. Further, 73% of respondents had not yet attempted to quantify the financial statement impact of AASB 15 on their organisation for the following reasons: Reasons for not commencing AASB 15 impact analysis: We don't expect our accounting treatment for revenue to change Implementing AASB 15 is not a priority for my organisation at present My organisation's customer contracts are very simple We do not have sufficient resources available at present My organisation only has a few customer contracts Implementation is expected to be simple Our auditors don’t believe there will be an impact on my organisation Our head office is responsible for assessing the impact of AASB 15 0%

10%

20%

30%

40%

50%

Whilst a number of the above may be true, the extent of AASB 15’s transition impact will depend upon an organisation’s industry and business model and organisations should be mindful of making assumptions about the new Standard without performing a sufficient level of analysis to support these views. Many companies will face a challenging implementation that will require planning, resources and comprehensive strategies to ensure both risks and opportunities are managed. Although on face value AASB 15 may sound easy to apply, with nearly 350 pages of guidance, there is more to the new Standard than five steps. A common misconception is that AASB 15 is just a financial reporting compliance issue. But the reality is it has the potential to impact an organisation beyond the finance and accounting department as revenue is more than just a number in a profit or loss statement. It is also: • • • • • • •

The starting point for establishing an organisation’s profitability A fundamental component of business forecasts A key input into KPI’s for employee share schemes and other remuneration structures A result of often complex commercial sales and contracting processes A key input into the components of covenant compliance calculations A driver of ratios and profitability measures The starting point for tax payable calculations.

Whilst we understand why organisations may delay addressing compliance matters like AASB 15, what many finance professionals may not realise is that beyond the compliance aspect of adopting a new accounting standard, implementation presents a unique opportunity to create significant value across their organisation and deliver first time right solutions. A number of companies underestimated the impact of first time adoption of IFRS equivalent standards in 2005 leading to last minute, high cost assessments and transitions, high levels of frustration in finance teams and in some cases errors in first time application. AASB 15 is expected to be one of the most significant financial reporting compliance changes since 2005 and early planning will be critical to a successful implementation.

Revenue Matters Is Australia ready for AASB 15? 3

Impacts beyond accounting Survey participants highlighted a number of areas worth considering early as they may prove to be a challenge beyond just the accounting. The significant level of detail required and data to be captured to implement and manage the requirements of the new Standard far exceed current accounting rules. Accounting areas of concern identified by survey participants: Determining the timing of revenue recognition (point in time vs over time) Presentation and disclosure requirements Identifying distinct performance obligations Accounting for contract modifications (in scope or price) Determining and allocating the transaction price Accounting for costs associated with a customer contract Accounting for warranties Accounting for significant financing components Accounting for options to acquire additional goods/services or rights of return Accounting for licences 0.0%

10.0%

Have not yet performed impact assessment

20.0%

30.0%

40.0%

50.0%

Have performed impact assessment

Specifically, once you overlay the extensive disclosure requirements of AASB 15 with the need to account for revenue at a performance obligation level (which may be far more granular than under previous requirements) and complex areas like accounting for modifications, variable consideration, licences and significant financing components, the potential for change and the need for robust processes and solutions is far greater than what many may be expecting and is likely to take time to assess, develop and implement. Interestingly, 42% of respondents noted they do not believe changes to their accounting systems will be required on implementation (with another 31% not yet having performed an assessment). This may be an optimistic view in light of the above factors. Disclosure requirements alone may be sufficient to drive a need for change as systems may not have the existing capability to capture and report the data required for AASB 15 compliance and the use of spreadsheets is unlikely to be a manageable solution for ongoing revenue accounting.

4

Time is running out With the effective date of the Standard deferred to reporting periods commencing on or after 1January 2018, organisations with December year ends have between 10 and 22 months to plan and implement AASB 15 (subject to the transition approach selected for adoption and assuming the option to adopt the Standard earlier is not taken). In addition to disclosing the impact of transition on comparatives (and in some instances, having to fully restate them), entities are also required to disclose the expected impact of adoption ahead of implementation. AASB 15 timeline for organisations with December year ends:

Current year

1 January 2016

Comparative period

1 January 2017

First time application of AASB 15

1 January 2018 Effective date of AASB 15

31 December 2018

Although this time line may be sufficient for some, time is running out, especially considering most organisations have not yet commenced their implementation efforts and the comparative period is just around the corner. Changes to existing processes, systems, internal controls and other business elements will take time to develop and test. Additional complexities could also arise due to the diversity of an organisation’s business across multiple geographies and operating models. Identifying exposure to changes too late will not only limit your ability to implement an appropriate solution but may lead to a lost opportunity for value creation.

When planning for implementation of AASB 15, organisations need to be mindful of the impact of other new accounting standards that will become effective during the same time period as AASB 15. Most notably, AASB 9, Financial Instruments, is also effective for year ends commencing on or after 1 January 2018 and IFRS 16, Leases, follows one year later. Similar to AASB 15, both of these standards have the potential to significantly impact an organisation across more than just finance and accounting teams and may place additional pressure on an organisations’ existing processes, systems and resources.

Revenue Matters Is Australia ready for AASB 15? 5

Where to start? A first step to consider is a diagnostic assessment of how your organisation expects AASB 15 will impact not only accounting processes but also some of the broader business issues that could arise. Some expected areas of impact noted by survey respondents include: Areas of impact identified by survey participants: Timing of revenue recognition is expected to change New processes need to be designed to manage AASB 15 accounting Significant increase in disclosure requirements Systems need to be upgraded to enable adequate tracking of AASB 15 data External stakeholder communication required Value of revenue recognised is expected to change Contractual covenants will need to be reassessed Existing KPI/performance measures will need to be reassessed 0.0%

10.0%

Have not yet performed impact assessment

20.0%

30.0%

40.0%

50.0%

Have performed impact assessment

A diagnostic is an effective way to identify areas of exposure ensuring organisations are well equipped to plan for an efficient transition and answer some of the many questions that should be on finance teams’ minds: • • • •

What will my stakeholders require from implementation? What level of resourcing may be required for implementation? When should formal implementation commence to ensure we meet reporting obligations? Are existing systems/processes sufficient to enable revenue accounting under AASB 15 or are significant modifications required? For example, will I be able to: – Identify all goods and services within a contract? – Capture and report data at a sufficient level of detail for analysis and reporting purposes? – Estimate stand-alone selling prices for contracts involving multiple goods and services? – Estimate and track variable consideration? – Identify and account for contract costs appropriately? – Assess capitalised amounts for impairment? • Are there opportunities for ‘quick wins’ and solutions that would not only aid transition, but improve current accounting processes and create value beyond accounting compliance? For example: – Have you considered using the data collected on transition as an opportunity to perform customer segmentation or profitability analysis? – Have you considered integrating systems and process changes required for AASB 15 compliance with other improvement projects to minimise cost and effort to implement? – Have you considered the benefits that could be realised from reviewing your customer contracts for commercial risks and other exposures, in conjunction with the accounting analysis required for implementation?

6

With the right planning, resources and focus, organisations can deliver a first time right accounting change program that not only meets the compliance objectives of AASB 15 but also removes significant pain points from the process while helping to set the finance function on a pathway to future success. The key is to start now — when it comes to one of the most important numbers in your financial statements, do you really want to take the risk?

How Deloitte can help Deloitte Australia is part of a global network of dedicated and experienced professionals able to assist you with end-to-end project management and implementation of AASB 15. For those that have only just begun their AASB 15 journey, Deloitte has developed an interactive diagnostic tool to assist organisations assess the risks and exposures of the new Standard across their business and plan for implementation. We believe the provision of exceptional technical accounting capability is a must-have for any AASB 15 project, but a world class accounting change program requires more than just technical accounting skills. Deloitte can offer a specialist and experienced team to work with you across every aspect of your AASB 15 implementation, from performance of the initial impact assessment of the Standard through to systems redesign and commercial risk management. For more information, please contact one of our team members listed on page 12.

Revenue Matters Is Australia ready for AASB 15? 7

Appendix

The following additional information relates to responses to survey questions not specifically detailed in the body of this publication: What is your current role? 7%

4%

2%

20%

67% Board member or CEO Senior finance team member (eg. CFO, Financial Controller, Finance Manager, Group Controller) Finance team member (eg. Senior Financial Accountant, Financial Accountant, Financial Analyst) Graduate Other

How would you rateyour current awareness of the requirements of AASB 15? 5%

8%

12%

22%

53% This is the first I have heard of AASB 15 I am aware of AASB 15 but not familiar with the requirements of the standard I am aware of AASB 15 but only familiar with high level requirements of the standard I am aware of AASB 15 and familiar with the detailed requirements of the standard as relevant to my organisation I am aware of AASB 15 and familiar with all of the detailed requirements of the standard

8

Has your organisation attempted to quantify the financial statement impact of AASB 15?

27%

73%

Yes No

Do you expect that AASB 15 will have a material impact on your financial statements?

Disclosure impact

Income statement impact

Balance sheet impact

No impact

Not yet determined 0%

10%

Have not yet performed impact assessment

20%

30%

40%

50%

60%

Have performed impact assessment

Revenue Matters Is Australia ready for AASB 15? 9

Do you expect that AASB 15 will require changes to your business operating model?

Significant changes

Minor changes

No changes

Has not been assessed

0%

10%

20%

30%

40%

Have performed impact assessment

Have not yet performed impact assessment

Do you expect that AASB 15 will have an impact on your organisation’s IT systems?

Major modifications

Minor modifications

No changes

Has not been assessed

0.0%

10.0%

Have not yet performed impact assessment

10

20.0%

30.0%

40.0%

50.0%

Have performed impact assessment

Do you believe that the disclosures required by AASB 15 will result in the disclosure of commercially sensitive information for your organisation? 17%

48%

35%

Yes No Not sure

Which transition approach is your entity considering adopting? 10%

18%

72%

Retrospective application Modified approach Not sure

Revenue Matters Is Australia ready for AASB 15? 11

Contacts

12

Megan Strydom Director Assurance & Advisory Tel: +61 8 9365 8012 [email protected]

Donna Carrington Partner Assurance & Adviso...