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ACC00713 Report 2019 S1
Due date: 5pm Friday 24 May 2019
Weight: 20 marks
Word limit: 2000 words
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Objective:
This task requires you to prepare a report to explain the regulatory requirements and standard
setting of financial reporting in the Australian context. You also need to evaluate and comment
on information provided in the annual report of an Australian company listed on the Australian
Stock Exchange (ASX). Your comments or Assessment should comply with the requirements of
relevant Australian Accounting Standards (AASBs).
Discussions:
The new revenue standard – AASB 15 Revenue from Contracts with Customers – applies to
entities and businesses for the accounting periods beginning on or after 1 January 2018. The
new accounting standard changes the financial reporting regime in terms of revenue. This will
not only influence customer contracts and business model, but also have wide-ranging
implications in business and control process.
You should address the following questions in your report.
Part A (8 marks)
1) Discuss and comment on the requirements of revenue recognition according to AASB 15.
2) Discuss and evaluate the measurement of revenue according to AASB 15.
Part B (9 marks)
From the perspective of the investors, discuss the potential impact of the adoption of AASB 15
on 2019 annual report of the chosen company. Your investigation should focus on the influence
on financial information regarding financial position, financial performance and financial ratios
(including at least one of financial ratios, such as profitability ratio) of the chosen company.
Your report should include some examples or evidence from the chosen company to support
your discussion.
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Part C (4 marks)
Effective communication, logic presentation and appropriate reference of this report.
You should provide relevant paragraphs of AASBs or others (e.g. sections from 2017/2018
annual report) to support your Assessment. You can access AASBs from the website:
https://www.aasb.gov.au/Pronouncements/Current-standards.aspx
In particular, your report should refer to the following AASBs in your report:
• AASB Conceptual Framework: Framework for the Presentation and Preparation of
Financial Statements
• AASB 15 Revenue from Contracts with Customers
• AASB 101 Presentation of Financial Statements
• AASB 118 Revenue
Assessment criteria:
The quality of this report will be assessed based on the following criteria:
• Identify the regulatory framework of financial reporting in Australia.
• Explain the recognition and measurement of revenue in business practice.
• Evaluate the implementation of recognition and measurement of revenue in financial
reporting by the chosen company.
• Use paragraphs from the annual report of a chosen company, Australian Conceptual
Framework, AASB 101 Presentation of Financial Statements, AASB 15 Revenue from
contracts with customers, or other relevant AASBs as guidelines to support your
discussion if it is necessary.
• Demonstrate effective communication, logical presentation and integrated Assessment.
Referencing:
• The references used in the report should follow Harvard Referencing Style.
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Submission:
• Please submit your report online through the link of Report and Submission provided
on the MySCU Blackboard site.
Special Instructions:
• This is an individual assignment.
• Word limit should not be less than 10% (1,800 words) or exceeds 10% (2,200 words) of
word limit (excluding summary, reference list and appendix). A loss of 10% of the total
available marks will apply if you did not follow this instruction.
• You must use the electronic Assignment Cover Sheet provided, fill in details and then
make this sheet the first page of your assignment. Do not send it as a separate
document.
• The file name should include (in order) initial, your surname and your student number.
For example: ‘BParker1235456′.
• Your assignment must be submitted as a Word document. If you wish to submit in any
other file format, please discuss this with your lecturer before the assignment
submission date.
• Each student should choose a company that is listed on the Australian Stock Exchange
(ASX). Find its annual reports for 2017/2018 financial year. Remember to use a
complete annual report, not a concise financial report or a half-year financial report.
• You must reserve your company by adding a post on ‘Discussion Board’ under ‘Reserve
your company here’. Write the name and the code of the chosen company in the
subject line of your post. If you add the company name in the message and NOT in the
subject line, then the reservation is void because it will not be readily visible to others.
• To ensure your choice of a company does not duplicate one already chosen by another
student, they will be allocated on a first come, first served basis.
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Sample Answers
ACC00713 Report 2019 S1
By (Name)
Course
Professor
University
Physical Address
Date
Introduction
The AASB 15 was introduced in January 2018 to aid in the presentation, recognition, and measurement of revenues from contracts with customers. Therefore, this paper examines the requirements of the recognition of revenues as provided by the AASB 15 revenues from contracts with customers. The paper also examines how the revenues are measured before presentation into the financial statements of the company. The second part involves the impact of the adoption of AASB 15 on the financial performance, position, and profitability of Michael Hill International Ltd.
AASB 15 Revenues from Contracts with Customers
Requirements of AASB 15
Australian Accounting standards board 15 provides for the principles through which a firm or business entity disclose financial information to the users of financial reports. The financial information relates to nature, amount, timing, and uncertainty of revenues and cash flow from contracts with customers. Therefore, all firm within Australia is required to report their revenues from the customer using AASB 15 (2018, par 1).
AASB 15 applies to all revenue contracts relating to customers. However, the standard does not apply to revenues relating to lease contracts under AASB 16 Leases, financial instruments and other contractual rights under AASB 9, AASB 10, AASB 11, AASB 127 and AASB 128. The accounting standard further does not apply to non-monetary exchanges between entities within the same line of business to facilitate sales to customers.
Moreover, the standard prescribes that AASB 15 applies only when a contract relates to customers a customer is an immediate party in the contract of goods and services where there is a consideration. The consideration in this contract is the revenue to the business entity. Also, the standard applies to contracts within the scope of this standard as well as the scope of other standards (AASB 15, 2018, par 2). In some cases, specific standards do not prescribe how to recognise the contracts; thus, this standard applies to the separate or initial measure of a part of the contract. The act further prescribes that AASB 15 applies to incremental costs only relating to a particular contract with a customer. The standard exempts the recognition of contracts relating to the not-for-profit public sector, for example, short term licenses and licences whose transaction price is very low.
In recognition of revenue contracts with customers, an entity would only identify contracts within the scope of the AASB 15 standard. In this case, the contract must be approved; the entity has known the rights of the parties of the contract; the entity identifies the contract terms. Also, the contract needs to have commercial substance as it can be expected to generate future cash flows. Moreover, an entity should identify the contract if it is probable that it will generate consideration.
AASB 15 provides that an entity can combine two or more contracts relating to one customer. Therefore, this would apply only if the contracts are negotiated as a package, the amount agreed depends on the performance of one of the contracts and the goods or services contracted in each contract requires single performance. Also, if a contract is modified, the business entity is required to account for the modification separately. Performance obligations in contracts relate to goods or services or a series of distinct goods or services with the same pattern of transfer. Revenues are to be recognised when the entity satisfies performance obligations, which involve the transfer of the promised goods or services to the customer; when the customer acquires control of the asset (AASB, 2018, par 30).
Measurement of revenue from contracts with customers according to AASB 15
Contract revenue is measured after the business entity performs the obligations. The revenue amount is recognised as a transaction price, which is measured after the contract is completed between an entity and a customer. The transaction price is measured by evaluating the contract terms since it is a valuable consideration that exists in a contract. In the determination of the transaction price, the entity has to consider the effects of variable consideration and to constrain estimates of variable consideration. The entity should also evaluate the effects of the existing significant financial components in the contract, non-cash consideration, and consideration payable to a customer (AASB 15, 2018, par 47-70).
Variable consideration is obtained by estimating the variable amount of a contract the entity entitles to a transfer of promised goods and services to a customer. Variable consideration results from discounts, rebates, refunds, credits, price concessions, bonuses, penalties as well as price incentives. Therefore, any variable consideration in a contract has to be stated within the contract. The consideration payable to a customer is regarded as a reduction in the transaction price in a particular contract. Non-cash considerations in contracts are estimated at fair value and consideration, in this case, is measured concerning a stand-alone selling price in a specific contract. Also, the existence of a significant financial component provides that the entity will recognize revenue relating to the price paid by the customer for the promised goods or services (AASB 15, 2018, par 60).
AASB 15 provides that the allocation of transaction price can be done by allocating based on stand-alone selling prices. Therefore, the entity is tasked to identify the stand-alone contract price relating to particular goods or services, and they are allocated in proportion with the stand-alone selling prices. Also, the allocation of transaction price considers the allocation of discounts and allocation of variable consideration in a contract to a customer of promised goods and services (AASB 15, 2018, par 73-84).
Allocation of discount is done to one or more but not all performance obligations based on distinct goods or services, stand-alone basis of a bundle of or some of the distinct goods and services as well as selling at a discount attributable to each bundle of goods or services and discount should relate to the performance obligations of a contract. Also, discounts are allocated using the residual approach to determine the stand-alone selling prices of goods and services relating to AASB 15.
The entity needs to allocate changes in transaction price as per the performance obligations of the contract with customers. All subsequent changes are allocated based on contract inception. Moreover, all the amounts that are allocated about changes in the transaction price need to be recognized as revenue in the particular period the transaction price changes. Nevertheless, an entity is required to recognize the incremental costs of obtaining a contract as well as the costs to fulfil the contract. However, these costs are measured only when the entity incurs them since it expects to recover the costs from the performance obligations of the contract.
AASB 15 Analysis of the 2018 Annual Report of Michael Hill International Ltd
Michael Hill International Ltd is a retail company specialised in the retail chain of jewellery. The company operates over 300 stores across Australia, New Zealand, and Canada. The company offers a variety of jewellery designs through which most of its consumers are to choose from. Also, in the presentation of its financial statements, Michael Hill International Ltd applies the Australian Accounting Standards, and the financial statements are presented as per the Australian Accounting Standards Board Conceptual framework. The Australian Accounting Standards Board recently established the AASB 15 revenue from contracts with customers. Therefore, this report aims to examine the effect of the introduction of the new standard in reporting financial performance, financial position, and financial ratios of Michael Hill International Ltd.
Consequently, this will help to identify the impact of AASB 15 on the financial information presented in the annual report of 2019 of the company. The analysis involves consideration of the AASB Conceptual Framework for presentation and preparation of financial statements and the AASB 118 revenue. The analysis further considers AASB 101, which relates to the presentation of financial statements.
AASB 15 applies to the effect that revenues that are recognised from contracts with customers will be treated separately with other revenues sources of the company. Michael Hill International Ltd has used the AASB 15 in the presentation of its financial statements to recognise the revenues that are generated from contracts with customers of the company. The company has first adopted the AASB conceptual framework since the financial reports are presented every financial year in the annual report of the company to ensure disclosure of financial information. Therefore, this enables the users of the financial information to understand how the transactions were accounted for during the financial year. Also, the company provides comparatively financial information as the 2018 annual report represents all the value of the 2017 financial reports to allow investors to monitor the company progress.
In the presentation of the financial statements, AASB 15 was adopted on 1st July 2018 by Michael Hill International Ltd in the reporting of revenues. The revenues were recognised as revenue from the sale of goods and repair services as required by the AASB 15. Timing of revenues was recognised as goods transferred at a point in time and services transferred over time by the company (AASB 15, 2018, par 35-38).
Figure 1: Extract from the 2018 Annual Report showing how the revenues were recognised in the income statement of the company (2018 Annual Report, 2019, pg.63)
Therefore, this shows that Michael Hill International Ltd adopted the application of the new accounting policy for recognising revenues from contracts with customers (AASB 15). Note 14 of the 2018 annual report confirms that the firm adopted the accounting policy on 1st July 2018 and all financial information was adjusted as per the new standard for recognising revenues from contracts with customers. The revenues were recognised based on the sale of goods-retail, interest revenue from in-house customer finance program, as well as rendering services-deferred service revenue as per the Australian AASB 15 (2018 Annual Report, 2019, pg.55). Rendering service revenue is presented and recognised as per the requirements of AASB 118 for deferred revenue from services, and these revenues were recognised only after the service was performed about performance obligations in AASB 15.
Also, interest revenue from in-house customer finance program the revenues are recognised in consistence with AASB 118 (2011, par 20). The consideration from this contracts involving the customer in house program is deferred, and this was considered as a significant financing component as per AASB 15 (2018, par 60) where customers pay prices related to promised goods or services. The sale of goods revenues was recognised when the products are delivered to the customer, and revenues are recorded on a gross amount of sale (2018 Annual Report, 2019, pg. 61).
Effect on the Financial Results
The adoption of the new Accounting standard led to the reduction in the net assets of the company in 2018 compared to the net assets in 2017. The net assets of Michael Hill International limited reduced from $202.2 million in 2017 to $189.2 million in 2017. The changes are as a result of an increase in deferred revenues that the company incurred from in-house finance programs with customers. The amount for the deferred revenue rose from $56 million in 2017 to $57.7 million in 2018. Therefore this shows that adoption of AASB 15 had an impact on the final results of the company during the fiscal year.
However, in the reporting of revenues of the company, there was an increase in the total revenues of Michael Hill International Ltd. The company accounted for or a total of $575.5 million revenues in 2018, which was a significant increase compared to the 2017 total revenue figures at $551.1 million. Even though the revenues were recognised as the company, there was a net effect of the accounting policy on the total profits of the company. The company incurred losses from the discontinued operations of the firm. Only the profit from the continuing operations helped to offset the losses from the discontinued operations of the firm. Therefore, the net profit for the financial year 2018 was $4.6 million compared to the value in 2017, which was $32.6 million. The reduced profits show that the firm was greatly affected by the adoption of the AASB 15 during the year. Most of the profits were obtained from the continuing operations of the company even though there was a significant decline in the net profit from continuing operations. The net profit from the continuing operations were $34.8 million in 2018, which represented a 21% decrease from the $44.1 million net profit for the financial year 2017. Also, in presenting this financial information was reported in compliance with the requirements of AASB 101 about presentation and compliance with accounting standards (AASB 101, 2015, par 15).
Figure 2: Extract of the Michael Hill International Ltd consolidated income statement (2018 Annual Report, 2019, pg.50).
Conclusion
All in all, the adoption of AASB 5 has been effective in aiding recognition, presentation, and measurement of revenues. The accounting standard has promoted disclosures, which are relevant to the users of financial information on how revenues are treated in the financial statements of the company. Michael Hill International Ltd adopted the use of the AASB 15 in July 2018, and this affected the figures of the financial statements. The net assets of the company reduced as well as the total equity and revenues. The net profit margin decreased to in 2018 compared to 2017 as a result of adjustments in the financial statement.
References
2018 Annual Report, 2019. Michael Hill International Ltd 2018 Annual Report. Available from: http://investor.michaelhill.com/static-files/efb5d976-14e3-4b9b-a038-ade3d088276a
AASB 101, 2015. Presentation and Compliance with Accounting Standards. Available from: https://jade.io/summary/mnc/2018/AULegSR/F2015L01626
AASB 118, 2011. Revenues. Available from: http://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPoct10_01-11.pdf
AASB 15, 2018. Revenues from Contracts with Customers. Available from: https://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14_COMPoct15_01-18.pdf
AASB Conceptual Framework, 2014. Accounting Assignment Help Australia Framework: Framework for the Presentation and Preparation of Financial Statements. Available from: https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf
