Recognising revenue in your financial reports ASIC Report

Friday, 01 October 2004

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Richard Cockburn

    With the financial reporting season well underway, one of the many issues you need to keep in mind is that revenue must only be recognised when it is appropriate to do so.

    With the financial reporting season well underway, one of the many issues you need to keep in mind is that revenue must only be recognised when it is appropriate to do so.

    Find out some of the issues we've identified about how some listed entities have recognised revenue, so that you can avoid making the same mistakes.

    The amount of revenue recognised directly affects the reported profit and the overall financial performance of an entity for a particular financial period. It is therefore important that your company only recognises revenue when appropriate.

    Accounting standard AASB 1004 "Revenue" sets out when companies, registered schemes and disclosing entities are able to recognise revenue.

    Accounts surveillance program

    This reporting season ASIC will reviewing 440 listed entity financial reports as part of our Accounts Surveillance Program, and revenue recognition policies will be monitored as part of this review. For more, see Media Release 04-158 at

    When we find material accounting issues in a financial report we've reviewed, we usually require the company concerned to release additional information to the market or to restate their financial statements. But we may also pursue legal action such as an injunction or prosecution, depending on the nature of the breach we identified. Under the recent Corporate Law Economic Reform Program (Auditing and Disclosure) Act (CLERP 9) amendments to the Corporations Act, we'll also have the option to refer accounting issues to the newly established Financial Reporting Panel from 1 January 2005.

    Our program found the following issues that you might find useful when reviewing your own revenue recognition practices.

    Avoid recognising revenue prematurely

    For sale of goods

    Under AASB 1004, revenue from the sale of goods can only be recognised when:

    • control of the goods has passed to the buyer, and
    • it is probable that the economic benefits (the consideration given in exchange for goods) will flow to the entity, and
    • the amount of revenue can be reliably measured.

    Some entities took an overly broad view of just when the control of the goods passed to the buyer. For example, we found one company that was recognising revenue at the time an order was placed, when the specific goods for the customer had not yet even been constructed.

    So ensure that you recognise sale of goods revenue only when the buyer gets control of the goods.

    For provision of services

    We also found some instances of service-providing companies prematurely recognising revenue for service contracts, where for example, revenue was recognised before reaching the required stage of completion for the revenue to become due and payable.

    Again, ensure that your company only recognises services revenue when the designated stage of work that the revenue covers has actually been completed.

    Correctly attribute portions of revenue

    If your company provides goods with service contracts attached, you must determine what portion of the combined revenue is attributable to each component and recognise the revenue accordingly.

    For example, we found that a telecommunications company that provided both equipment and ongoing services to customers as part of a package was recognising revenue on both components of the package upfront on the sale of the equipment. AASB 1004 requires revenue on the service component of the package to be recognised at the time that the service is provided to the customer.

    Avoid including revenue not attributable to the entity

    In the last two years a number of travel companies had to change their revenue recognition policies when we found they were recognising the gross value of travel sold as revenue, when they received these amounts as an agent. Under AASB 1004, only the commission receivable for the travel sold in an agency capacity can be recognised as revenue, rather than the gross value of the travel sold.

    Offset any discounts on acquisition

    Where a company makes an acquisition where the assets are worth more than the consideration paid, you must ensure that any discount on acquisition is offset against the entity's non-monetary assets, as required by AASB 1013 "Accounting for Goodwill". Companies can only recognise a discount on acquisition as profit to the extent that it exceeds the value of non-monetary assets.

    Disclose your revenue recognition policy

    AASB 1004 requires companies to disclose their revenue recognition policy. However, during the 2003/04 financial reporting season, we identified a number of entities that made no such disclosure.

    Many other companies we reviewed merely disclosed that "revenue is recognised when control of the goods passes to the customer" but did not provide information about their specific revenue recognition policy. Arguably, this is insufficient disclosure.

    Australian adoption of IFRS

    For financial years commencing on or after 1 January 2005, Australian companies will be required to comply with the new Australian equivalents of International Financial Reporting Standards. The requirements of the new "Revenue" standard, AASB 118, are similar to those in the existing AASB 1004 for the above issues.


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