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New revenue rules Is your business impacted? November 2016 AASB 15 Revenue from contracts with customers was issued on 28 May 2014. The new rules will cause significant systems issues for companies that offer bundled products and services, provide warranties or rebates, or have contracts where the amount of consideration varies. While some companies can afford to wait until closer to the 2018 implementation date, those who are affected will need to start now to get the necessary systems changes up and running in time. A new regime for revenue The core principle of the new revenue recognition standard is that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. The most significant changes that flow from that principle are: • any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements • revenue may be recognised earlier than under current standards if the consideration varies for any reasons (such as for incentives, rebates, performance fees, royalties, success of an outcome etc) – minimum amounts must be recognised if they are not at significant risk of reversal • the point at which revenue is able to be recognised may shift: some revenue which is currently recognised at a point in time at the end of a contract may now be recognised over the contract term and vice versa. The systems impact: billings ≠ revenue Most systems are set up to draw revenue numbers directly from the billings system. Under the new standard, information from the contracts that lie behind the billings will need to be analysed in order to determine the separable elements of the contracts and the revenue to be recognised from those elements. Interfaces between customer relationship management, sales and distribution and the general ledger may be impacted, and previously automated processes may now require intervention. New revenue rules Is your business impacted? November 2016 The knock-on effect The changes have the potential to trigger changes across the business. Systems: Likely to be the most significantly impacted, and take the longest lead time to change. Your systems may need to capture and analyse new information in a more disaggregated way (see box). Controls and processes: The standard requires companies to make more estimates and disclosures, calling for new controls and processes. Compensation and bonus plans: Revenue recognition can trigger payments like bonuses or commission. Companies will need to consider how timing changes for revenue recognition affect these and other internal arrangements. Contracts: Existing terms could take on new meaning under the new standard, and changes to the amount and timing of revenue recognition may trigger contingent consideration or other provisions based on revenue measures. You may need to re-negotiate debt covenants or other contracts prior to transition to the new standard, to maintain the original intent. You may also want to rethink how you structure customer agreements in future, for example if you want to achieve recognition over time rather than at a point in time. Tax: The timing of cash tax payments could be affected if, for example, clients recognise revenue sooner than in the past. Investor relations: Stakeholders may want to know how revenue recognition will change and how the new standard affects a company’s financial picture. The changes have the potential to trigger dependencies across the business. Preparing for impact Your business can’t change its strategy and practices overnight. You’ll need to consider the changes well in advance of the deadline for adopting the new standard, and determine the level of impact on your business. In particular, companies with large numbers of customer contracts, diverse or constantly changing contract terms, or complex and heavily dependent systems, should assess their position now. An integrated approach PwC is already working with a number of large companies around the world to manage their transition to the new standard. We have developed an approach that draws on our expertise in accounting, systems implementation and transaction structuring to deliver an integrated solution, and can help you to manage the implementation project from start to finish. To find out more, contact your usual PwC representative or visit http://www.pwc.com.au/ifrs This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2016 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Liability limited by a scheme approved under Professional Standards Legislation.