Australian companies and accounts for revenue
Under the Corporations Act 2001 both small and large companies in Australia must prepare and lodge a financial report for the end of each financial year. A large company has to include a directors’ report for each financial year. The accounts must be audited unless ASIC exempts the company. According to the AASB118, revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity. Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties, such as goods and services taxes collected on behalf of the Australian Taxation Office, are not economic benefits which flow to the entity and do not
Result in increases in equity. Therefore, they are excluded from revenue ( Haswell S, Langfied-Smith L, 2008)
This Standard and the Framework for the Preparation and Presentation of Financial Statements are both based on a notion that income comprises revenue and gains. Under AASB 1004, revenue received on disposal of assets is the fair value of the consideration received but, under AASB 118, for some assets gains and losses are recognised on a net basis. In particular the AASB 118 does not define ordinary activities. However, the standard and the AIFRS Framework means that revenue is income from an entity's core activities, such as amounts received by a Government Printing Office as opposed to income from gains such as the sale of a property by the same department. That is, ordinary activities do not include the disposal of assets that are unlikely to recur on a regular basis ( Docstoc, 2011). Revenue recognition is important because it has a direct impact on quarterly income statements, incentive calculations, investor confidence, and perception of an organizations financial health. To maintain consistency across organizations, the Securities and Exchange Commission relies on the standards published by the Financial Accounting Standards Board to establish the guidelines for revenue recognition (A ASB, 2011).
Whenever a product is sold, the seller earns and reports the revenue. However, in the real world such sales transactions are not as straight forward, and the principle of revenue recognition is one that creates the most issues for accountants. Nowadays the process of selling has become quite complex. There are many issues and procedures involved. Customers have the option to make payments right away when making the sale, or can choose to make the payment in instalments as agreed to in the sales contract. There are many credit and financing options available. Customers also have guaranteed return days. All of these incentives help make it easier for customers to buy products increasing sales for the seller; however, the job of an accountant has become more challenging. Accountants have yet to come up with a system that perfectly suits revenue recognition, and is compatible with all the various industries .With the Telecommunications industry it is very important to understand the principles of determining revenue in multiple element transactions for example they provide free handset for customers with contract arrangements. Across a range of industries and transactions, it is difficult to identify consistently when earning or realization occurs under multiple-element revenue-generating arrangements ( US securities and exchange, 2011).
Hutchison accounts for revenue
Hutchison Telecommunications Australia measure and recognise revenue at the fair value of what they consider received or receivable. Revenue from the telecommunication services with respect to voice, video, internet access, messaging and media services, including data services , is recognised when the service is rendered and, depending on the nature of the services, is recognised either at the gross amount billed to the customer or the amount receivable as a commission for facilitating the services. Revenue from the sales of prepaid mobile calling cards is recognised upon the customer’s usage of the card or upon the expiry of the service period .The sale of handsets is recognised at the date of send out of goods, Interest income is recognised on a time proportion basis using the effective interest method (Hutchison Annual Financial Report, 2010).
Companies can only recognize revenue if it is both realized and earned. In many situations, this clearly takes place when the company delivers the product and receives payment.
However, there are some cases when organizations physically deliver a product but do not immediately recognize the revenue. In addition, there is the case when companies do not deliver a physical product but need to recognize revenue .Total revenue attributable to Hutchison in 2010 financial year was $2,410.9 million, an increase of 18.2% from 2009 financial year. Service revenue grew by 16.8% to $2,201.4 million, with operating margin up 22.0% reflecting lower domestic roaming costs through the utilisation of Hutchison Telecommunications Australia’s network assets and growth in non-voice revenue .Growing profitability Earnings Before Interest, Taxes, Depreciation and Amortization with 21.6% of service revenue, is up from 9.3%in 2009.Operating expenditure per customer is $371, down by 16.3%.They have strong post paid customer growth. Post paid customer base is now59.4%, up from 56.8%.Customer acquisition cost per connection is $145, down by 12 %.
( Hutchison Annual Financial Report, 2010).These revenue figures probably mean Hutchison’s recognition of revenue in 2010 financial year has seen an increase in the service revenue by 16.8% from 2009. EBITDA has increased by 21.6% of the service revenue. This means the operating margin has increased to 22% in the 2010 financial year. This increase has reflected the lower domestic roaming costs of Hutchison but not the increasing revenue from sales or service activities.
Aspect from the standard AASB118 Revenue for Hutchison
The Australian Accounting Standards Board has adapted the AASB Standard 118 as fundamental principles, which most of the Australian companies follow when accounting for revenue. However, it must be declare that all the rules in AASB 118 may not be in the best interests of a business. as discussed before, it may be true ”as the AASB118, revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity”. However if a change occurred to the revenue recognition of the component transactions it is likely to provide more accurate recognition but it may need telecom to exercise judgement when determining whether a transaction should be recorded on a gross or net basis. For example, in some cases the customer’s credit risk for amounts receivable resides with the telecom but control over the content and price resides with the content provider. The objective of this change is to develop conceptual guidance for revenue recognition and a statement that would apply to all business entities, both public and private.(emagia).
With telecommunication service providers' revenue per bit falling at 50% or more per year,
Chief Executive officers of Hutchison review the accounts and side the Profit growth is result of Hutchison investment in Vodafone Hutchison Australia. As a result revenue from VHA’s ordinary activities is not included in Hutchison’s consolidated revenues from ordinary activities ( Hutchison Annual Financial Report, 2010).It seems Hutchison revenue come from investment in the stock exchange market is not gross earnings from certain business activities. Revenue recognition is a greasy issue in accounting, and an area that has proven lead to fraud. The Financial Accounting Standards Board has been wrestling with revenue recognition for years. They are in the midst of a project to develop a comprehensive statement that is conceptually based and framed in terms of principles (asic)
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In this report, I highlighted the Standards set by AASB 118 which relate to any financial treatments that arise when accounting for Revenue in Australia. On the other hand, the Framework provides a much more extensive scope into understanding the concepts that arise from the preparation of financial statements. It is important to mention that the Framework does not specify neither ‘override’ any Australian Standard since it has been adapted from the IASB Framework. In conclusion it must be said that when the Standard and Framework work together, it provides valuable information to companies in deciding how to account for Revenue.
References:
AASB 118 Revenue
AASB Framework for the preparation and presentation of financial statements.
www.asic.gov.au
Bookkeeping Financial Accounting Resources, 2011 accesses 25/03/2012 www.bookkeeping-financial-accounting-resources.com
Docstoc, 2011 ACT AIFRS Policy Summary AASB 118 accesses 1/05/2012 http:/www.docstoc.com
Financial Accounting Standards Board, 2011accesses 30/4/2012 http:/www.fasb.org
Haswell, S, Langfied-Smith, L, 2008 Australian Accounting Review vol 18, p46-62
Hutchison2010, Annual Financial Report accesses 26/03/2012 www.hutchison.com.au
US securities and exchange, 2011accesses 10/05/2012 http;//www.sec.gov.