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Revenue Recognition Final Assignment

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Revenue Recognition Final Assignment

  1. 1. Contents 1. MEANING OF ‘REVENUE’..............................................................................................................2 2. Capital Market Expectations about Slater and Gordon Growth and How They Met..........................3 3. Reasons of declinedin share prices by 50%...................................................................................4 4. Analysis and Evaluation Criteria of Services Revenue Recognition under IAS18 and AASB IFRS15 .....5 4.1 Services revenue recognized under IAS18..............................................................................5 4.2 Revenue recognized under IFRS15- 5 Step Mode ...................................................................5 4.3 Analysis of Change in both standards....................................................................................6 4.4 Who will sense the biggest Impact of IFRS 15?.......................................................................6 4.5 What are the effects of the IFRS 15? .....................................................................................6 5. Accounting Treatment of Revenue Recognition of Slater and Gordon WIP and IFRS15 Compliance ..7 6. Slaterand GordonFinancialsforthe Year ended2013, 2014 and 2015 in termsof Revenue Recognition - Analysis.........................................................................................................................8 6.1 Revenue recognition policy until June 2015 was based on,.....................................................8 6.2 Reasons of Significant Revenue Drop in late 2015 - Accounting Changes in 2015 .....................8 7. Factors Influencing Firms Accounting Policy and relevant Research Literature ................................9 7.1 Positive Accounting Theory ................................................................................................10 7.2 Early Adoption of Revenue Recognition Standard IFRS15 by Slater and Gordon.....................10 8. Comments/ Opinion on Sharp Reductions in Firm Revenue/ Income ............................................11 9. Fundamental Principles of Accounting Ethics - APES 110 Code of Ethicsfor Professional................12 9.1 Comments on Pitcher Partner Working with the Firm in Ethical Point of View .......................12 10. References............................................................................................................................13
  2. 2. In businesses normally revenues are the largest single number in the financial statements. It is also a number that attracts a great deal of user attention. At the same time as it might be accepted that profit is the most significant single indicator of corporate financial performance revenue does not fall far behind. Indeed in many sectors, for example the services sector, revenue is an ‘eye-catching number’ that is frequently announced first when results are communicated externally. In sectors where this is true, the remuneration/ reward packages of senior executives often include a ‘performance related element’ with revenue growth as the vital element of ‘performance’. 1. MEANING OF ‘REVENUE’ Revenue is the sum of money that a company/ business actually accept during a specific period, including discounts/ rebates and deductions for returned sell. It is the "top line" or "gross income" figure from which costs are deducted to conclude net income.
  3. 3. 2. Capital Market Expectations about Slater andGordon Growth and How They Met Slater and Gordon is a leading consumer law firm in Australia and the United Kingdom (UK). The firm is specialist in Personal Injury Law practice and work performed on a No Win – No Fee basis. They are the market leader in their domain and covered almost 25% of market share in Australia. The first law firm of the world to float on the share market in 2007 with investors backed. Firm has taken advantage of its access to capital market to develop its reach and presence, first in Australia and later on United Kingdom, by acquiring many law firms. Firm was considering the top 100 Australian listed companies with a worth of $2.5 billion. Shareholders love company’s progress because of, a) Day to day increase in financial numbers, especially more revenues, more profits, good work in progress position, increase in earnings per share every year and dividends. b) Increasing firmsize,especially buying others companies in the UK and other countries. Slater & Gordon had a clearly defined growth strategy based on the acquisition of other practices in core business areas. Shareholders/ capital market trust on the firm because of his long working history, good reputation in market and good returns on investments. The firm therefore performed as an aggressive growth strategy and acquired many law firms including but not limited to, Trilby Misso, Russell Jones, Keddies, Schultz Toomey O'Brien, Clark Toop & Taylor, Nowicki Carbone, & Walker. Since 2007, the firm had spent five hundred million dollars on 40 firms and had become known as a "roll-up" - a company that develops by eating other companies. Shareholders interested in firm’s profits, growth and positive projections. Slater and Gordon always take care about these and given good returns on shareholders investments in terms of not only dividends, but also increase in share prices due to better performance and future plans.
  4. 4. 3. Reasons of declinedinshare prices by 50% No words can describe the suffering felt by shareholders of Slater & Gordon Limited who viewed helplessly as their shares more than halved in price in a day in late 2015. Share prices reduced by 50 %. On December 17, 2015, Slater & Gordon dumped its profit predictions, quoting poor transactional results because of introducing new legislations in UK as well as change in revenue recognition policy due to the adoption of new IFRS15 for revenue. Effects weren't favorable at home either. Slater & Gordon marked down its Australian businesses by $52 million on worse than expected cash flows. Investors doubted if the company would continue, and whether the banks would take it over. Here are five things we need to know: A) Existing worries - This was the result of two separate examinations into its accounting actions; its debatable procurement of Quindell Plc earlier this year; and anxieties about its book-keeping procedures (WIP). B) Seriously Shorted - Slater & Gordon has become one of the shorted companies on the ASX. According to ASIC, 16.3% of its shares were shorted on 20 November, 2015; sense any immoral news is possible to have a dramatic effect on the share price. C) Changes to individual injury law - Substantial fall in share prices came after the company released a market sensitive announcement. The company informed briefly about proposed changes to personal injury law in the UK which, if applied, would impact on the privileges of people injured in road traffic accidents. D) Quindell Plc Acquisition – Controversial procurement of Quindell Plc had created some trouble amongst stockholders. E) Adverse Cash flow Position.
  5. 5. 4. Analysis andEvaluation Criteriaof Services RevenueRecognition under IAS18 and AASB IFRS15 When to recognize revenue? This simple and straight forward question is one of the upmost debatable issues in today’s accounting. It is very much simple and cool when you sell goods, but for long-term contracts or some sort of services it is much complex and tough. Companies needs to make/ have some rules on WHEN to recognize the revenue according to the requirements of IAS18 / IFRS15 guidelines, because all profits and losses, company reputation in front of the outside world and taxes depends on this. Revenue recognition rules have just changed; please read below details of recognition criteria under old and new standards/ rules. Note: I am focusing on service revenue only as required by examiner. 4.1 Services revenue recognized under IAS18  Revenue shall be measured at the fair value of the consideration.  Outcome of a transaction relating to rendering of services can be estimated reliably.  Stagse of completion of work can be measured reliably.  The result of a transaction can be projected reliably.  The sum of income can be measured reliably.  It is probable that associated benefits with the transaction will flow to the company.  If the rendering of services value can’t be measured reliably, revenue shall be recognised only to the amount of the expenditures recognised that are recoverable. 4.2 Revenue recognized under IFRS15- 5 Step Mode  Both parties agree and signed on contract.  Performance requirements in the contract - contract contains undertakings to transfer goods or services to a customer).  Amount/ value of consideration in a contract to which an entity expects to be entitled in exchange for transferring services to a customer.  Allocate transaction value to the performance duties in the contract.
  6. 6.  After the successfully completions terms of contract Recognised revenue according to the contract. 4.3 Analysis of Change in both standards Under IAS 18, Revenue recognition from the sale of goods and rendering of services based on the transfer of substantial risks and rewards. Though in IFRS 15, instead, focuses on when control of those goods has moved to the customer. This different method may result in a variation of timing for revenue recognition for some entities. 4.4 Who will sense the biggest Impact of IFRS 15? The professionals say that the most impacted industries are telecom, software development, real estate and further industries with long-term contracts/ commitments. 4.5 What are the effects of the IFRS 15? The largest impact of the new standard/ rule is that the corporations will report profits in a different way and income reporting patterns will change.
  7. 7. 5. Accounting Treatment of Revenue Recognitionof Slater andGordon WIP and IFRS15 Compliance Work in Progress is an accounting method/ terminology used by many companies/ professional’s - mostly without happening. Same thing is doing by Slater and Gordon. But VGI's research pointed out on Slater & Gordon pitched up 10 red flags, including its Work in Progress bookkeeping and its aggressive desire to buy smaller law firms. VGI said Slater & Gordon was purchasing the undervalued WIP in these firms and inflating up its value on its own books, artificial increasing revenue and profits. In starting Slater & Gordon denied the reality of any accounting issue when first time rose in the media and investigated by ASIC, they said these arguments are incorrect and false, and they are very confident about their accounting policies and procedures. But after sometimes, they finally accepted that they have found some consolidation error in accounts and ASIC investigation is underway. During investigating period ASIC found some serious doubts about revenues and WIP and asked Slater and Gordon to hire new CFO and change their external auditor. After changing of CFO and external auditor Slater and Gordon up dated their accounting policies and UK laws required some changes and adopted IFRS 15 for revenue. This will result change of work in progress treatment in financial statements. This accounting standard required Slater and Gordon to book only revenue that it could class as "highly probable", and contractually agreed, which resulted; write down of work in progress significantly - from $467 million to $382 million in 2014, and $826 million to $694 million in 2015. The Slater and Gordon disclosed that due to the mandatory requirements of IFRS 15 necessary discounting of Work in Progress by 15 to 20 per cent. Standard also required from Slater and Gordon to impaired goodwill from purchase of the Slater Gordon Solutions business in the UK; Reduced goodwill arising from many acquisitions of legal services businesses in Aus and UK; Reduced the worth of WIP on the acceptance of accounting standard IFRS 15; and Raise its provisions against receivable and disbursement assets. Additional facts on these substances are provided in the firm’s ASX and financial report.
  8. 8. 6. Slater and Gordon Financials for the Year ended2013, 2014 and2015 in terms of Revenue Recognition - Analysis Slater & Gordon was specialized in "no win, no fee" personal injury cases, recorded revenues on work in progress basis as some of the cases take almost 18 to 20 months’ time period. They estimate the likelihood of success and how much work had been done. 6.1 Revenue recognition policy until June 2015 was based on,  Outcome of the services can be measured reliably.  Stage of the completion of case (Recording revenue according to the % of services provided).  Revenue recognition to the extent of costs incurred.  Interest revenue recognised on a proportional basis according to interest rates.  Other revenue recognised once the right to receive the income has been recognized Majority of revenue was from services (fee billed). During this time period Slater and Gordon acquired many law firms and consolidated their accounts with Slater and Gordon after inflating revenue and WIP figures to show good performance and stability. When we saw revenue figures of these three years, they show continuous upward trend from 2013 to 2015 respectively. Revenue figure was mainly based on services provided to their clients.  In 2013 revenue figure 297,576,000 and growth was 8.0% as compared with 2012.  In 2014 revenue figure 418,466,000 and growth was 40.5% as compared with 2013. While,  In 2015, closing year in June 2015 revenues were 6,653 3,753, a huge upward trend (60%) in revenues. 6.2 Reasons of Significant Revenue Drop in late 2015 - Accounting Changes in 2015 In consultation with auditors, management of Slater and Gordon was reviewed their accounting policies and decided some changes in policies. Beside others, group will move to early adoption of IFRS15 – Revenue from Contracts with Customers in Fiscal Year 2016. And
  9. 9. for the 6 month interim period, the financial statements for FY15 will include greater disclosure about revenue recognition policy. As a result firm has to comply recognition requirements under IFRS 15 requirements that are stricter than old standard. That’s why firm dumped its revenue figures. And also admitted the new standard led to a discounting of WIP by 20 per cent. 7. Factors Influencing Firms Accounting Policy andrelevant Research Literature Accounting standards are policies, principles, rules, conventions, bases, and practices applied by any organization when preparing and presenting its financial statements. It is usually accepted that International Financial Reporting Standards endorse a true and fair demonstration of financial picture (BS, PL and Cash flow). The true and fair reporting of financial information helps investors, bankers and regulatory authorities to make better decisions about company. When preparing financial statements companies’ using information according to the guidelines provided/ described by IFRS. But country law and company practices are also important. If there is something is different in country law and accounting standard then country law will prevail and company/ business must have to follow it. In different countries different reporting models are working because of ground realities (Different culture, Government requirement, Local atmosphere, etc), out of them some are given below, Income strategy models are designed and developed for each firm according to the type of accounting policies working. The results suggest that both the size and debt/equity suggestions are significant. These results are surprising given, A- The close relationship between firms and the government, B- Regulations of the commercial code which serve to protect the interests of debtholders, and C- The tight relationship between banks and firms which protects firms from bankruptcy and takeover.
  10. 10. 7.1 Positive Accounting Theory Positive accounting theory is where experts explain why some accounting practices and procedures are more popular than others (e.g., because they increase management returns against their investments). Positive Accounting Theory tries to make good estimates of real world events and translate them to accounting transactions. They have given guidelines to firms about selection of appropriate accounting policies, such as,  Firm reaction to newly proposed accounting standards.  Choice of accounting policies for different types of firms under different environment (Political and economic).  Firms can exercise maximum prospects for survival, so firms organize themselves more efficiently.  Firms are observed as the accumulation of the agreements they have entered into.  Positive Accounting Theory expects from managers that they are flexible when choosing accounting policies. Positive Accounting estimates and predictions based on three below stated points;  Business managers normally use these accounting techniques to show future earnings in current year to increase their bonuses, because their bonus criteria based on revenues and/ or profits.  Managers use it to show future earnings in current period to highlight company stability and performance.  In tough political and tax conditions managers try to transfer current year profits/ income into future years to reduce tax liabilities and other related issues. 7.2 Early Adoption of Revenue Recognition Standard IFRS15 by Slater and Gordon After highlighted of Slater and Gordon accounting treatment issues of revenue and work in progress mentioned by VGI research report and changes of some laws in UK, management of firm in consultation with auditors has decided to review accounting policies and to adopt IFRS15 for revenue recording that is more suitable for them to show clear picture. The new CFO and auditors believed that the under current standard IAS18 reporting shall
  11. 11. not be true and fair view. Hence they have decided to move on to IFRS 15- revenue from contracts with customers and adjusted their revenue, WIP and Goodwill according to standard requirements. 8. Comments/Opinion on Sharp Reductions in FirmRevenue/Income Slater and Gordon revenue was significantly decreased in late months of 2015. There are many reasons behind of declined including early adoption of IFRS15, as well as some others factors are given below, 1. Examination of Quindell by UK government, sold its professional services division to Slater & Gordon for $1.3 billion. Both Slater and Quindell have been criticized for violent accounting practices. This investigation damaged the reputation of Slater and Gordon. 2. Firm aggressive approach towards buying other law firms. It was beneficial in start but in later years created cash flows and some other issues for Slater and Gordon. 3. Early adoption of IFRS15 – Result tough rules of revenue recognition under IFRS15. According to new rule firm can record only revenue that is highly probable and defined clearly in contract with terms and conditions, which triggered a huge write down in revenues. 4. Investigations started by Australian Securities and Investment Commission against firm accounting treatment. 5. Some unexpected claims from customers and related persons. 6. Reforms announced by UK government directly hit to the firms business. 7. Poor trading results. 8. Huge losses to buy Quindell, around $814 million in value. 73 % was because of cases, particularly the hearing-loss files, were not being resolved. The rest related to the Cameron government's announcement of reform.
  12. 12. 9. Fundamental Principles of Accounting Ethics - APES 110 Code of Ethics for Professional Accounting and Ethical Standards Board Limited issues APES 110 Code of Ethics for Accountants. All members within and outside Australia but doing business in Australia shall comply with APES 110 including when providing Professional Services in an honorary capacity. The basic principles of the standard are, a) A member shall be straightforward and honest in his profession – Integrity. b) Member not allowed bias and conflict of interest – Objectivity. c) Member must have professional knowledge and required level of skills - Professional Competence and Due Care. d) Member can’t disclose any confidential information to outsider/ third party unless required by law or his/ her professional duty to disclose the information – Confidentiality. e) Member must follow the applicable regulations and avoid any action that discredits the profession - Professional Behaviour. 9.1 Comments on Pitcher Partner Working with the Firm in Ethical Point of View The ‘Pitcher Partners’ auditor of Slater and Gordon was not fulfilled their duties properly during the time of pre and post audit according to the APES 110 Code of Ethics. Infect they had been given relaxation to client in many places, like they did not created any issue on wrong reporting of ‘work in progress and revenue’ as well as hide company actual position from shareholders and government agencies. According to the APES guidelines auditor failed to fulfill his duties might be because of these reasons,  Might be he was not straightforward in his profession – Integrity issue.  Might be he has not having enough knowledge about applications of standards – Lacking in professional competencies.  Auditor did not disclose relevant information to the government authorities and shareholders on timely basis – Discredit the profession.
  13. 13. 10. References https://media.slatergordon.com.au/ http://www.asx.com.au/asxpdf/20140919/pdf/42sb0ld0sct8yw.pdf http://www.apesb.org.au/ http://www.smh.com.au/business/slater--gordon-acquisition-transformative-20150330- 1mb754.html http://www.iasplus.com http://www.ifrs.org/ EY official website.The newrevenue standardaffects more than just revenue, http://www.ey.com

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