International Financial Reporting Standards defines the pragmatic accounting rules and procedures set by International Accounting Standard Board to describe the presentation of the transaction in financial statements (Tysiac, 2014). IFRS 15 accounting standard was developed and implemented to replace the older International Accounting Standard 18 to enhance broader revenue recognition framework of as well as maintaining consistency in recognizing revenues global companies to substantiates the proper presentation of financial reporting of revenues realizes from the sale of goods and other services (Dalkilic, 2014). The Development of IFRS 15 substantiated positive contribution towards companies accounting of revenue from operations which enhanced the investors understanding of the reported revenues informations and time of recognition.
IAS 18 and its adequacy as applied in the current Rio Tinto Business transactions
The IAS 18 framework outlines the accounting requirements for recognizing the business revenue from the sale of business goods, the business rendered services as well as the interest earnings, royalties and business dividends (Tysiac, 2014). The standard accentuates that revenue is configured at its the fair value attached to the consideration receivable or received and the is recognized after meeting the prescribed situations (Anand, 2017). The IAS 18 defines the recognition of revenue based on the IASB incorporated criteria and the time of recognition the revenue is recorded in the income statement.
The revenue is recognized where there is a probable future economic benefit that is associated with the several revenue items that are expected to flow to the entity, and the amount is reliably valued.
The IAS 18 section 14 capitalizes on the standardized criteria of recognizing the revenues from sales of business goods (Kalpesh, 2010). The section 14 of the IAS 18 standard literate that revenue is recognized on the following basis:
Where the sellers have initiated the transfer of goods to the buyer and offer the ownership reward
Where the amount of revenue from the goods sold can be reliable measured
Where the cost attributable to the transaction of goods has been incurred or is to be incurred is reliably measurable
Where there is a probable economic benefit to be realized with respect to the goods sold.
The IAS 18 section 20 exploits the standardized criteria for recognizing the revenues from rendering of service as per the percentage of completion method;
The amount of cash from the services rendered is reliably measurable
The probable flow of economic benefit to the seller
The cost to be incurred or already incurred regarding the service rendered is reliably measurable
In cases where the above criteria are not substantially obtained then revenue attributable to the rendering of services to the extent that expenses incurred are recoverable based on the Cost-recovery-Method (Dalkilic, 2014).
The aggregate Rio Tinto revenue to be recognized during each financial period is consequential to the amount of the goods sold, the companys services rendered within the financial year, the insurance premiums, as well as the revenue from other Rio Tintos activities, constituted over the entity's earning course (Barth, 2012). The Rio Tinto 2016 annual report defines the major revenue from the companys financial services with the investment as well as interest income, and the sales from trading gains.
Rio Tintos application of the IAS measure in recognizing of revenue
The IAS 18 condition on sales of goods is applied and satisfied where the title is passed to the customers or where the products are delivered on the customer's destination thus revenue is fully recognized (Steele, 2012). The majority of Rio Tintos products delivered to the customers based on a contractual method where the pricing mechanism and tenure vary respectably. The Rio Tintos sales revenue is subject to adjustment upon the customer's product inspection thus enhancing revenue recognition based on a provisional basis which is subject to the Rio Tintos best estimation method (Dalkilic, 2014). The Rio Tintos provisionally priced measures are accorded as the revenue recognized but subject to the adjustment upon the in the period of 30 to 180 days after the goods are delivered to the customer.
The revenues from the provisionally priced sales attributable to the goods sold are recognized on the grounds of the estimated fair values attached to the consideration receivable and relevancy of the industry market prices (Bratton, 2012). The Rio Tinto Annual report accentuates that on each reporting day, the provisionally priced metal is recognized based on the market price to the forward selling price quotationally to the stipulated contractual time (Annual report, 2016). However, the transparency of the pragmatic measure over revenue recognition on the strategic business transaction requires a pragmatic set of standards that will consider the complex business transitions.
The IAS 18 primarily conceptualized on the stringent policies of revenue recognition which are very applicable in a noncomplex transaction such the recognition of contract Rio Tintos revenues which are provisionally priced and requires an adjustment upon the customer re-evaluation (Annual report, 2016). The recording of revenue realized from the contract does not describe an exceptional measure where the revenue resource is primarily considered on the sale of metals (Kalpesh, 2010). The Rio Tintos several complex revenue entries are not adequately met by the predefined IAS 18 revenue recognition policies.
The Objective of IFRS 15
The major objective of IFRS 15 is to configures the revenue realization principles that outlines the entitys procedural steps where the company will clearly record the revenue on financial statements based on the business nature, the transactional amount as well as timing, and the revenue uncertainty from the companys customer contract (Steele, 2012).
The Scope of IFRS 15
IFRS 15 Revenue recognition standard clearly accentuates that the revenue from Customers Contracts through step performance obligation and determination of the transaction price allocated to the performance obligation where the revenues then recognized when entity satisfies its performance (Dalkilic, 2014). The IFRS 15:7 accentuates that if the contract specification cannot be quoted as separate or initially measurable, then the separation, as well as measurement, are applied respectively (Bratton, 2012). The transaction price is comprehensively deemed to the amounts initially ascertained under another standardized framework. In case there is no other standard providing guidelines on the mode for separate or initially measuring parts of contract thus the application of IFRS 15 will be effectively applied to enhance evaluation of the recorded contractual revenues.
The argument for implementation of predicated IFRS 15 revenue recognition standard
International Financial Reporting Standards (IFRS 15) is an accounting standard issued in May 2014 and expected to be applied fully in January 2018 to configure the recognition of revenue from the contracts with the customers (Dalkilic, 2014). The IFRS 15 is jointly established by the IASB and FASB to substantiate the measures of recognizing the business revenue from the customer's contract as opposed to the insignificant approached applied under the IAS revenue recognition standard that does not comprehend an effective framework for recognizing revenue from contracts (Barth, 2012).
The International Financial Reporting Standards conceptualize on the provision of comprehensive accurate and timely revenue recognition framework which is more applicable in recognizing the revenue from the Rio Tintos sale of metals on contractual basis (Anand, 2017). IFRS 15 enhance effectiveness in reporting of timely inclusive financial reports which is disclosed relevant adjustment on the reported revenues in the annual report financial information as compared to the initial IAS 18 standard which does not comprehend the recognition of provisionally priced contract revenue in the financial statement reporting date (Bratton, 2012).
The IFRS 15 created the single model framework where the revenue from customers contracts are recognized based on the five-step model to promote greater consistency and trace of the contract customers revenue over the financial period (Steele, 2012). The five-step model pragmatically defines the procedural measure through which the revenue from customers contracts are subsequently recognized based on the performance obligations (Steele, 2012). IFRS 15 accentuates that the customer identification is the initial step where the performance obligation is separately considered for the contract and determination of the transaction price is then allocated to the performance obligation where the revenues are recognized when entity satisfied performance obligation as shown below;
The financial significance of adoption of IFRS 15 by Rio Tinto
The Rio Tintos implementation of IFRS 15 stimulates consistency in recognition of revenues from the Rio Tintos contracts thus enhancing financial reporting that sufficiently provide traces of revenues from respective contracts (Dalkilic, 2014). IFRS 15 promotes single model contractual accounting context where the revenue from customers contracts are recognized based on the step model to promote greater consistency and trace of the revenue from customers contract after meeting the performance obligation (Dalkilic, 2014). Rio Tintos adoption of the IFRS 15 reporting standards has enhanced the presentation formats that reduce the investors time and cost in processing the reporting revenue financial information (Steele, 2012).
Adoption of IFRS 15 enhances comparability of financial information where the Rio Tinto will reveal universal standardized contractual revenue realization measure from the customers contracted after satisfying the performance obligations and enhanced the presentation of financial information are easily comparable to the once within the same industry with certainty and accurately (Bratton, 2012). The Rio Tintos universal reporting standards effectively promote investors assessment of the revenues realized and recognized from the Rio Tintos contracts where the accuracy of the reported data deems the effect of non-disclosures of revenues due to lack of effective standards such as IAS 18 where the contractual revenues were not accorded and recognized effectively (Annual report, 2016). Moreover, IFRS 15 reduce the cost incurred by the companys investors to the financial analyst to describe the technical presentation of financial statements informations as delivered under IAS 18 where there was no proper step-step process of recognizing revenues (Anand, 2017).
The stringent standardized policies and procedures describe under IFRS 15 promote transparency in financial reporting through pragmatic compliance with unvarying measures hence substantiating contractual recognition of revenues (Tysiac, 2014). Moreover, augmented transparency expedited by IFRS 15 enhance companys reliability of financial information that can stimulate financiers consideration in investing more in the company since the Rio Tintos structured procedure of recognizing revenues is transparent (ACCA, 2016). The layout structure of financial statement integrated with IFRS 15 policies over the revenues recognition describes noncomplex reporting enhancing users understating of the companys financial performances.
In conclusion, Rio Tintos adoption of IFRS 15 generally facilitates the vision for reporting fra...
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