CHAPTER 6 Statement of profit or loss and statement of changes in equity 233(iii) Commissions
When the Group acts in the capacity of an agent rather than as the principal in a transaction, the
revenue recognised is the net amount of commission made by the Group.
(iv) Rendering of services
Revenue from a contract to provide services is recognised by reference to the stage of completion of
the contract. Revenue from time and material contracts is recognised at the contractual rates as labour
hours are delivered and direct expenses are incurred.
(iii) Interest income
Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective
interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through
the expected life of the financial asset to that asset’s net carrying amount.
(iv) Dividends
Dividends are recognised as revenue when the right to receive payment is established.FIGURE 6.3 JB Hi-Fi Ltd Revenue recognitionSource: JB Hi-Fi Ltd 2015, preliminary final report, pp. 68–69.
Expense recognition
Recognising an expense involves determining if a decrease in assets or an increase in liabilities is
required, paying due attention to relevance as assessed considering the factors of uncertainty, prob-
ability and measurement uncertainty. In many instances, this is straightforward (e.g. goods to a known
value have been sold, or an invoice for advertising expenses has been received). Other transactions
involve greater uncertainty about the occurrence and measurement of the outflow of economic benefits
(e.g. employee benefits expense and asset impairments).
As a result of the economic climate, many entities have suffered impairment losses. The accounting
rules require entities to write down the carrying amount of their assets if the carrying amount is higher
than the asset’s recoverable amount. The recoverable amount is the higher of the asset’s value in use and
net selling price. The reality check ‘Orica’s $1.65 billion write-down a disappointing but decisive action’
illustrates a decision that has been made to recognise an expense (an impairment loss) based on the need
to reduce the carrying value of an asset, and how this has impacted on the entity’s reported profit.
REALITY CHECKOrica’s $1.65 billion write-down a disappointing but decisive action,
CEO Alberto Calderon says
The company significantly downgraded profit expectations, telling the market it expected its net profit
after tax would be 10 to 15 per cent below current consensus forecasts of $490 million. The market
reacted with Orica’s shares tumbling 12 per cent — down $2.28 to $16.58 when the market opened.
Orica, the world’s largest explosives maker, announced a massive $1.65 billion asset write-down
associated with declining fortunes in mining and a global oversupply of ammonium nitrate.
The decision, in response to a changed operating environment, saw asset write-downs across all
Orica key business units.
The impairment charge against its ground support business — which focuses on underground
mining — will be in the range of $730 to $870 million.
Ammonium nitrate manufacturing assets based in Indonesia and Peru will be written down by up to
$600 million, while another $120 million to $180 million impairment charges will be taken across the
business to reflect changed ‘longer-term operating conditions’.
Source: Letts, S 2015, ‘Orica’s $1.65 billion write-down a disappointing but decisive action, CEO Alberto Calderon
says’, ABC News, 7 August, http://www.abc.net.au/news/2015-08-07/orica27s-24165-billion-write-down/6680272.