Slater and Gordon Limited – Annual report – 30 June 2021
Industry: support services
1.4 Significant Accounting Judgements, Estimates and Assumptions
In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are regularly reviewed. Revisions to estimates are recognised prospectively.
The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty are outlined in detail within the specific note to which they relate.
Note 3. Revenue from Contracts with Customers
3.1 Accounting Policies
Provision of Legal Services – Personal Injury Law Claims
The Group’s personal injury law practice operates on the basis of No Win – No Fee (“NWNF”) conditional fee arrangements, whereby fees are earned only in the event of a successful outcome of a client’s claim. Fees may be fixed depending on the stage at which a matter concludes or determined based on an agreed scale detailed within the legal cost agreement, which is often a mix between time-based charging and set rates for certain activities.
Contracts with clients may comprise a single performance obligation, being the provision of services in pursuit of the successful settlement of a customer’s claim, or may contain multiple performance obligations, such as legal services in respect of a statutory claim and a common law claim, or initial pre-issue work and litigation work. In both circumstances, the transaction price is allocated to a single distinct performance obligation given the services being performed are highly integrated.
The NWNF arrangement introduces transaction price variability as the final fees receivable under a contract are generally only known upon the matter’s conclusion. Expected fees are only recognised as revenue to the extent that it is highly probable that the cumulative amount of revenue recognised will not be subject to significant reversal when a matter is concluded.
The transaction price for revenue recognition is estimated using the expected value method basis using the Group’s historical experience in similar contracts and is influenced by the following factors:
The additional risk adjustment is applied to consider the variability of the final outcomes of contracts in a particular group of matters and determines a percentage adjustment that should be applied to the expected outcome in order to satisfy that it is ‘highly probable that a significant reversal of revenue recognised will not occur’ when the uncertainty associated with the amount of variable consideration is resolved.
Where historical averages are not predictive of the probability of outcomes for a given contract, or where the Group has limited historical experience with similar contracts, the expected amount of variable consideration is estimated using a ‘most likely amount’ approach on a contract by contract basis. In such circumstances, a level of judgement is required to determine the likelihood of success of a given matter, as well as the estimated amount of fees that will be recovered in respect of the matter.
Revenue is recognised when control of a service is transferred to the client. The Group recognises revenue in respect of personal injury matters ‘over time’ (as opposed to at a ‘point in time’) using a milestone-based approach. The percentage completion is determined:
- by calculating the average fee received for matters that resolve at a particular status code as a percentage of the average fee received for matters that resolve at that status and any later status; or
- by use of defined completion allocations based on historical performance.
Estimates of revenues (including interim billing), costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management.
The Group also arranges for the disbursement activities provided by third parties on behalf of the client where the Groups acts as an agent because the Group does not control the output from those activities and cannot influence the content of the medical reports or certain court filings. No profit margin is recognised on the activities when clients are charged the direct cost incurred by the Group. The amount recognised for the expected reimbursement does not exceed the relevant costs incurred. Disbursements are treated as a separate asset reduced by an allowance for non-recovery based on past experience. Refer to Note 10.
Provision of Legal Services – Litigation and Emerging Services
The Group earns revenue from the provision of general legal services, including project litigation. Revenue for general legal services is recognised over time in the accounting period when services are rendered. Revenue recognised is carried as ‘Work in progress’ until the matter is finalised and a client invoice is raised.
Fee arrangements from general legal services include NWNF arrangements, fixed fee arrangements, and partially or fully funded litigation.
NWNF arrangements: Revenue is estimated using a most likely amount approach on a contract by contract basis. Management makes a detailed assessment of the amount of revenue expected to be received and the probability of success of each case. Variable consideration is included in revenue only to the extent that it is highly probable that a significant reversal will not occur.
Partially or fully funded litigation: The Group enters into arrangements with third party funders to provide a portion of the fees on a matter over time as services are performed. In such arrangements, the funded portion of fees, referred to as time and materials, is billed regularly over time and is not contingent on the successful outcome of the litigation. The remaining portion of fees is variable consideration which is conditional on the successful resolution of the litigation. The variable consideration is included in revenue as services are performed only to the extent that it is highly probable that the amount will not be subject to significant reversal when the uncertainty is resolved.
Fixed fee arrangements: Revenue is recognised based on the stage of completion tracked on a contract by contract basis using a milestone-based approach, similar to Personal Injury Law Claims as explained above.
As in the case of personal injury claims, estimates of revenues, costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management.
The Group has determined that no significant financing component exists in respect of all its revenue streams. This is because:
- a substantial amount of the consideration promised by the client is variable subject to the occurrence or non-occurrence of a future event that is not substantially within the control of the client or the Group; and
- for fixed and funded fee arrangements, the period between when the entity transfers a promised good or service to a client and when the client pays for that good or service will be one year or less.
A receivable in relation to the Group’s services is recognised when a bill has been invoiced, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. When an invoice is raised, the amount receivable is transferred from ‘Work in progress’ to ‘Accounts receivable’.
Applying the practical expedient in paragraph 94 of AASB 15 Revenue from Contracts with Customers, the Group recognises the incremental costs of obtaining contracts as an expense when incurred.
Critical Accounting Estimates and Judgements
3.2 Disaggregation of Revenue from Contracts with Customers
The Group derives revenue from the transfer of goods and services over time and at a point in time, in the major product lines of Personal Injury Law and Litigation and Emerging Services and the geographical regions of Australia:
Note 2. Segment Reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenue and expenses that relate to transactions with any of the Group’s other components.
The Group has one reportable segment relating to provision of legal services in Australia. Information provided to the chief operating decision maker for the purposes of making decisions about allocating resources to the segment and assessing its performance is consistent with amounts presented in the consolidated financial statements. The Group’s revenues and assets are wholly based in Australia. The Group is not reliant on any single customer.