The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have published a new revenue recognition accounting standard. It will eliminate global differences and conflicting requirements. But implementing the new regime will be a considerable challenge to many businesses, particularly those offering complex ‘bundles’ of goods and services or long-term service contracts.
Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, said: “Revenue is a crucial number to investors and other users of financial statements seeking to understand and assess a company’s performance and prospects.
“Until now, there have been significant differences in how and when revenue has been recognized and reported under International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Standards (US GAAP), which has made it difficult to compare reported revenues across companies, industries and capital markets. This new ‘flagship’ convergence standard will improve comparability and the quality of information available.”
The almost fully converged revenue recognition standard, which the IASB and the FASB have been working on since 2002, will come into force in 2017. It clarifies when revenue should be recognized, how it should be measured and the disclosures required about contracts with customers.
Some businesses will be far more affected by the standard’s change than others. Among those likely to be affected the most are companies offering complex ‘bundles’ of goods and services – such as a telecom company selling a package including a telephone and a fixed-period contract, or a car dealer selling a vehicle with extended warranties and insurance – or providing long-term service contracts. The amount of revenue recognized should not change but its timing will.
Nigel commented: “Industries such as telecoms, construction, real estate and software are likely to feel the changes the most. For some of these companies, the change may present a formidable logistical challenge. This will involve assessing the impact of the standard on all the company’s revenue streams and determining what customers pay for each element of goods and services sold as packages. This can be a complicated task.”
“For many other businesses – such as those undertaking straightforward retail transactions – the standard will mean only limited change. However, as the new standard has much more detailed guidance than the previous IFRS, it is important that all IFRS reporters consider carefully and early on how they may be affected. The standard could require a business to make changes to, for example, its information systems and processes, internal controls and bonus plans.”