Revenue recognition changes questioned
Only 38% of businesses think that new global revenue recognition changes are needed
As the IASB and FASB ready the release of final global revenue recognition changes, a global business survey finds only 38% of respondents believe that existing accounting standards on revenue recognition need to be improved or replaced.
A majority of the respondents also thought that the latest joint proposals would lead to increased costs (50% v 33%) and more complexity (46% v 36%), and only 38% were aware of the upcoming revenue recognition changes. The survey was conducted by Experian during the month of May 2013, with 3,200 businesses in 44 countries as part of the Grant Thornton International Business Report, a quarterly business survey in its twentieth year.
“Some may argue that the current standards aren’t broken, but we think there are serious problems,” said Grant Thornton global CEO Ed Nusbaum. “The two main IASB standards are based on different principles and lack guidance in important areas such as multiple element arrangements. The US literature suffers from the opposite problem of excessive guidance - much of which is specific to particular industries. We anticipate that the changes will require that every company provide more disclosure about its revenues, which will benefit investors who have complained about a lack of transparency.”
"We applaud the two Boards for delivering a converged standard in this critical area of financial reporting. Convergence has been challenging and not without setbacks and controversies. Against that background, we see this standard as a landmark achievement that will provide a major boost for investors looking to compare company performance across borders."
Some of the industries that will be most affected by revenue recognition changes include:
- Telecoms and IT – where multiple deliverables are commonplace and current practice is mixed. Mobile/cell-phone businesses that account for a 'free' handset as a marketing cost will need to change this policy and instead allocate revenue based on relative value
- Real estate – when to take revenue for 'off plan' apartment sales has been a difficult issue and the new model will shift the boundary between percentage- of-completion and on-completion revenue recognition
- Performance-based or contingent fee sectors - such as asset management and some legal and professional services. Under the new model variable payments would be accounted for on a best estimate basis subject to being 'reasonably assured'
- Retail - accounting for rights of return, customer loyalty schemes and warranties could all be affected.
Other areas that could be affected include deferred and advanced payments, licensing arrangements, breakage and non-refundable upfront fees.
A final standard is now expected in September 2013 and would be effective for annual periods beginning on or after 15 December 2016 (FASB) or 1 January 2017 (IASB). The IASB, but not the FASB, will permit earlier application. [FASB-only: Public companies that report their financial results in the calendar year have until the first quarter of 2017 to comply and private companies will have a one-year deferral.
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