The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) released revised proposals that will bring significant changes to when companies record their revenue, particularly for those that provide multiple goods or services in a single contract.
Ernst & Young’s Global IFRS Services Leader, Ruth Picker says: “We welcome the Boards’ objective to create a single revenue model under both IFRS and US GAAP as this will promote consistent accounting for revenue recognition and increase comparability and transparency for stakeholders. Finalizing the revenue recognition standard has been one of the key focuses of convergence on accounting standards for the Boards in recent months.”
In June 2010, the Boards issued the first proposal for a single revenue model for both IFRS and US GAAP. Some constituents raised concerns about the timing of revenue recognition and the practicality of some of the requirements in that proposal. Industries that would have been significantly impacted include entities in the telecommunications industry, real estate sales and construction industry (including construction of real property, infrastructure, and other specialized and customized plants and equipment).
Ruth Picker comments: “The Boards have tried to address concerns raised by respondents regarding the timing of revenue recognition for goods or services satisfied over time, for example, off-plan real estate sales. In this revised proposal, the Boards have developed additional guidance to assist companies in determining when goods or services are transferred over time. Some construction companies in certain jurisdictions may be able to recognize revenue over the construction period which would be consistent with current practice. However, when and how much revenue is reported may still be significantly impacted for many entities. For example, companies in the telecommunications industry that provide free or subsidized handsets together with air time contracts may need to recognize more revenue upfront”.
Despite the revisions made by the Boards to address respondents’ concerns, the revised proposals may still challenge existing practice. The proposals would require the use of greater judgment and estimates compared to current practice, for example, when identifying performance obligations in a contract and estimating stand-alone selling prices of goods or services when they are not typically sold separately. As originally proposed, entities would need to provide significantly more disclosures, for example, disaggregated revenue, than is currently required. Key metrics may also change, for example, the presentation of bad debts as a contra revenue line instead of part of operating expenses as it is currently presented would result in a lower gross margin amount.
Ruth Picker says: “The reissue of the proposals will provide constituents an opportunity to reevaluate the revised model – sufficient feedback is an essential process to develop a standard that is durable and serves all stakeholders. Given the expected impact of the changes it is important that all entities assess how they will be affected and provide comments to the IASB and FASB.”
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