A new revenue driver – the balance sheet never looked so good
IASB is turning revenue recognition on its head by looking at the balance sheet – a focus often resulting in revenue deferral
Revenue recognition is an area where even the simplest of transactions can give rise to divergent views on accounting. The experience under the ‘rules biased’ United States GAAP is illustrative: numerous interpretations exist on how revenue should be recognised, often dealing with specific fact patterns and often contradictory. The International Financial Reporting Interpretations Committee (IFRIC) is also dealing with more issues – from real estate construction to customer loyalty programmes. Who would have thought providing a customer with a free cup of coffee every so often could create such an issue.
The IASB and FASB have recognised the need for reform in this area and have been working on a joint project for some time. The conceptual approach being developed is focussed on the balance sheet through looking at the contract with the customer – in other words looking at the ‘two sides’ of what the supplier has promised to the customer (goods and services) and what the customer has promised to the supplier (cash or other consideration). The measurement and these rights and obligations, together with widespread concept of ‘control’, are key determinants of when revenue is recognised.
In some cases, the outcome will be the same as current practice, but in other areas some long term practices might be overturned:
- Construction – revenue might only be recognised when the customer takes control of the goods, this might not be until delivery at the end of the contract, rather than progressively over the contract
- Multiple-element arrangements – even though arguably somewhat consistent with current requirements, splitting one overall transaction into its component parts may see a different revenue recognition outcome
- Warranties – these types of arrangements are seen as a form of ‘promise’ and so would result in the deferral of revenue.
The new revenue standard is expected to be finalised during 2010, for application no later than 2013, and perhaps earlier.
What are the short-term considerations?
It would appear clear that the way revenue is recognised and measured is going to undergo a significant transformation. But why worry now? The first consideration is what the new approach means for existing accounting policies. IFRIC has already shown a penchant for borrowing the new concepts being developed for application under existing standards – as is evidence by its Interpretation on customer loyalty programmes.
So, perhaps now is a good time to reconsider existing revenue recognition policies, an area where perhaps less attention was given on transition to IFRS.
Longer term, companies should not underestimate the need to reflect on profit and revenue forecasts from a differing pattern of revenue recognition, and for flexible systems to accommodate the new approaches.