New revenue recognition standard will cause upheaval

Accountancy firms and professional bodies are warning that some businesses will face major upheaval as a result of the introduction of a new revenue recognition accounting standard agreed jointly by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), which is likely to call for changes in systems, processes and disclosures for some companies

The converged revenue recognition standard, IFRS 15, Revenue from Contracts with Customers, which the IASB and the FASB have been working on since 2002, will come into force in 2017. It clarifies when revenue should be recognised, how it should be measured and the disclosures required about contracts with customers.

Veronica Poole, Deloitte's global IFRS technical leader, said: ‘The standard will bring change to the numbers which companies report, though the effect will vary considerably across different industries. It will have significant knock-on effects on the reporting of key performance indicators, for example, and may impact companies’ internal systems. Companies should not underestimate the possible impact of the new standard.’

ICAEW said implementing the new regime was likely to be a considerable challenge to businesses which offer complex ‘bundles’ of goods and services or long-term service contracts. While the amount of revenue recognise will not change, its timing will.

Nigel Sleigh-Johnson, head of ICAEW’s financial reporting faculty, said: ‘Industries such as telecoms, construction, real estate and software are likely to feel the changes the most. 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.’

Sleigh-Johnson said that the new standard has much more detailed guidance than the previous IFRS, which mean that companies with more straightforward retail transactions would still need to assess its impact on their operation. He warned it could require a business to make changes to, for example, its information systems and processes, internal controls and bonus plans.

Brian O’Donovan, partner with KPMG’s international standards group based in London, said: ‘The new disclosure requirements are extensive and might require changes to systems and processes to collect the necessary data – even if there is no change to the headline numbers in the financial statements.’

The new standard takes effect in January 2017, although IFRS preparers can choose to apply it earlier. O’Donovan said: ‘While the effective date may seem a long way off, decisions need to be made soon – namely, when and how to transition to the new standard. An early decision will allow companies to develop an efficient implementation plan and inform their key stakeholders.’

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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