Booking of contract revenue set to change; From 2017, firms must follow a 5-step model requiring more judgment, estimates
June 1, 2014 Leave a comment
Booking of contract revenue set to change
Business Times
30 May 2014
Michelle Quah
From 2017, firms must follow a 5-step model requiring more judgment, estimates
[SINGAPORE] In what may be the biggest change in recent years in the manner companies prepare their accounts, the world’s global financial standards setting body has announced a substantial alteration in the way revenue is to be recognised.
The International Accounting Standards Board (IASB) – in conjunction with its American counterpart, the Financial Accounting Standards Board (FASB) – has released a new International Financial Reporting Standard: IFRS 15 on revenue from contracts with customers.
It will affect just about every entity that generates revenue, with the biggest impact expected on telecommunications, technology and real estate companies.
Coming into effect in January 2017, IFRS 15 will require companies to use a new five-step model, which shows the transfer of goods or services to customers in amounts that reflect the expected payments for these goods and services. It is a model that also calls for more judgment and estimates from companies.
The standard is also notable in that it marks a coming together of the IASB and the FASB on accounting standards. IFRS 15 is a joint project between the two bodies that has been 12 years in the making.
Nigel Sleigh-Johnson, head of The Institute of Chartered Accountants in England and Wales’ (ICAEW) Financial Reporting Faculty, said: “Until now, there have been significant differences in how and when revenue has been recognised 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.”
Michael Lim, chairman of Singapore’s Accounting Standards Council (ASC), which prescribes accounting standards here, said: “This new IFRS on revenue recognition took a fairly long time to finalise, but it marks a commendable stride by the IASB towards improved financial reporting. It represents a timely overhaul of the existing requirements in IFRIC 15 (on the recognition of revenue by real estate developers for sales of units) that were seen as rigid by business communities.”
It’s been a big step for the standard setters, but arguably bigger steps will be required of companies.
Gerald Low, audit partner at KPMG in Singapore, said: “Many companies typically prepare five-year budgets and these budgets may have to be re-visited to take into account the proposed changes of the new standard. Additionally, revisions may have to be made to executive compensation packages linked to revenue numbers. IT systems may also have to be reconfigured to reflect the changes to the timing of revenue recognition.”
Mak Keat Meng, head of Assurance at EY in Singapore, said: “The new standard also requires companies to publicly disclose much more information on revenue in their financial statements in the hope that investors and other users will benefit from the enhanced information.”
Chen Voon Hoe, Accounting Advisory & Reporting leader at PwC Singapore, said that the new standard will require companies to identify separate performance obligations in a contract, allocate the transaction price to each obligation and only recognise revenue when the obligation is satisfied.
Among those most affected will be the telcos.
Mr Chen said: “For example, a telecommunication company is required to allocate revenue earned on the customer contract to the respective components – handset and the subscription service based on its relative stand-alone selling prices. Currently, most telcos recognise the revenue on the handset based on the promotional sales price rather than the full selling price.
“Under the new standard, the telco may recognise higher revenue allocated to the handset based on its relative selling price at the point of sale. The impact may be significant as most handsets sold today are smart phones which have a higher selling price.”
In addition, Mr Chen said “software companies, media and music companies that license intellectual property will need to determine if they are providing the right to use or access intellectual property”.
Specialists say that real estate and construction companies will also be impacted greatly – and will likely be among the earliest adopters of the new standard.
Mr Low said: “Revenue and profits are currently recognised only upon completion of their developments overseas. This causes significant earnings volatility. Applying the new standard is expected to allow revenue and profits for some overseas building projects with non-refundable progress payments to be recognised progressively. Many developers in Singapore are already eagerly waiting for the ASC to issue the new standard here.”
He pointed out that, in terms of other companies, ship and oil rig builders are likely to experience significant earnings volatility from adopting the new standard. “For affected companies, the new standard may change their earnings pattern by deferring revenue until delivery of the vessels in some cases.”
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