PROPOSED changes to the revenue recognition accounting standard are aimed to provide clarity in this complex area, which is of particular sensitivity for banks.
The International Accounting Standards Board (IASB) and US equivalent the Financial Accounting Standards Board (FASB) have released a revised proposal, and the deliberations indicate the difficulty of drafting a widely accepted standard.
The boards decided to consult again on the proposals because of the importance of the financial reporting of revenue to all entities and their desire to avoid unintended consequences arising from a final standard.
The proposed standard is aimed at improving International Financial Reporting Standards (IFRS) and US General Accepted Accounting Principles (GAAP) by providing a more robust framework for addressing revenue recognition issues; removing inconsistencies; improving comparability across companies, industries and capital markets; providing more useful information to users of financial statements; and simplifying the preparation of financial statements. This permutation retains the core principle of last year’s consultation document – that entities recognise revenue from contracts with customers when they transfer goods or services to the customer.
Brian O’Donovan, partner in KPMG’s international standards group, says the most affected companies could be those with bundled products and services, or those engaged in construction activities.
The first exposure draft was issued in June 2010 and engendered almost 1,000 responses, many of which complained about the complexity of the standard and the difficulties of practical application.
However, attempts to make the standard less complex would see simpler rules surrounding warranties and how transaction prices should be determined, plus fewer instances in which onerous tests apply.
Despite the revisions, the proposals might still challenge existing practice. They would require the use of greater judgement and estimates; for example, when identifying performance obligations in a contract and estimating standalone selling prices of goods or services when they are not typically sold separately.
FASB chairman Leslie Seidman said: “Because this proposed standard would affect companies across a wide range of industries, we are taking this additional quality control step to ensure the proposed standard is well understood by companies, auditors and investors before it is issued as a final standard.”
Deloitte international accounting standards expert Veronica Poole said revenue recognition is “the most important item in financial statements… and one of the most difficult standards for standard setters to write”, calling the revised draft “an effective step in the right direction”.
Stakeholders will have 120 days to respond to these revised proposals, with re-deliberations beginning early next year and a final standard expected in 2012. ?