Retail to benefit from revenue recognition rules

The new ASB standard, which takes effect from this month, is designed to clamp down on companies that exaggerate their revenues.

The implications are wide ranging and will affect how companies report revenue from pre-ordered goods, concession outlets, gift vouchers, loyalty cards and even two-for-one deals.

‘Firming up the rules will make accounts more comparable both from company to company and country to country because there will be more certainty about how we arrived there,’ says Amanda Aldridge, head of retail at KPMG.’

One underlying principle behind the new rules, which brings the UK in line with international accounting standards, is that of accounting on delivery rather than order. Companies must fulfil obligations to the customer before accounting for the sale and boosting the revenue numbers.

Until now the UK had no comprehensive accounting standard on when companies should record revenue in their financial statements.

‘Many investors focused on revenue growth as an important indicator of a company’s performance. Recent reports of questionable practice have highlighted the need for us to set out best practice. Our subsequent research has emphasised the need for this new standard,’ says ASB chairman Mary Keegan.

One high-profile case where revenue recognition became an issue was MyTravel. Its revenue recognition policy was ditched last year and £70m was deducted from profits. The company had been recording income from insurance policies at the time customers were sold their policies rather than when they began their holidays.

Allied Carpets ran into trouble with a practice known as pre-dispatching, in which carpets were recorded as ‘sold’ as soon as an order was placed.

The policy had exaggerated sales by £6.3m. Another example involved Wickes, the DIY chain, which overstated profits by £18m using cash rebates and discounts from suppliers.

The new ASB standard affects a range of retailers. Even book stores taking advance deposits on big new launches will only be able to record revenue when they hand over the book to the customer.

Supermarkets and big stores that run ‘two-for-one’ offers will only be able to record the revenue actually taken, rather than use the notional value of the two goods sold.

Gift voucher purchases will only be recorded as revenue when customers exchange them for goods. The value of loyalty card points will need to be deducted from the price of goods being bought.

Big department stores with concession outlets within them would no longer be able to get away with counting concession stores’ revenue figures in both sets of results.

The changes come as CBI figures showed a slow build-up to Christmas, with sales growth in the first half of November falling below expectations.

The retail and leisure sector could face tougher trading conditions next year with the possibility that further interest rates rises could hurt consumer spending.

Martin Ellis, partner for Grant Thornton retail, says: ‘The sector is facing a tough year because of saturation, consumer spending power and overall confidence, as companies have continued to cut jobs.’