Recognise the impact of revenue changes

REVISED PROPOSALS on revenue recognition may accelerate or defer revenue recognition for some companies. However, all companies should consider the effect the proposals will have on their systems and processes – and on the information they provide to the market.

The IASB and FASB published a new exposure draft on revenue recognition in mid-November. This is the latest step in their long-running project to develop a single revenue recognition standard under IFRS and US GAAP.
The first question all companies will want to ask is whether the proposals will change the amount or timing of their revenue compared to current practice. This could be the case if, for example, a company enters into contracts featuring multiple components or variable consideration, or contracts that are satisfied over a long period of time.

Companies in the telecoms sector could face changes. If a telco sells a smartphone and a two-year data plan to a customer under a single contract, then it may have to change the way in which it allocates the total price between the smartphone and the data plan. This could change the timing of revenue recognition. The telco will also need to consider whether its systems capture and track the data necessary to implement the proposals.

Conversely, companies in the construction sector are likely to welcome the revised proposals. In many cases, they will continue to recognise revenue over time as construction work is performed. The revised proposals will allay previous concerns that the Boards intended to prohibit revenue recognition until construction projects were complete.

In addition, some aspects of the proposals will affect almost all companies, even those that will see little change to their reported revenues.

One example of this is the new approach to customer credit risk, a topical issue for many companies.

Suppose a company regularly sells a product for 100. However, it expects to collect only 98 for every 100 it bills, due to customer credit risk. In this situation, is revenue 100, being the amount the company bills? Or is revenue 98, being the amount that, on average, the company expects to collect?

In this case, it seems that the Boards can see both sides of the argument. They propose that the company present 100 as revenue and, in addition, present a deduction of 2 immediately below the revenue line in its income statement. This will increase the prominence and transparency with which an entity presents the effect of customer credit risk in its financial statements.

All companies will also wish to look carefully at the proposed disclosure requirements. Increased disclosures are proposed for annual financial statements and also for interim reports. Once again, companies will need to assess whether their systems and processes capture the required information. The increased disclosures could also convey important additional information to investors and, indeed, competitors.

The first question companies should ask is “how will these proposals affect my reported revenues?” However, this should not be the only question they ask. The revised proposals are open for comment until 13 March 2012.

Brian O’Donovan is a partner with KPMG’s International Standards Group