In a move designed to address growing concerns over aggressive earnings management and widespread inconsistencies, the Accounting Standards Board has published a discussion paper on revenue recognition.
It hopes it will stimulate debate and develop a conceptual framework on which to write a standard on the issue. A glut of diverse practices within industries, the evolution of business methods and rising demands from auditors have all led to the ASB’s attempt to stamp out the minority of companies that inflate their revenues.
Those particularly targeted are ones that book revenues before deals are finalised. Mary Keegan, the ASB chairman, said: ‘The vast majority of companies recognise revenue on a sensible basis. We’re trying to find the principles that recognise that. A small minority have taken an aggressive stance.
‘More importantly companies are evolving the manner of trade. ‘New businesses are experimenting with different terms of trade.
‘The thrust of the proposals contain two very simple things,’ said Keegan.
‘Firstly if I agree to do business with you, we should have agreed on what constitutes a transaction. Secondly, the transaction should have happened before I can recognise revenue.’
In what will be a boost for the ASB’s project, Wilson Connolly, the housebuilder, this week announced its intention to fall into line with its rivals on revenue recognition. It will now book a transaction on legal completion rather than on exchange of contracts.
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