ASB to clamp down on revenue policy
Companies will face a strict new standard cracking down on the way they recognise revenue in their accounts after the Accounting Standards Board decided to reverse a decision to hold-off any changes until 2005.
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Mary Keegan, chairman of the ASB, said she came to the decision because of information showing that some UK companies are recognising their revenue too early.
She said the standard would tackle companies that book sales ‘beyond the edge of acceptable behaviour’. Keegan told Accountancy Age: ‘There have been reports of companies that recognise revenue in advance.’
The new draft requirement will be ‘loosely’ based on the revenue recognition discussion paper published in July 2001 and FRS5.
Peter Holgate, senior technical partner at PricewaterhouseCoopers, and a member of the urgent issues task force, has seen the draft and warned it was ‘too short’ to answer many questions. Nevertheless, he believes it can provide interim guidance.
The draft will be principles-based rather than hard rules. This style of regulation is popular in the UK, but goes against US trends. Keegan said she chose principles-based regulation because it gives ‘the best guidance’ to different companies in different trades.
Holgate pointed out that while US revenue recognition rules are ‘very prescriptive’, there had been numerous scandals where the ‘big issue’ specifically was revenue recognition.
Peter Wyman, president of the ICAEW, agreed. ‘I don’t believe that you can put revenue recognition entirely into rules. In the end it comes down to judgement,’ he said.