Revised revenue recognition standard ‘simpler’

PROPOSED CHANGES to the revenue recognition accounting standard are aimed at providing greater clarity in this complex area, which is of particular sensitivity for banks.

The International Accounting Standards Board and US equivalent FASB have released a revised proposal and the protracted deliberations indicate the difficulty of drafting a widely accepted standard.

Complex products and services mean banks can find this area particularly tricky, and issues like working out transaction prices have caused strife among stakeholders.

The most recent version retains the core principle of last year’s exposure draft – that entities recognise revenue from contracts with customers when they transfer promised goods or services to the customer.

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.

FASB chairman Leslie Seidman (pictured) said:” Because this proposed standard would affect companies across a range of industries, we are taking this additional quality control step to ensure the final 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”.

KPMG’s Brian O’Donovan, partner in the international standards group, said: “The most affected companies could be those with bundled products and services, or those engaged in construction activities – for example, the telecoms, software and engineering industries.”

The new proposals could see the timing of their revenue recognition change and varying impacts on issues such as contract terms, employee incentives and communications with investors.

The first exposure draft was issued in June 2010 and engendered almost 1,000 responses, many of which complained about complexity of the standard and difficulties of practical application.

Stakeholders will have 120 days to respond to these revised proposals, with re-deliberations beginning early next year and a final standard expected in late 2012.

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Fiona Westwood of Smith and Williamson.