Steve llings gets to grips with the exposure draft for a new international standard on revenue regnition. Sooner or later, you will need to do so as well, he warns.

On 14 November 2011, the International Acunting Standards Board (IASB) issued a revised proposal for revenue regnition.  A hot issue for several years, any revenue regnition changes are likely to filter through to UK GAAP as our standards nverge towards IFRS.

The project was carried out in llaboration with the American standard-setters – the Financial Acunting Standards Board (FASB) and if adopted the standard would replace IAS 18 Revenue and IAS 11 nstruction ntracts.  It would also replace the guidance on revenue regnition in ic 605 Revenue Regnition in US GAAP.

Why Change Now?

Revenue, in all untries, is the headline figure in a set of financial statements. It plays a pretty important part in not only the calculation of profits, but also affects external stakeholders such as banks, other financiers, tax authorities, suppliers and credit rating agencies.  In a nutshell, the IASB reintroduced proposals it originally proposed in 2010 in order to give analysts and investors more nfidence that revenue is being regnised on a nsistent basis and across all industries and ntinents that adopt IFRS.  Indeed these proposals are likely to affect certain listed mpanies in the UK that report under EU-adopted IFRS.

The IFRS proposals aim to:

improve the mparability of revenue regnition policies

rce the number of acunting requirements to which a mpany must refer

simplify the interpretation of emerging revenue regnition issues on a case-by-case basis; and

improve the ntent of financial statements prepared under IFRS.

IAS 18 and IAS 11 weaknesses

The existing IAS 18 Revenue deals with revenue arising from:

Sales of goods

Rendering of services

Interest

Royalties

Dividends

IAS 11 enmpasses, among other things, the revenue regnition requirements relating to nstruction ntracts in a similar fashion to the UK’s SSAP 9 Stocks and Long-Term ntracts.  IAS 11 uses the “stage of mpletion” method, also known as the “percentage of mpletion method”.  Essentially, ntract revenue and sts are regnised as revenue and expenses in profit or loss in the period in which the work is performed.  When losses are foreseen they are immediately regnised, which is nsistent with SSAP 9 requirements.

IAS 11 is fairly mplicated because a nstruction mpany has to be able to make reliable estimates of its inme and sts to regnise revenue.  This is easier to do once the ntracting parties have drawn up an enforceable ntract that stipulates the ntract nsideration and the terms of settlement.  As is often the case in such matters, the mpany has to have the ability to review and, where necessary, revise its estimates of revenue and sts during the life of the ntract.  The mpany needs to have an effective system of internal financial budgets and reporting systems.

The IASB acknowledged that simply amending the existing IASs would not resolve the fundamental weaknesses in those standards.  So what are these “fundamental weaknesses”?  Because the standards are entirely different, a mpany reporting under IFRS regime uld regnise and report significantly different levels of revenue depending on which standard it applies. IFRS does not clearly distinguish between goods and services, so some mpanies may not be entirely sure whether to acunt for some transactions under IAS 18 or IAS 11.

The exposure draft is open for mment until 31 March 2012 and the IASB plans to issue a revised standard for revenue regnition in 2012.

Steve llings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘The Interpretation and Application of International Standards on Auditing’ (Wiley March 2011) and ‘The AcuntingWEB Guide to IFRS’ (Sift Media May 2011).