New revenue recognition standard agreed

The International Accounting Standards Board (IASB) and its US counterpart the Financial Accounting Standards Board (FASB) have agreed a new accounting standard for when companies account for revenue from customer contracts.

Companies using IFRS will be required to apply the revenue standard for reporting periods beginning on or after 1 January 2017; public companies using US GAAP will be required to apply it for annual reporting periods beginning after 15 December 2016; and US non-public companies and organisations are to apply the revenue standard for annual reporting periods beginning after 15 December 2017.

It will affect many companies and is seen a milestone for international accounting standards.

The old accounting rules for revenue recognition were different under IFRS and US GAAP, which was confusing for investors.

The new standard will "result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements," the accounting standard setters said.

Hans Hoogervorst, chairman of the IASB, said agreeing the new standard was a "major achievement" for both boards.  

Steve Collings, AccountingWEB's expert on financial reporting, said the revenue recognition standard will have the greatest affect on businesses in the construction industry, telecommunications and software companies because they will probably recognise revenue earlier than they would do under the existing IAS 11 'Construction Contracts' and IAS 18 'Revenue' standards. 

"This, clearly, will have direct tax implications," he said.

"In addition, the new standard brings new judgements that will have to be exercised although there won't be more judgements to consider in relation to the actual timing of revenue recognition (i.e. performance obligations) given that some industries will inevitably have to recognise revenue earlier under IFRS 15."

For accountants, ensuring compliance with IFRS 15 is going to be the main consideration and the new standard brings with it enhanced disclosures and this will bring with it more work - especially where the client is audited to ensure compliance with the new standard, Collings added.

Veronica Poole, Deloitte's global IFRS technical leader, said: “The standard will bring change to the numbers which companies report, though the effect will vary considerably across different industries. It will have significant knock-on effects on the reporting of key performance indicators, for example, and may impact companies’ internal systems.

“Companies should not underestimate the possible impact of the new standard either in terms of change in revenue profile and the potential need for changing systems, processes and disclosures."