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Revenue recognition accounting rule progresses

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12th Sep 2013
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The International Accounting Standards Board (IASB) and its US counterpart the FASB have agreed parts of a new accounting standard for eevenue recognition - although a final version is not expected until 2017.

The planned rule for when companies put sales in their accounts is one of the most important of the IFRS used by companies to prepare financial statements.

Revenue is the headline figure in a set of financial statements in all countries. 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. The objective of a standard for revenue recognition is to give analysts and investors more confidence that revenue is being recognised on a consistent basis and across all industries and continents that adopt IFRS.

The standard is fairly complex, but progress is being made according to a PwC report. Agreement on the new standard, includes:

Constraint on variable consideration

The boards confirmed that revenue recognised from variable consideration will be constrained to the amounts that management is confident will not be subject to significant reversal. Management will assess its experience of similar types of performance obligations to determine whether revenue will be constrained.

The transaction price includes any minimum amount of variable consideration expected to be received (and subsequent changes to that amount) if management has predictive experience of the arrangement’s outcome and is confident that the amount will not be subject to significant reversal.

Consumer credit risk

The boards agreed to clarify the distinction between impairment and price concessions. Management will need to consider all relevant facts and circumstances to make this determination. The transaction price will be reduced to reflect the expected concession, and any adjustments to that estimate will be recognised as an adjustment to revenue. Impairments of receivables, however, will be presented as an expense in a separate line item in the income statement.

Accounting for an arrangement that is not a ‘contract with a customer’

The boards confirmed that they will not provide guidance on asset de-recognition or cost recognition for arrangements that are not in the revenue standard’s scope. Such arrangements will be reassessed at each reporting date. Once an arrangement meets the scope requirements, the revenue standard guidance will be applied.

Revenue is recognised when there are no remaining performance obligations and either all of the consideration in the arrangement has been collected and is non-refundable or the contract is cancelled and consideration received is non-refundable.

The final standard is expected before the end of the year and will be effective on 1 January 2017. Early adoption will be allowed.

The PwC report also reviews the global progress of IFRS.

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