Revenue recognition (or ‘rev rec’) is fast becoming a hot topic in 2016 in the changing regulatory landscape. In a new content series, Robert Lovell pulls back the covers to find out more about adoption of the new accounting rules, the wider impact on the profession and how software companies are meeting the challenge.
Over the years rev rec practices have resulted in misleading financial results, giving rise to a number of major accounting scandals. In response, accounting standards have been tightened to stop companies from deliberately manipulating financial statements by delaying or accelerating revenue.
The new rev rec standard issued by the IASB, IFRS 15 Revenue from Contracts with Customers, has a five-step approach and addresses weaknesses and inconsistencies that were found in the previous IAS 18 Revenue and IAS 11 Construction Contracts.
IFRS 15 applies to listed companies and therefore accountants dealing with clients in industries such as telecommunications and housing that are listed will be required to prepare their financial statements under IFRS.
According to Steve Collings, understanding the new requirements will be a challenge because the principles in IFRS 15 are much stricter.
“Particularly the five-step approach,” Collings said. “which will invariably need some professional judgement, for example where variable consideration is concerned.”
He added in that the standard had not been short of controversy, with amendments already taking place to offer additional clarity.
When it comes to accountants preparing for the new rules, Collings said there was no substitute for actually reading the standard. In addition, many publications online offer guidance on applying the detailed technical aspects, but he added: “Care needs to be taken at entity level because every company is different so there isn't really a 'one-size-fits-all' where the new IFRS 15 is concerned.
The steps involved are:
- Step 1: Identify the contract(s) with the customer
- Step 2: Identify the performance obligations in the contract
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price
- Step 5: Recognise revenue when a performance obligation is satisfied
IFRS 15 is converged with US GAAP guidance so there is little difference between the two standards.
The effective ‘from dates’ are slightly different as IFRS requires IFRS 15 to be applied to annual periods commencing on or after 1 January 2018 (it was 1 January 2017) and early adoption is permissible.
US GAAP entities that are listed should apply the US GAAP version of the standard (ASC 606) for accounting periods starting on or after 15 December 2017 and non-listed US entities must apply the new rev rec standard for annual periods starting after 15 December 2018.
The accounting of revenue is rarely as simple as a credit to revenue and a debit to cash, and accounting standards bodies have given a lot of thought into how revenue should be booked.
The buzz at SuiteWorld 2016, NetSuite’s annual user conference in San Jose last month, was all about the new rev rec rules.
According to Zach Nelson, chief executive of the cloud ERP company, the NetSuite rev rec solution has been seven years in development and is now well ahead of other vendors.
NetSuite’s Advanced Revenue Management module, which comes with no additional charge to existing customers and is available now, has an expanded set of data requirements and functionality.
The next article in this content series will examine how some of the main software vendors are meeting the rev rec challenge.