The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have issued a converged standard on the recognition of revenue from contracts with customers.
The new standard IFRS 15 Revenue from contracts with customers will come into force in 2017 and will require more disclosure in both interim and annual financial statements as it clarifies when revenue should be recognised, how it should be measured and the disclosures required about contracts with customers.
IASB chairman Hans Hoogervorst said that the successful conclusion of this project, which started in 2002, is a major achievement for both boards. "Together, we have improved the revenue requirements of both IFRS and US GAAP, while managing to achieve a fully converged standard. Our attention now turns to ensuring a successful transition to these new requirements," he said.
FASB chairman Russell Golden said IFRS 15 was a "milestone in [the] efforts to improve and converge one of the most important areas of financial reporting". He added that it will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance.
Easier and better comparability
Professional bodies from around the world have hailed the new accounting standard as a positive change to how businesses globally report revenues and for increasing the comparability of the information available for investors.
"Revenue is a crucial number to investors and other users of financial statements seeking to understand and assess a company’s performance and prospects," Institute of Chartered Accountants of England and Wales (ICAEW) financial reporting faculty head Nigel Sleigh-Johnson said.
"Until now, there have been significant differences in how and when revenue has been recognised and reported," he continued. "This new flagship convergence standard will improve comparability and the quality of information available."
South Africa Institute of Chartered Accountants project director financial reporting Sue Ludolph said almost all companies that generate revenue will be affected in some way by the new standard. "The sectors that will be more affected include construction, telecommunications and entertainment & media," she added.
Challenges for businesses
Ludolph predicted that the changes could be costly for some companies. "The requirement to identify each component of a contract sold and monitor the delivery of each obligation will need significant processing effort, which will mean changes to IT systems,” she said.
With only 18 months to get ready to the new standard, businesses have little time to adapt, which led KPMG International standards group partner Brian O’Donovan to say: "Publishing a joint standard on revenue recognition is a major achievement for the standard setters. But for companies, the real work is just beginning."
Because the standard has been in preparation for some years now, many businesses postponed thinking about how they will be impacted, O’Donovan explained. "It’s natural that some have taken a ‘believe it when I see it’ approach," he added. "But now it’s here, we have a new standard on one of the most important financial reporting metrics – revenue – and it will apply to almost all companies reporting under IFRS and US GAAP."
He said cfompanies that sell products and services in a bundle will be the most affected while for others "it will be more a case of ‘business as usual’". O’Donovan warned that while the effective date may seem a long way off, decisions need to be made soon.
"Namely, when and how to transition to the new standard," he concluded. "An early decision will allow companies to develop an efficient implementation plan and inform their key stakeholders."