International Financial Reporting Standard – Revenue Recognition

Following a period of consultation, the accounting bodies are now considering the final standard and when it may be implemented. A final standard should be announced in mid-2011.

The standard identifies five steps to apply:

(i) Identify the contract with the customer;

(ii) Identify the separate performance obligations;

(iii) Determine the transaction price;

(iv) Allocate the transaction price to the performance obligations; and

(v) Recognise revenue when a performance obligation is satisfied.

Whilst the majority of simple transactions will be unaffected by the new standard, there will be a significant impact in some key industries and a few examples of changes are given below:

(i) Revenue will be recognised when control of the service provided is transferred to the customer on long term contracts, rather than using the percentage completion method.

(ii) All distinct services will need to be recognised as separate performance obligations as opposed to including incidental services within one transaction.

(iii) The different elements of a contract must be allocated a price based on their estimated stand-alone price.

(iv) Where a warranty is offered, revenue will be deferred and recognised over the warranty period.

It remains to be seen how this standard may affect professional firms. The critical point will be determining when a performance obligation is met and control of a service passes to a client so that they can use and benefit from a service.

Proposed Implementation Dates

The Accounting Standards Board (ASB) have released proposals for a new financial reporting framework for the UK which is intended to replace UK GAAP. Financial Reporting Standards for Medium Sized Entities (FRSME) is based on the IFRS fro SME’s and as the proposals currently stand will apply to non-listed large and medium sized entities for accounting periods beginning on or after 1 July 2013. For a professional services firm with a year end of 30 April, this would mean that first implementation would be for the accounting year ended 30 April 2015.
The proposals on revenue recognition above are not currently included within FRSME, however if the draft proposals are implemented as an IFRS then the FRSME will eventually follow.

We will keep you informed of any developments in this area once the final standard has been released.

Contacts

If you would like to discuss how these changes affect your firm, please contact Jon Dawson at jdawson@kingstonsmith.co.uk or 020 7566 3748