Revised IASB proposals could affect the way income is
recognised, writes Nick Randall.
The International Accounting Standards Board (IASB) has issued a
revised exposure draft (ED) in response to feedback on its original
proposals. If finalised, it could affect how professional practices
recognise their income and, therefore, pay tax. The IASB received
more than 1,000 comment letters on the original ED. Many felt it
was unclear how to apply the proposed core principles in practice,
to both service and construction contracts.
Revised ED proposals
The core principle set out in the revised ED is consistent with
the original draft. It says: "an entity shall recognise
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods and
The revised ED outlines five steps an entity needs to consider
to recognise revenue.
Identify the contract with a customer.
Identify the separate performance obligations in the
Determine the transaction price.
Allocate the transaction price to the performance
Recognise revenue when a performance obligation is
For many firms, step five will be the most important in
determining revenue to be recognised in each accounting period. For
contracts such as straightforward advisory transactions, this will
have little, if any, effect on the timing and amount of revenue
recognised. However, the proposed new standard could mean
significant changes for long-term contracts, those containing
multiple deliverables or contracts for services.
Step five says that revenue should be recognised when an entity
satisfies its performance obligations by transferring control to
the customer. If clearly transferred at a specific time then
revenue should be recognised from then. If transferred over a
period of time, then it should be recognised over the period.
The original ED proposals would have prohibited the recognition
of revenue over time for many service and construction contracts
where the asset created by the seller's performance, i.e. the
work in progress of professional practices, was not controlled by
the customer until the end of the contract.
In the revised ED, revenue can be recognised even if the
customer does not have control of the work in progress, provided
that it does not have an alternative use to the seller and other
criteria are met (including a right to payment for partial
completion). It means that more transactions will be accounted for
over time than under the original ED.
A key change from the original ED and from current practice is
the proposed treatment of credit losses. The revised ED requires
the amount of any expected credit losses and any subsequent
adjustments, i.e. any bad and doubtful debt expense, to be
presented in a separate line item within the statement of
comprehensive income (profit and loss account) next to the revenue
The revised ED proposes a fuller set of disclosures that require
both qualitative and quantitative information about revenue and
cashflows. Apart from some minor amendments they are unchanged from
the original ED.
The final standard is expected to be issued by the end of 2012.
The IASB has indicated that the earliest date by which the new
standard will be mandatorily effective is for periods beginning on
or after 1 January 2015.
Although the new standard will not apply for a few years, the
impact on some firms could be significant. Early efforts to
consider how this could change the firm's accounting policies
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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It is true that accountants are well ahead of most other professions when it comes to risk management and certainly, the "big four" have had in place risk management processes and dedicated resources far earlier than solicitors.
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