Changes to revenue recognition rules looked upon favourably

3 September 2013

Changes to revenue recognition rules looked upon more favourably in New Zealand

New Zealand businesses are more receptive than most to the new global revenue recognition rules soon to be issued by the IASB and FASB.

The latest Grant Thornton International Business Report (IBR) survey found that 46% of New Zealand businesses believe changes to the existing accounting standards on revenue recognition are needed, compared with a global average of 38%.

Despite being more favourable of the changes, the majority of the New Zealand respondents thought that the latest joint proposals would lead to increased costs (62% vs a global average of 50%) and more complexity (48% vs a global average of 46%).

Grant Thornton New Zealand National Technical Director Mark Hucklesby says the proposed change will bring a renewed focus on this critically important element of financial statements, as the revenue amount is often the largest single number reported in financial statements.

“The two Boards are to be congratulated for delivering a converged standard in this critical area of financial reporting. Convergence has been challenging and not without setbacks and controversies. Against that background, Grant Thornton sees this standard as a landmark achievement that will provide a major boost for investors looking to compare company performance across borders.”

Some of the industries that will be most affected by revenue recognition changes include:

• Telecoms and IT – where multiple deliverables are commonplace and current practice is mixed. Cellphone businesses that account for a 'free' handset as a marketing cost will need to change this policy and instead allocate revenue based on relative value

• Real estate – when to take revenue for 'off plan' apartment sales has been a difficult issue and the new model will shift the boundary between percentage- of-completion and on-completion revenue recognition

• Sectors where performance-based or contingent fees are commonplace, such as asset management and some legal and professional services. Under the new model variable payments would be accounted for on a best estimate basis subject to being 'reasonably assured'

• Retail - accounting for rights of return, customer loyalty schemes and warranties could all be affected.

Other areas that could be affected include deferred and advanced payments, licensing arrangements, breakage and non-refundable upfront fees.

A final standard is now expected in the third quarter of this year and would be effective for annual periods beginning on or after 1 January 2017.

To find out more about IBR, visit www.internationalbusinessreport.com

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