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Towards higher quality reporting
WITH new global rules for recognising revenue due to be implemented in just over two years, preparers of financial statements, auditors, and standard-setters are working together to ensure the smooth implementation of this groundbreaking change.
In May 2014, the profession's two major accounting standards-setters - the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) - converged their standards for recognising revenue into one consistent standard known as "Revenue from contracts with customers".
The two bodies spent more than a decade developing the converged standard, holding several roundtables, extensive deliberations with stakeholders and issuing multiple documents for public comment.
The standard will become effective come Jan 1, 2018 for more than 100 jurisdictions across the world. As revenue is one of the most important measures used by investors, experts say the new rules are significant, as it will consistently report revenue regardless of the company's industry or jurisdiction.
"Revenue is a key performance metric and in our borderless world of evolving business practices and transactions, reporting revenue in a manner that depicts economic realities and promotes comparability is of paramount importance," says Nagaraj Sivaram, deputy chairman, Singapore Accounting Standards Council.
He notes that the standard's principle-based approach to revenue reporting, together with disclosures of significant judgements, will lead to higher quality financial reporting by focusing on economic substance and will enable the application of sound judgement.
However, others feel that it may lead to a divergence in the measurement of revenue in the future, given more judgement and estimates are required under the new revenue recognition standard, compared with the current one.
"With the expanded disclosure requirements, companies will find the efforts and decisions surrounding disclosures more onerous and challenging," says Ronald Wong, partner, Financial Accounting Advisory Services at EY in Singapore.
That said, he believes that the changes would lead to a higher quality of financial reporting given that the new revenue standard provides more guidance than the current one, including significantly expanded disclosure requirements. The wider business impact of the new standard will also drive integration of financial reporting across various functions in an organisation, he adds.
With such substantial changes on the cards, there is naturally an air of uncertainty among businesses and accountants. In particular, organisations may not fully know how their businesses will be impacted when the new revenue standard takes effect in 2018, says Shariq Barmaky, chairman, Revenue Working Group, Financial Reporting Committee at the Institute of Singapore Chartered Accountants.
"However, this can be overcome with early assessment and preparation, including early education for their key stakeholders. Having said that, the new standard does come with some implementation challenges, particularly on the areas of judgement and estimates involved in its application," he says.
Mr Sivaram says that smooth implementation is key as changes resulting from it are expected for all operating entities, ranging from new disclosures to changes in the amount and timing of revenue, and in some cases, overhaul of systems and processes. There are also potentially broader implications for other business areas, including income taxes, employee compensation and debt covenants.
"The efforts necessary for an effective implementation of the standard cannot be underestimated. Entities are strongly encouraged to start working with their professional advisers to avoid roadblocks that could derail implementation, if they have not already embarked on this crucial process," he says.
The new standard comes with extensive guidance and numerous examples to help preparers apply the new concepts. Additional guidance and examples should also help minimise divergences in accounting for certain revenue transactions.
Perhaps highlighting the challenge of implementation, earlier this year both the FASB and IASB postponed the effective date by one year to January 2018 after considering feedback from stakeholders.
Beyond promoting comparability of revenue, the implementation of the new rules also presents an opportunity for businesses to improve their operations. These include reassessing the effectiveness of existing accounting policies, processes and systems and improving the integration of various functions within the organisation that impact financial reporting.
"Companies should leverage the new changes and tap the experience of advisers to transform various aspects of the organisation," says Mr Wong.
Organisations can also benefit from the detailed amount of data that they need to collect in order to apply the new standard, notes Mr Barmaky.
He says: "Such data can be very useful if meaningfully collated and analysed for business decision making. Since the extent of detail of such data is determined by accountants themselves for financial reporting purposes, accounting professionals can play a major part in helping their businesses meaningfully analyse such data."
Tips for implementation
James Schnurr, chief accountant at the US Securities and Exchange Commission, offers some tips to CGMA Magazine on implementing the new converged revenue standard.
- Management information assessment. Management should assess whether it currently has the information to satisfy new reporting requirements. "New processes and controls may be needed in order to not only gather the information but also ensure its accuracy and completeness," Mr Schnurr says. Management also should take a holistic view of the potential effects the new standard may have on internal controls, he says.
- Evaluate resources. Mr Schnurr encourages audit committees to consider whether adequate resources have been dedicated to analysing the impact of the new standard, because the significant change could put pressure on resources for reporting earnings and preparing periodic reports.
- Ask why. Audit committees should ask management to identify why changes are occurring and in some cases why changes are not occurring, Mr Schnurr says. Audit committees should ask whether there are different views within the industry on how to implement the standard, and if so, how management and the auditor decide that the company's approach is appropriate.
- Challenge conclusions. Mr Schnurr suggests that audit committees challenge auditors on conclusions that do not appear to reflect the core business of the company.
- Consider communication. Implementation plans should consider how management will communicate to key constituents about the impact the standard will have on the organisation's financial statements, Mr Schnurr says.