Revenue recognition: IASB issues revised proposals
The IASB has issued its revised proposals on revenue recognition. The model continues to require a five-step analysis of contracts, based on the core principle that revenue is recognised on transfer of control, either over time or at a point in time, depending on the substance of the contract.
The IASB’s revised proposals on revenue recognition retain a five-step analysis of contracts, based on the core principle that revenue is recognised on transfer of control, either over time or at a point in time, depending on the substance of the contract. The model is broadly consistent with that set out in the original proposals but there are some changes in the detail, some of which we discuss below.
The proposals might ultimately lead to little change for many companies but for some, e.g., those with bundled products or services or those involved in construction activities, significant changes to revenue recognition are more likely. All companies are likely to be affected by the proposed disclosure requirements. Companies may need to redesign, and in many cases significantly expand, their disclosures.
The IASB intends to release a final standard in 2012 but the final proposals will not be effective before 1 January 2015.
A key change in the revised proposals affects transactions currently accounted for using the stage of completion method (including transactions involving the delivery of services). The ED contains new criteria to determine whether revenue should be recognised over time or at a point in time. Management will need to evaluate contracts against the new criteria and reconsider whether revenue should be recognised at contract completion or as the contract is fulfilled.
The ED’s disclosure requirements are extensive and would apply to all companies. They are intended to help users understand the amount, timing and uncertainty of revenues and as such, may convey important information about business practices and prospects. System and process changes may be necessary to capture the information required for these new disclosures.
Other changes from the original proposals include:
- presentation of credit losses as a line item adjacent to revenue rather than as an adjustment to revenue itself;
- determining the transaction price when consideration is variable by estimating either the probability-weighted amount or the most likely amount (whichever has the more predictive value). The original proposals required estimation of the probability-weighted amount in all cases;
- recognising revenue only up to the amount a company is ‘reasonably assured’ to be entitled to receive rather than recognising revenue only when the transaction price could be ‘reasonably estimated’; and
- recognising a provision for onerous performance obligations satisfied over a period of time greater than one year: previously a provision would have been recognised for any onerous performance obligation.
KPMG’s New on the Horizon: Revenue from contracts with customers discusses the proposals in more detail. New on the Horizon: Revenue recognition for building and construction addresses issues specific to entities in the building and construction sector.
The IASB is requesting comments on the proposals by 13 March 2012.
Changes to auditor remuneration disclosures
For accounting periods beginning on or after 1 October 2011, the auditor remuneration disclosure requirements change for large companies. The new requirements may be applied early so companies may elect to apply them in their December 2011 year end accounts. Changes are made to the amount disclosed for the company audit fee and the categories of other services for which a fee is disclosed.
For large companies (as defined by the Companies Act 2006), SI 2011/2198* changes the auditor remuneration disclosure requirements for accounting periods beginning on or after 1 October 2011. As the new requirements may be applied early, companies with December year ends may elect to prepare their disclosures in accordance with the new requirements for their 2011 accounts.
The audit fee disclosed for the audit of the company will now comprise the fee paid to the auditor and its associates in respect of the company audit. For example, fees paid to an auditor’s associate for the audit of a company’s overseas branch would now be included as part of the company audit fee.
The disclosure of fees for other services will now be analysed into eight categories of service (previously ten categories of service) as follows:
- the auditing of accounts of any ‘associate’ of the company (i.e., subsidiaries and certain pension schemes)
- audit-related assurance services
- taxation compliance services
- all taxation advisory services not falling within category 3
- internal audit services
- all assurance services not falling within categories 1 to 5
- all services relating to corporate finance transactions entered into, or proposed to be entered into, by or on behalf of the company or any of its associates not falling within categories 1 to 6
- all non-audit services not falling within categories 2 to 7.
The ICAEW's TECH 6/06 will be updated shortly to reflect these changes.
* SI 2011/2198 Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011
FRC’s Sharman Panel issues its preliminary recommendations for going and concern and liquidity
The preliminary report seeks views on five key recommendations for improvement to going concern assessment and disclosure as well as views on whether a special regime should be in place for banks. A final report is expected in February 2012.
In March 2011, the Financial Reporting Council (FRC) launched an inquiry, led by Lord Sharman, to identify lessons for companies and auditors when assessing going concern and liquidity.
In November 2011, the FRC issued its initial recommendations in Going Concern and Liquidity Risks: Lessons for Companies and Auditors, and is seeking responses to those recommendations by 31 December 2011. It is also seeking views as to whether a special regime of private disclosure (to regulators) or delayed public disclosure, should be in place for banks. Its final report is expected in February 2012.
Initial recommendations include:
- establishing protocols with the Department for Business, Innovation and Skills (BIS) and other regulatory authorities such that the FRC may take a more systematic approach to learning lessons from individual corporate failures;
- harmonisation and clarification of going concern assessment and disclosure between accounting standards and regulatory requirements;
- a review of the FRC’s current Guidance for Directors to ensure that the going concern assessment is longer term and includes those risks to an company’s business model or capital adequacy that could threaten its survival;
- inclusion of the going concern assessment in the strategy and principal risks section of the company’s narrative report, even if there are no significant doubts as to a company’s survival (the audit committee report would also confirm that a robust process had been undertaken); and
- a statement in the auditor’s report as to whether the auditor is satisfied that it has nothing to add to the disclosures.
FRRP announces its priorities for 2012/13
Sectors of focus for the Financial Review Reporting Panel (FRRP) in 2012/13 include commercial property, retail and support services. Consistent with its 2011/12 priorities, the FRRP is looking for transparency, clarity and a balanced account in financial and narrative reporting.
The Financial Reporting Review Panel’s (FRRP) annual priorities press release identifies the following sectors for particular focus in 2012/13:
- Commercial property;
- Retail; and
- Support services.
Companies whose shareholders have raised concerns over governance and those companies that have received specific complaints will be given particular attention. The FRRP will continue to liaise with the Financial Services Authority in relation to financial services companies.
The FRRP also confirmed that, given the current uncertain economic climate, it will continue to focus on:
- disclosure of risks, including principal risks and uncertainties and risks and uncertainties arising from financial instruments;
- disclosure of judgements, key assumptions underpinning estimates and sensitivities around those estimates;
- application of IFRS 3 Business combinations; and
- whether business reviews are fair, balanced and comprehensive, and cover both good and bad news.
As a brief reminder, the FRRP identified commercial property, insurance, support services (particularly those with significant exposure to public spending cuts); and travel as priority sectors for 2011/12. Companies that operate in niche markets or that are outside the FTSE 350 and have a market capitalisation of over £50 million, were also identified as they are seen to be facing more risks in the current economic climate compared with larger diversified companies.
As with its updated priorities for 2011/12, the FRRP is looking for transparency, clarity and a balanced account in financial and narrative reporting.
News in Brief
FRC launches UK’s Financial Reporting Lab
The FRC has launched a new Financial Reporting Lab to provide an environment for investors and quoted companies to come together to identify practical solutions to current reporting needs. It comprises participants drawn from a diverse range of industry sectors and also has a Steering Group that contributes ideas and high-level direction. The FRC’s role is to facilitate dialogue between companies and investors and share best practice with the broader corporate reporting community.
In its recent November update, the FRC re-iterated that the Lab’s agenda will be driven by companies and investors, not the FRC. It is keen to receive suggestions for projects or examples of good practice. Projects identified so far include net debt reconciliation, accounting policy disclosures and the remuneration report, to name a few.
Further information on the Lab and its current projects is available here.
Future of UK GAAP: change in expected application date
The Accounting Standards Board (ASB) has tentatively decided to defer the mandatory application date of the proposed revised financial reporting framework in the UK to periods commencing on or after 1 January 2015 (the previous expected application date was 1 January 2014).
A revised exposure draft on the proposed framework is expected to be issued early in 2012.
Further information on the status of the ASB’s project is available here.
2011/12 UK GAAP Checklist
Our bi-annual UK GAAP checklist for 2011/12 is now available for download from our web site http://www.kpmg.co.uk/ or may be downloaded here.
IFRS newsletters and other publications
KPMG in the UK publishes Financial Reporting Matters, a short newsletter to alert you to key changes in UK and International Financial Reporting Standards and UK company law. It is available for download here. Alternatively, you may subscribe by sending an email to Financial Reporting Matters.
KPMG IFRG Limited has published the following since the September/October 2011 Update, which are available on its web site at http://www.kpmgifrg.com/:
First Impressions: Production stripping costs (October 2011)
The Application of IFRS: Chemicals and performance technologies companies (November 2011)
New on the Horizon: Revenue from contracts with customers (November 2011)
New on the Horizon: Revenue recognition for building and construction (November 2011)
IFRS for Investment Funds: Presentation and measurement of financial assets carried at fair value (November 2011)
IFRS for Investment Funds: Segment reporting (December 2011)
KPMG IFRG Limited also publishes In the Headlines, which provide information in relation to new exposure drafts and standards issued by the IASB, as well as any other relevant developments affecting current and future IFRS reporters, including summaries of IASB meetings on a monthly basis.
In the Headlines Issue 35 – Revenue from contracts with customers
In the Headlines Issue 36 – Further EC proposals for reform of the audit market
In the Headlines Issue 37 – November 2011 IASB meetings
In the Headlines Issue 38 – Reminder: effective dates of IFRSs
In the Headlines Issue 39 – Amendments to IFRS 9
In the Headlines Issue 40 – Offsetting financial assets and financial liabilities