The IASB has issued jointly with the US FASB its exposure draft on revenue recognition.  This follows on from last year's discussion paper and seems set to reignite many of the same concerns.

The issue of revenue recognition concerns just precisely when you record revenue in your accounts. It's a big deal because it's the very first number you see in the profit and loss account and is often used as a key performance indicator by analysts and investors.  Also, with revenue typically comes profit, which brings a tax bill.  Change the timing of revenue and you may change the timing of its related tax.

The discussion paper upset people because it threw all prior standards on revenue recognition in the bin and started from first principles.  It suggested that companies should do things they weren't particularly keen on doing, such as unbundling multiple products and services.  So, for example, when a store sells a tv bundled together with an insurance policy, the DP expected the two items to be recorded separately.  It also, controversially, suggested that accountants should look to the legal form of sale agreements (rather than the more traditional economic substance) to determine how to account for revenue.  This could mean more discretion and more subjectivity - precisely the opposite of what an accounting standard is meant to deliver.

Some of these wrinkles have been ironed out.  But there's still some madness in there.  There's an example in Deloitte's helpful newsletter on the exposure draft which shows how a warranty would be accounted for in the future.  Instead of recording a simple provision as currently, companies will need to revisit the warranty each year, potentially recording revenue over several periods after the original sale.  Pure it may be, but simple it ain't.  Expect a bunfight.

People who read this post also read:

• Whole of government accounts: why bother?
• 2010 edition of Deloitte’s “IFRSs in your pocket” published
• Do we need a general anti-avoidance principle for accounting?
• Addressing Ritchie’s 17 questions on accounting regulation
• Responding to EFRAG on corporation tax disclosure

Filed under: Accounting, Current issues with tags deloitte, fasb, iasb, revenue recognition, substance over form