The changes being made to the International Financial Reporting Standards on revenue are expected to affect many sectors but will have the greatest impact on the telecommunications sector, reports the South African Institute of Chartered Accountants (Saica).

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board undertook this project to provide clear principles on when revenue should be recognised and how much revenue should be recognised.

“Revenue is an important aspect for investors to assess how well companies are doing financially. The way that businesses account for revenue will now change,” says Saica chartered accountant Sue Ludolph.

The changes are still in the proposal stage and are out for comment. The feedback gained during the comment period, which ended march 13, will be collected and reverted back to the international standard setters for review.

Once all comments have been reviewed and deliberated the IASB hopes to make an announcement on the changes by 2013, giving markets time to prepare.

The changes for financial reporting are likely to be seen in South Africa by 2015. Saica points out that the Saica accounting practices committee, which comments to the IASB on all proposed standards, is in discussion with various industries about the changes.

“The main objectives for the change are to remove inconsistency and weaknesses in existing revenue recognition standards by providing clear principles for revenue recognition,” Ludolph says.

Further, the proposed standard aims to provide a single revenue recognition model that will improve comparability over a range of industries, companies and geographical boundaries and to simplify the preparation of financial statements by reducing the number of requirements to which preparers must refer.

“The new revenue standard is premised on the understanding that a business needs to assess the contract with a customer, consider the obligations that have been contracted to by the provider and should recognise revenue based on the obligations of the contract,” Ludolph says.

This means that the obligations of the service provider need to be considered and accounted for from day one of the sale of the contract.

A cell phone contract service provider sells a package for two years with a free phone. Currently all the revenue would be recognised over the service delivery period. With the changes, revenue needs to be allocated to the phone and to the cell phone monthly contract. Revenue for the phone must be recognised upfront and only the revenue allocated to the cell phone contract will be recognised over the service delivery period.

“The changes are unsettling to many businesses, as they will be costly for the service providers. The requirement to identify each component of a contract sold and monitor the delivery of each obligation will need significant processing effort, which will mean changes to information technology systems and this is costly.

“The revenue standard affects any costs related to revenue and, in the telecommunications industry, commission costs are incurred. Previously this was recognised on day one of sale, but in some cases this may have to recognised over the service delivery period,” says Ludolph.

In applying the new accounting requirements, it is expected that many companies could experience a decline in reported gross margin, and increased visibility of their bad debts. For sales made on credit, companies will be required to estimate the likelihood that the sales amount will not be collected and recognise a loss for this expectation on the initial date of sale.