Newspaper article International New York Times

Regulators Adjust Rules for Revenue Accounting ; Many Firms across Globe Will Be Able to Report Profit Sooner Than Before

Newspaper article International New York Times

Regulators Adjust Rules for Revenue Accounting ; Many Firms across Globe Will Be Able to Report Profit Sooner Than Before

Article excerpt

The standard will change in 2017, the two boards that set accounting regulations for companies in most major countries said Wednesday.

Accounting for revenue -- one thing that every company has, or at least needs if it is going to stay in business -- will be significantly changed in 2017, the two boards that set accounting standards for companies in most major countries announced on Wednesday.

The new rules -- issued by the Financial Accounting Standards Board, which sets guidelines for United States companies, and the International Accounting Standards Board, whose rules are used in the European Union as well as a number of other countries -- replace those specifying how and when revenue can be recognized in different industries. Those rules sometimes differed among countries, and often differed among industries.

"It will result in changes for most every company," said Dusty Stallings, a partner at PricewaterhouseCoopers. Even companies in industries that do not have major changes will discover they may need to make more estimates and disclose more to investors, she said.

In many, but not all industries, one result will be to give companies greater leeway in recognizing revenue earlier, thus allowing them to report profits sooner than they previously might have.

"Because there is a greater need to estimate, there is a greater need to disclose," Russell G. Golden, the chairman of the Financial Accounting Standards Board, said in an interview. He said new disclosures would be required in footnotes to financial statements, "so that investors and other users of financial statements better understand the economics behind the numbers."

Mr. Golden said current rules for revenue recognition for sales of computer software often forced companies to delay revenue, while it could be reported earlier for hardware sales. Under the new rules, the accounting is likely to be much closer for the related industries.

The new rules will take effect for companies that are on calendar years at the beginning of 2017. American companies will not be able to make the changes earlier, but the international board will allow that, in part because some countries are likely to move from national rules to international standards before 2017, and it would not make sense to require them to change twice.

Under the new rules, companies must first analyze the so-called contract between themselves and their customers. That contract could be implied rather than written, like the contract between a grocery store and a customer who buys a gallon of milk. In some cases, more than one product is being sold -- for example, when a car manufacturer sells a vehicle and promises to pay for maintenance for the first two years. Under the new rule, that promise creates a "performance obligation" that must be accounted for separately from the sale of the car.

Then the price must be determined. That is easy for the grocer selling milk, but not so easy for companies whose revenue could vary based on factors not yet known, for instance an investment manager who gets a share of the profit earned by the customer.

The issue of how much revenue may be reported immediately will depend on estimates of what is likely to happen. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.