LONDON (Reuters) - Standard setters have reached broad agreement on the first global rule telling companies how to book revenues in a reform that may encourage listings and bump up IT costs for telcos.
Revenue is the most important line in a company’s earnings statement and policymakers want to make it easier for investors to compare firms and help bring down the cost of capital by making markets more efficient and transparent.
The new rule is part of wider efforts to create a single set of global accounting standards.
The International Accounting Standards Board (IASB), whose rules are used in over 100 countries, including in Europe, Asia and Canada, and the Financial Accounting Standards Board (FASB) which sets U.S. rules, voted on the new rule on Wednesday.
“I think we are substantially converged,” FASB Chairman Russell Golden told a joint meeting of the two boards.
The rule will be published in 2014 and take effect in 2017.
Daniel Feather, a partner at accounting firm EY, said companies using IASB rules will feel the biggest impact as they have had little guidance on how to book revenue from sales that involve multiple elements, such as a product and back up servicing.
The United States has had such guidance for a decade.
“When the rules were introduced in the United States it was huge with many companies having to change processes, controls, legal and sales training, to identify and keep track of different elements of each contract they were selling,” Feather said.
The rule will particularly affect telecom, software, outsourcing, life science and construction as they offer so-called “multiple elements arrangements” whereby products and services are bundled with no separate pricing of the different parts.
Phone companies often give a “free” handset to customers who take out a network contract, and then book revenues for each monthly payment received. Under the new rule the company will have to recognize some revenue upfront from the handset as well, requiring far more detailed tracking of sales.
“It is going to impact reported revenues for telcos and require a lot of work behind the scenes. For many telcos, it will accelerate revenue recognition and introduce a disjoint between revenue and cash collection,” said Brian O’Donovan of accounting firm KPMG’s international standards group.
The change could cost tens of millions of pounds for telcos and will be significant for other sectors such as technology and outsourcing, EY’s Feather said.
Any company with complex contracts will have to spend time estimating the revenue from up-front elements versus the on-going services that accompany products they sell, Feather said.
“But we are seeing some software and technology companies wanting to adopt the new rule early as they will be able to tell their story in a better way that is also more understandable to United States investors,” Feather said.
“This could also help during U.S. IPOs and cross-border merger negotiations because revenue recognition is usually an area of focus,” Feather added.
Property developers, especially from countries like Malaysia and Singapore, are also likely to welcome the new rule which will allow them to book revenue as a project proceeds rather than having to defer until completion.
The new rule is likely to come into force on January 1, 2017 but U.S. companies may need to start preparing as early as next year as they must have two full years of data for comparison.
Editing by David Cowell