Tag: FRS 102

When should you recognise revenue on services provided?

Profitability

The International Accounting Standard IAS 18 states

‘where the outcome of a transaction involving the rendering of services can be estimated reliably, associated revenue should be recognised by reference to the stage of completion of the transaction at the end of the reporting period’ . In other words, the revenue is recognised gradually, rather than all at one ‘critical point’, as is the case for revenue from the sale of goods. IAS 18 further states that the outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

(a) The amount of revenue can be measured reliably.
(b) It is probable that the economic benefits associated with the transaction will flow to the seller.
(c) The stage of completion of the transaction at the end of the reporting period can be measured reliably.
(d) The costs incurred to date for the transaction and the costs to complete the transaction can be measured reliably.

IAS 18 does not prescribe one single method that should be used for determining the stage of completion of a service transaction. However the standard does provide some examples of suitable methods:
(a) Surveys of work performed.
(b) Services performed to date as a percentage of total services to be performed.
(c) The proportion that costs incurred to date bear to the estimated total costs of the transaction.

If it is not possible to reliably measure the outcome of a transaction involving the provision of services (perhaps because the transaction is in its very early stages) then revenue should be recognised only to the extent of costs incurred by the seller, assuming these costs are recoverable from the buyer.

In the UK UITF40 and SSAP9 defined the way we report revenue and profit in relation to Services, although accountants and lawyers were among the most high profile casualties of the new regime back in 2005, which forced them to re-catagorise WIP and Revenue, many other service providers  also had to consider how they accounted for income. Professionals such as surveyors, architects, doctors and dentists all had to consider the impact of the new rules on their tax liabilities.

FRS102 has not changed the rules.

Revenue Recognition

steve@bicknells.net

Goodbye UK GAAP, bring on FRS 102….

Accounting Standards

Generally Accepted Accounting Practice in the UK, or UK GAAP, is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom. This includes not only accounting standards, but also UK company law. (Wikipedia)

UK GAAP was over 3,000 pages, but in March 2013 the new Financial Reporting Standard – FRS 102 – was finalised. It’s a mere 342 pages and will succeed UK GAAP and bring the UK closer to International Financial Reporting Standards (IFRS).

FRS 102 will be mandatory for periods beginning on or after 1st January 2015 but you can adopt it for periods ending after 31st December 2012.

It will apply to all entities with the main exceptions being:

  • Those small companies who have adopted FRSSE (Financial Reporting Standard Small Entities)
  • Those companies applying IFRS (International Financial Reporting Standards)

The Financial Reporting Council (FRC), in an article in Financial Director Magazine April 2013, claim:

  1. UK GAAP provided inadequate guidance on accounting for financial instruments
  2. There were inconsistencies in standards between IFRS and older standards
  3. Trainee accountants now learn IFRS so knowledge of UK GAAP is being lost
  4. FRS 102 allows for benchmarking which could lead to reduced borrowing costs

There are a number of key areas which you should start to consider now so that you can prepare for FRS 102:

Financial Instruments (FI) – FRS 102 deals with FI in two chapters:  Chapter 11 deals with basic FI such as debtors, creditors and simple loans, chapter 12 deals with more complex FI such as forward contracts, interest rate swaps and derivatives.  Basic FI will continue to be recognised at amortised cost, however, the more complex transactions that fall into Chapter 12 will need to be measured at fair value with movements being recognised in P&L a/c.

Business Combinations – For most acquisitions accounted for under FRS 10 intangible assets such as brands, customer lists etc are mainly rolled into the goodwill figure rather than recognised separately.  Under FRS 102 it is more likely that intangible assets will be recognised separately from goodwill and each might well be amortised over different useful lives.

Investment Property – FRS 102 requires revaluation gains and losses on investment properties are recognised directly in P&L a/c rather than the current procedure under UK GAAP which is for gains and losses to be held in the Statement of Total Recognised Gains and Losses (STRGL) until realised.  This is likely to lead to more volatility in the P&L a/c.

Deferred Tax – changes to the deferred tax treatment of revaluations of property, plant, equipment and investment property, fair value adjustments under business combinations, unremitted earnings of overseas associates and joint ventures are likely to result in more deferred tax entries in the future.

http://community.cimaglobal.com/blogs/nick-topazios-blog/key-changes-uk-accounting-requirements

steve@bicknells.net