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Companies lag in disclosing impact of new revenue recognition standards

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The changes in standards to rejigger how firms recognise revenue will force businesses in more than 100 countries to disclose much more information about their contracts and accounting judgments, some of which they haven’t gathered before.

The new rules will supersede virtually all existing revenue recognition requirements under International Financial Reporting Standards and is similar to changes under way with U.S. Generally Accepted Accounting Principles. Under both standards, companies will be required to provide more detailed information about revenue recognition.

According to an article in the Wall Street Journal, some sectors, such as telecommunications, media and pharmaceuticals, are expected to be affected more than others. So far, 29% of FTSE 100 companies still haven’t disclosed an impact assessment, according to a September report by KPMG LLP.

“The impact will vary, depending on the individual company, their sector and their business model,” said Nick Chandler, a partner at KPMG. The new revenue standard “requires a far deeper understanding of companies’ contracts than previous rules. It’s a huge exercise,” Chandler is quoted as saying.

According to the KPMG study, only a small number of firms—9%—expect the new rules to have a material effect. Still, all listed companies filing results under international financial reporting standards must publicly disclose that they have assessed the impact.

Deutsche Telekom AG is one company that expects a material change to its financials, reports the WSJ. The German telecommunications company’s 2018 opening balance sheet will reflect a one-time increase of €3 to €4 billion ($3.5 billion to $4.7 billion) in retained earnings.

Going forward, the company is expected to post lower revenue in its mobile-service business but higher revenue in its hardware business starting from the first quarter.

The company also will have to provide more details about how it subsidises the cost of a mobile phone with revenue from contracts sold alongside the device, said Guillaume Maisondieu, head of group accounting.

Deutsche Telekom has had around 50 people working on implementing the new standard for the past two years, Maisondieu said.

By contrast, competitor Vodafone Group plc has only indicated that the rules will apply to its results for the financial year commencing April 1, 2018. “We will have something to talk about later this year,” said a spokesman of the British telecommunications firm.

Germany’s SAP SE has indicated the new accounting standard won’t be material for its revenue. Still, some components of the balance sheet at SAP could look different next year, finance chief Luka Mucic told the WSJ. “The transition to the new standard requires a considerable amount of work,” he said.

Analysts say companies’ impact assessments of accounting rules help them adjust their forecasts.

The last opportunity for companies to disclose the potential impact of the new rules is in their financial results for the period ending 31 December, says KPMG’s Chandler.

https://www.wsj.com/articles/new-accounting-rule-to-revamp-companies-financials-1510960723