As the IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board) ready the release of final changes to global revenue recognition, a business survey finds only 38 per cent of Indian respondents believe the existing standards need to be improved or replaced.
A majority of them also thought that the latest joint proposals would lead to increased costs and more complexity, and only 38 per cent was aware of the upcoming changes.
Across the BRIC (Brazil, Russia, India and China) region, only 30 per cent saw the need for the changes, 57 per cent believes it will lead to increased costs, 49 per cent thinks it would result in more complexity, and only 23 per cent was aware of the upcoming changes.
The survey by Experian in May 2013 polled 3,200 businesses in 44 countries as part of the
“The new standard shifts the underlying principle for revenue recognition from transfer of risks and rewards to transfer of control,” said Yogesh Sharma, Partner — Assurance, Grant Thornton India LLP.
“It provides more specific guidance in areas like multiple element arrangements, segmenting contracts, contract modifications, contract costs, licensing arrangements and time value considerations. The standard could have a pervasive impact across sectors. Further, considering that there is very limited guidance under Indian GAAP, upon convergence this could result in significant changes for Indian companies from current practices and may require extensive efforts to comply.”
Some of the Indian industries likely to be most affected by revenue recognition changes include
Telecoms and IT — where multiple deliverables are commonplace and current practice is mixed. Mobile phone businesses that account for a ‘free’ handset as a marketing cost will need to change this policy and instead allocate revenue based on relative value;
Real estate — the question of when to take revenue for ‘off plan’ apartment sales has been a difficult one, and the new model will shift the boundary between percentage-of-completion and on-completion revenue recognition;
Sectors where performance-based or contingent fees are commonplace, such as asset management and some legal and professional services. Under the new model, variable payments would be accounted on a best estimate basis, subject to being ‘reasonably assured’;
Retail — accounting for rights of return, customer loyalty schemes and warranties could be affected.
A final standard is expected in September 2013 and would be effective for annual periods beginning on or after January 1, 2017. The IASB will permit earlier application. The draft of IFRS-converged Indian Accounting Standard 18, Revenue — available on the Ministry of Corporate Affairs Web site — is based on the current version of IAS-18, Revenue; but once the IASB issues the final standard, the ICAI is likely to move forward.
— Grant Thornton India LLP