This week we were asked an interesting technical question as to whether FRS 102 would have an effect on the sales (and obviously on the profit) of a particular client.
Put to one side the fact that the client was involved in designing, developing and selling software, a sector where there appear to have been some interesting controversies concerning revenue and profits - think of examples such as iSoft and Autonomy.
The key to our advice was the answers to 2 questions:
- Did the company currently comply with UK GAAP (such as FRS5 AN G and UITF 40)? The answer was YES!
- If it was doing so, does it operate in one of the very few areas where FRS 102 Section 23 on Revenue would make a difference? The answer was NO!
Conclusion - the company's revenue and thus profits will probably not be affected by FRS 102!
FRS 102 rewrites, rationalises and consolidates existing UK GAAP (in addition to the above, it also incorporates SSAP9 on Long Term Contracts, the principles of FRS 5 on Substance and some references to FRS 12 on Provisions) and does so in a relatively understandable manner - certainly compared with many other parts of FRS 102!
We would though strongly recommend that the relevant sub-sections of FRS 102 on Revenue (Section 23) should be read for each and every client and compared with the policy currently being used.
Where it differs from current standards is in requiring possibly more and certainly better disclosure, in the way that it brings everything together AND in including an invaluable Appendix containing 26 examples of appropriate revenue recognition policies in a wide range of industries and circumstances.
We can be sure that HMRC inspectors will be comparing clients' accounting policy notes with what is in those examples!
Just occasionally, FRS 102 may make a difference and we need to be aware of the possibility. As an example, it suggests that builders selling 'off plan' houses should generally not take revenue until the customer takes possession of the property. This may or may not be the same as the current accounting policy for revenue, and if the current policy is different there will need to be a change of policy with prior period adjustments. This may be beneficial in that it may lead to revenue and profit (and tax) being taken/paid later. The relevant example in the Appendix can be found in section 23A.14.
Returning to the title of this blog post, in most cases moving to FRS 102 may well be a 'damp squib' in that it has little effect providing the current policy does comply with current UK GAAP. We do know however that is not always the case and care needs to be taken to actually read the standard.
The standard analyses revenue under areas of:
- Sale of Goods
- Rendering of Services
- Construction Contracts
- Interest, Royalties and Dividends
- And offers several examples illustrating Franchising
I'm sure you've heard so many of us say there really is no alternative to reading FRS 102 - reading the whole document may be a challenge too far but please make sure you get the revenue right!