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Oct 12, 2012

Revised revenue standard to affect construction sector firms

Construction|Engineering|Africa|Building|Africa|South Africa|Services|Theunis Schoeman|Operations
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The introduction of a new accounting standard from January 1, 2015, will require companies to identify separate performance obligations in a contract for accounting purposes.

The standard, although a relatively minor adjustment for most companies, assumes huge significance in the building, construction and civil engineering industries, where multiple performance obligations are more the norm than the exception.
PKF chartered accountants and business advisers director Theunis Schoeman says a revised exposure draft on revenue recognition was jointly published in November last year by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), detailing the more onerous disclosure requirements with regard to contractual performance obligations.

“While these revisions will not affect business operations, they will inevitably create additional costs and require greater preparation of company financial statements. This brings South Africa in line with what is happening globally and is an element of the process of global harmonisation,” he explains.
He adds that while these requirements remain onerous, they are less radical than initially feared.

It appears from the revised draft that cognisance has been taken of the industry’s concerns that were based on the first draft.
“Notably, representations were made to consider aligning the implementation of financial instrument IFRS 9 with the revenue exposure draft. There also seemed to be a certain degree of conflicting principles relating to the accounting treatment for a receivable between the exposure draft and IFRS 9. Both these issues have been resolved,” Schoeman notes.
A key issue that was laid to rest in the exposure draft is the approach to capitalising bid costs, which has been historically inconsistent.

The draft clarifies that, where a company incurs incremental costs in obtaining a contract, these costs should be capitalised and therefore amortised over the period of the contract. Further, in the case of a contract that is valid for less than a year, these costs can also be entirely expensed within the period during which they are incurred.
Although the new standard, as outlined in the revised draft, is only scheduled to come into effect for yearly financial periods on or after January 1, 2015, it will have to be applied retrospectively in respect of prior years.

“As a result, I recommended that affected companies start implementing it for periods from January 2013 onwards to ensure they have that retrospective information at hand,” he says.
Several standards and interpretations will fall away with the new standard, including IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC 31 Revenue-Barter Transactions Involving Advertising Services.
Further, there will be exceptions for lease contracts in terms of IAS 17, insurance contracts in terms of IFRS 4, contractual rights or obligations in terms of IFRS 9 and nonmonetary exchanges between entities in the same line of business.
The revised exposure draft proposes a five-step model for determining when revenue should be recognised, based on the core principle that revenue is recognised when or as an organisation transfers control of goods and services to a customer.

Edited by: Martin Zhuwakinyu
Creamer Media Senior Deputy Editor
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