The Accounting Standards Board (ASB) in Britain has tightened the rules on how companies record revenues in their accounts. The move is aimed at deterring companies from using a variety of ruses to bolster revenues.
Mary Keegan, chairman of the ASB, said it had become clear that some UK companies had “pushed the envelope” in their recent reporting practices. She said: “It has become clear from recent reports of questionable practice in the UK market that we should not wait any longer to clarify revenue recognition principles here.”
Wickes, the DIY chain, overstated profits by £18 million in the mid-1990s using cash rebates and discounts from suppliers. MyTravel, formerly Airtours, flattered its profits by immediately booking revenues on travel insurance sold with package holidays. Allied Carpets was criticised over pre-dispatching, in which carpets were marked as “sold” as soon as an order was placed.
International accounting regulators are developing a new accounting standard on revenue recognition. The ASB is seeking comments on an application note to its existing standard FRS 5: “Reporting the Substance of Transactions”. The guiding principle is that revenue should only be recognised when something of value is delivered to the customer.
The proposed note singles out five types of transaction which have been open to differing interpretations. These include long-term contracts, in which it is sometimes not clear at what point a company can “book” its profit. A second category involves sales with right of return. A company might take profits immediately, without making allowance for the customer cancelling.
The note also singles out separation and linking of contractual arrangements; bill and hold arrangements; and presentation of turnover as principal or as agent.Comments are invited by May 30.