Archives For IASB

By Paul Cooper, corporate reporting manager, ACCA

revenue recognition

IAS 18 Revenue and IAS 11 Construction Contracts currently determine how entities subject to IFRS recognise their income. The IASB has been conducting a lengthy consultation on this important area, beginning in 2008. This process culminates in a replacement IFRS on Revenue Recognition, with publication expected during the first half of 2013. Responses to the final consultation stage were submitted by mid-March 2012.

The project has been jointly undertaken by the IASB and FASB in the United States, and represents a further step towards global convergence at a time of more general concern over the future of the convergence process. At the same time as updating international and US GAAP, the new Standard should establish common principles, and provide additional guidance on revenue recognition.

There have always been questions about the recognition and disclosure of revenue which is subject to complexity or uncertainty.  Complexity can arise because of the long time-period for the fulfilment a contract, the numerous components within a contract, and the extent of tailoring of the good or service to a customer’s specific requirements. Credit risk (not being paid for the work) and warranties (whether statutory or specific to the contract) add uncertainty about the overall amount and timing of total contract revenue.

As the final Standard, reflecting any changes consequent on the last consultation stage, has yet to be published, the following points reflect the most recent proposals, and ACCA’s responses to them. However, it is not anticipated that the published Standard will look much different.

The IASB’s consultation process on revenue recognition has been evolutionary: changes to the proposals along the way have not caused a major or widespread impact. Revenue is to be recognised in a stepped process, starting with the separate identification of a project, then the components within the contract, called ‘performance obligations’, and the price of each. When an obligation is satisfied, the revenue attaching to it can be recognised in the financial statements.

For an obligation to be satisfied, the customer must have control of the good or service. For example, a contract to supply and deliver furniture may involve several deliveries, each of which the customer accepts by signing to confirm satisfaction with the goods on receipt. Each delivery may involve items which can be enjoyed (i.e., controlled) separately by the customer, and so revenue is recognised on each delivery. Alternatively, the deliveries are of parts, all of which are necessary before the customer can use any of the furniture, and this results in revenue being recognised only on the acceptance of the final delivery.

The methodology for revenue recognition established by the Standard should be practical across industries, and the IASB has provided additional detail which should reduce potential uncertainties in the application of the Standard. It should be noted that for certain long-term contracts, especially where control of the good passes to the customer at a late stage, it is likely that the recognition of revenue will be later than under a percentage of completion method, even if this change goes against industry practice, or any other accepted idea of what is the true ‘substance’ of the contract.

The step process for revenue recognition, based on individual performance obligations, has the advantage of clarity and applicability across industries. This will represent a change for entities which assess the performance of a contract as a whole. They may not find it appropriate to recognise individual loss-making obligations, or onerous commitments, when they view these in the context of the overall contract profitability, and accepted the obligations on this basis.

The value of the consultation process, and the continuing involvement by ACCA in it, is however evident in the clarifications and simplifications made by the IASB. For example, it is no longer proposed that credit risk will be deducted from the revenue figure disclosed in the Income Statement. The amount reflecting credit risk will instead be disclosed adjacent to the revenue figure. The treatment of warranties will now also be closer to current practice.

Once a Standard has been issued, it is not left to operate as it is until an overhaul is considered necessary. After an IFRS has been in operation for two years, the IASB now conducts a Post-Implementation Review of how it is working in practice. In addition, concerned parties are also able to lobby the IFRS Interpretations Committee, if they have concerns such as over divergences in accounting practice. The comments made can then result in proposals for amendments to particular areas of a Standard.


tall building, modern CFOBy Jeffrey C. Thomson, CMA; President and CEO, IMA

According to The Changing Role of the CFO, a new report co-published by ACCA and IMA®, CFOs will face many challenges in the future, including global economic uncertainty and volatility, fluctuating energy prices, and turbulent currency markets, along with a shift in economic power. The report identifies emerging priorities that will impact the future role of the CFO and cites nine future key issues that will shape the finance function’s top job, including regulation, globalisation, technology, risk management, transforming finance, stakeholder engagement, strategy, integrated reporting, and talent.

Of course, these emerging priorities could well vary by global region depending on regulation, socio-economic factors, environmental conditions, culture, and more. But as a former U.S.-based CFO, I wonder if we in the U.S. face a couple of unique challenges associated with regulatory uncertainty and litigation. These issues exacerbate the ‘day-to-day’ challenges – and opportunities – of today’s CFO team.

First, let me tee up the uncertainty associated with regulation. Usually, when we discuss the CFO team’s lead role in dealing with uncertainty and disruption, it is in connection with consumers and competition, not regulation since that tends to be a ‘known’ quantity with exposure drafts, comments letters, discussion roundtables etc. before a regulation associated with financial reporting even goes into effect. Specifically, I am focusing on the uncertainty associated with adoption of IFRS in the U.S. Will the U.S. adopt IFRS? If not in full, what would an ‘incorporation’ model look like? The larger questions are around the degree to which U.S.-based CFO teams should begin the training process and technology changes necessary to affect a massive shift from the decades-old US GAAP. This is not the resource allocation challenge that CFOs deal with every day in trading off returns on various investments; it is a long-term decision to invest in training and technology without clarity as to ‘if, how and when.’

Smart CFOs will need to do two things: (1) Hire and nurture good technical talent, so adopting to any deviation to pure-play GAAP will be that much easier; and, (2) Stay close to the regulatory scene and be a proactive advocate for the best solution (e.g., SEC, FASB, IASB, IFRS Foundation, etc.)

The second, arguably unique challenge for U.S.-based CFOs is with integrated reporting, or, the evolution of external corporate reporting. At least in the U.S., the external disclosures are voluminous and yet do not adequately inform stakeholders as to long-term sustainable value generation and growth because they are too financially focused, too complicated, and yet not comprehensive enough. But the unique challenge in the U.S. is not so much about selecting more non-financial measures, or measures more of a leading indicator variety, or even how to source and report measures such as employee learning and growth, process improvements, sustainability, carbon footprint, societal contributions, or governance factors. It is the litigious nature of society and an often ‘unforgiving’ regulatory environment in the U.S. If this challenge is approached as ‘let’s report everything – and thus subject it to internal controls and audit – because it may be useful to some stakeholder in the future,’ then much like in the early days of Sarbanes-Oxley, integrated reporting will be viewed as a ‘social tax’ with little societal good and expensive shackles placed on corporate entities. There are no easy answers here, but leading CFOs need to be at the table to find the right balance, rather than waiting for the steam-roll effect of transforming external corporate reporting ‘to just happen.’

What do you think?

By Paul Cooper, Corporate Reporting Manager, ACCA

The IFRS Foundation’s review of its governance gives insight into how the IASB (International Accounting Standards Board) structures itself as an organisation.

The Foundation’s ‘Drafting Review’ proposes to formalise within its constitution a change which it has already made. The roles of the IASB Chair (principally responsible for standard-setting) and oversight (executive) functions are now held by different people. This is because the latter role might be seen to conflict with the functions of the Chair, such as with fund-raising.

Comments for the ‘Drafting Review’ were requested by 23 October 2012.

An executive director has already been appointed, so the Foundation wishes to change its constitution accordingly as soon as possible. The executive director has a staff role in the Foundation, and is not a member of the IASB.

The change was in fact a recommendation of an earlier review of the Foundation’s governance. ACCA’s response to the review in March 2011, supported the recommendation, but questioned the appropriateness of the title of the role, which at the time was to be chief executive officer.  The executive role reports to the IASB chair, so arguably the term ‘CEO’ is not entirely suitable.

ACCA’s response to the current consultation reiterates our support for the separation of the chair and executive functions, and support the title of executive director (rather than CEO) for the latter role.

The IASB also has a vice-chair now, part of whose role under the constitution is to represent the chair externally. The earlier governance review identified the matter of travel demands on the time of the IASB chair. As a solution, ACCA supported the appointment of a vice-chair.

The IASB positions referred to in this blogpost are currently held by the following people:

Chair – Hans Hoogervorst

Vice-Chair – Ian Mackintosh

Executive Director – Yael Almog

James Bonner, independent sustainability consultant 

Materiality is defined by the IASB (International Accounting Standards Board) as ‘an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report.’ In other words – it is about making judgements on the significance/importance of the variety of issues that might be considered for inclusion in the financial reporting of organisations – both according to their nature (what they relate to) and their magnitude (how big they are). If something is material to an organisation, it should be reported on, if it is not material, then it does not necessarily need to be.

By its very nature, materiality is an inherently subjective concept, and difficult to set and define. It is quite obvious that making professional judgements on levels of materiality is integral to the financial reporting and auditing process. Consequently, to support practitioners, a number of bodies involved in the accounting sector – standard setters, regulators, sustainability reporting groups – have developed guidance on their understanding and perspective on the concept.  

The following table provides some excerpts from guidance/definitions of materiality from such bodies, and their sources. A number of the issues included, and terms used, are similar – but it is worth considering what/who some of the substantive terms in these definitions relate to. For example, who are the ‘users’ of the accounts referred to in these definitions, and what type of information is likely to influence their decisions about an organisation?


Of interest, several prominent sustainability reporting bodies make reference to the interests of wider stakeholders and broader organisational performance (including social and environmental issues) in their guidance – which, in doing so, extends the scope of what might merit inclusion as material issues in financial reporting.  More inclusive and wide ranging definitions of materiality will, obviously, have implications for the accounting sector, as practitioners will have to use their professional judgement on issues and topics which may be important to users of the financial statements.

This blog post intends to primarily support ACCA’s Accounting for the future, in particular the session ‘Measuring risk: Material or significant – what it means to me’ on Monday the 8th Of October by looking at some key bodies involved in the reporting and auditing process, and their definitions of the concept of materiality- an issue which will be discussed in greater detail in the session.

Additionally, a number of other presentations during the conference relate to the themes covered in this blog post:

Monday 8th October
11.30:12.39 Is Natural Capital a Material Issue?
14:00-15:30 Measuring risk: Material or significant – what it means to me
16:00-17:00 Practical Workshop: materiality matrices

Tuesday 9th October
12:30-13:30 Inclusive and Integrated – the future role of the CFO

Wednesday 10th October
12:30-13:30 Evolution of the Annual Report

By Richard Martin, head of financial reporting, ACCA

Bob Herz, chair of the US' Financial Accounting Standards Board (FASB), has announced – as I'm sure you've noticed – that he's to retire from the role early. With the IASB's chair, Sir David Tweedie, stepping down next year, it's suddenly 'all change' at the top of the key accounting standards bodies.

Rachel Sanderson in today's FT (£) sees the departures as an opportunity for the accounting profession. I'm not so sure we can call the long-term impact of the departures just yet; Herz's departure in particular raises more questions than answers:

  • Why has Herz left now? It's not the best timing, given the IASB and FASB are both engaged in a major push to try and get a whole series of converged standards agreed to according to a programme endorsed by both the SEC and G20.
  • Is it connected to the FASB Financial Instruments Exposure Draft, which has been less than warmly received in the US and is also divergent from the IASB position? Bob Herz voted in favour of it, but his temporary replacement, Leslie Seidman, voted against.
  • The SEC is meant to be getting closer to a decision on whether to adopt IFRS. Do the changes – particularly the decision to increase the size of the FASB board from 5 to 7 – indicate that the SEC is going to give a 'no' to IFRS, meaning FASB will be needed for longer? After all, the 5 member board (reduced from 7) seemed to be too small and perhaps too dependent on the individuals involved, and was split on some key issues.
  • What does this mean for the current convergence programme? I suspect this will be delayed further.
  • Who replaces Herz and Tweedie? There's an issue in recruiting high quality individuals to boards, and to these roles in particular. There have been suggestions that the search for Tweedie's replacement has been bedevilled by problems; for the FASB role these problems will be even greater given the degree of uncertainty over the longer term future of the organisation.
  • And where next for Herz? He was after all once spoken of as a possible successor to David Tweedie…

Update: There's an interview with Leslie Seidman over on WebCPA