Which FRSs could be affected? FRS 18 Revenue and FRS 11 Construction Contracts are proposed to be merged into a single revenue recognition model in a discussion paper published in Dec 2008.
What is the proposed underlying principle?
The underlying principle in the proposed model is that revenue is recognised when a company satisfies a performance obligation in a contract; in other words, when the company fulfils one of its promises in the contract.
Who will be affected?
The abolition of FRS 11 would affect industries involved in ship building and property development. Particularly those industries delivering products and services with long gestation period.
What would be the difference in treatment?
Currently, revenue is recognised on a percentage of completion basis.
In proposed model, revenue can only be recognised if and only if the work-in-progress is transferred to the Customer as it is created. Since the Customer will not be accepting the handover of partially completed products/services, the business entities involved could experience fluctuations in reported earnings.
For those in the software business – For eg. a software developer is paid $1 million to develop a software with a warranty period of 3 months after delivery date. The developer cannot recognise the full $1 million upon delivery of the software. To satisfy the proposed change, the $1 million must be apportioned as separately identifiable revenue to software development and warranty respectively. Over the delivered portion can be recognised as revenue.
Reference – Accounting and Business 04/2009