New Zealand businesses currently lead the world in their lack of awareness of proposed changes to the way that revenue is recognised in financial statements.
Research from the Grant Thornton International business report released yesterday, which surveyed 2,800 businesses globally, found that 86% of New Zealand business owners were not aware of revenue recognition changes being proposed by the International Accounting Standards Board (IASB). Of the 40 countries surveyed only Poland 96%, France 92% and Finland 90% showed greater ignorance of the proposed changes. The global average was 58%. The United States had the best knowledge of what was happening with only 40% of businesses being unaware of the proposed changes.
Mark Hucklesby, National Technical Director for Grant Thornton New Zealand Ltd, said that the US awareness rate was not surprising given the focus that the US places on earnings per share, but the real concern was that with less than a month remaining for public comment, the figures for New Zealand were surprisingly low. Given the significance of the proposed changes, particularly for smaller businesses that provide turn key product and service solutions, it is disappointing to see this complacency.
“How revenue is accounted for is extremely important. It is almost always the largest dollar amount reported in any set of financial statements and for many listed companies it is the first number that gets reported by the media. Auditors, as one might expect, spend a lot of time checking the revenue figures.
“What has been overlooked by many is that later this year a global, accounting standard for accounting revenue will be introduced.
“For businesses in New Zealand, now is the time to ask “do these changes work for us?” This is why this standard has been re-exposed for comment a second time by the IASB. For example, is separating out goods and services as separate revenue streams feasible, and is the guidance on separately accounting for warranty provisions reasonable?” he said.
The aim of the changes proposed by the IASB and the Financial Accounting Standards Board (FASB) is to improve and converge the financial reporting requirements of International Financial Reporting Standards (IFRSs) and US General Accepted Accounting Principles (US GAAP) for revenue (and some related costs) from contracts with customers.
The proposed changes improve current IFRSs and US GAAP by:
- providing a more robust framework for addressing revenue recognition issues;
- removing inconsistencies from existing requirements;
- improving comparability across companies, industries and capital markets;
- providing more useful information to users of financial statements through improved disclosure requirements; and
- simplifying the preparation of financial statements by streamlining the volume of accounting guidance.
“The core principle of this proposed standard is that an entity recognises revenue from contracts with customers when it transfers promised goods or services to the customer. The amount of revenue recognised would be the amount of consideration promised by the customer in exchange for the transferred goods or services.
“I am staggered at the figures for New Zealand, as business owners in this country are usually pretty savvy about these matters, but our global survey clearly indicates these proposed changes have not received the attention they deserve,” he said.
“The survey also revealed that New Zealand was in the top third of countries where business owners thought that the requirements to prepare IFRS financial statements were too complex. This finding is not unexpected, and confirms what many directors and business owners have been saying for a long time.
“Nearly half of the business owners (48%) in New Zealand held this opinion, which put us almost in line with Australia, the United Kingdom and the United States. Denmark looked to be the most knowledgeable country with only 10% finding financial statements they were required to prepare too complicated. However at the other end of the scale were Greece and Italy where 60% of businesses said that preparing financial statements today was far too complicated. The global average from this latest Grant Thornton survey was 38%.
“While the closing date for submissions to the IASB and the FASB on revenue recognition is 13 March 2012, New Zealand companies have been asked by the newly created External Reporting Board (XRB) to have submissions ready by 20 February 2012. Given the importance of revenue to almost every business in New Zealand, this is an opportunity to have your views heard. Failure to comment may result in companies having to paying tax on earnings earlier than they previously have, given the Inland Revenue’s policy decision to use IFRS as the platform for revenue recognition for almost every large company in New Zealand” Mark Hucklesby said.