Certain changes to revenue accounting standards are set to come into effect in 2017 that will change the time frame and manner in which companies do their books. Different opinions exist on the current revenue accounting rules and ideal standards, but rule makers are hoping to streamline global markets by establishing these changes.
In 2017, the first global revenue accounting rule is set to come into effect. This rule is expected to allow investors to more easily evaluate companies across the board by standardizing certain revenue accounting measures regarding when and how these monies are recorded. With revenue not only a key factor for a company staying in business but also a benchmark for deciding on mergers and acquisitions, the style and time frame in which accounts are kept have a great effect on investors.
After years of deliberation, the Financial Accounting Standards Board that writes accounting standards for the United States and the International Accounting Standards Board that sets rules used in Europe, Asia and parts of the Americas have finally come to a consensus on certain details. Under current revenue accounting standards used outside the United States, details remain fuzzy on when revenue should be booked. Likewise, critics of the U.S. accounting standards view the standards as being too prescriptive.
Companies currently using the rules set outside the United States are projected to experience the most change since they have little direction on how to report revenue from sales that combine different aspects like product and back-up servicing. For example, under the new rules, companies will be required to set a dollar amount on service promises on products, which can be difficult to forecast and lead to accounting discrepancies.
Several businesses are expected to need changes in their IT systems, internal controls and even the timeframe for awarding company bonuses. It is projected that the revenue accounting changes could result in extreme logistical challenges to some companies, wherein businesses will have to assess the impact of the change on all revenue streams within the company and determine what customers pay for each item of goods and services as a package.
Under the new accounting rules, some companies will be forced to estimate their revenue at the point of sale and book the rest over the course of service contracts. However, some companies are looking forward to the change because they view the current rule as being too restrictive.
The changes will take effect in 2017, but a current U.S. law requires two comparison years ahead of tax changes, so companies will have to show these new changes in 2015 and 2016. Disagreements still remain among the two boards, but these set changes to revenue accounting are intended to make capital markets more efficient.
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