A global survey of 2 800 businesses conducted by Grant Thornton finds that only 40% of South African businesses are aware of coming global changes in accounting standards relating to the way they recognise and report revenue.
The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have recently developed a joint proposal for a converged revenue recognition standard. But less than one third (32%) of SA businesses believe existing accounting standards on revenue recognition need to be improved or replaced, despite a decade of documented problems with corporate revenue recognition.
“The majority of local businesses are not educated about these very important changes. Those that are, do not believe they are necessary. And yet, these changes will most likely have a significant impact on them,” says David Reuben, head of assurance at Grant Thornton Johannesburg.
Slightly more than half (53%) thought that the latest joint proposals would lead to increased costs and 64% said it would lead to more complexity. “It is concerning that South African businesses share this view with some of the world’s biggest economies,” says Reuben. “There is a very real need for businesses to be aware of the pending changes”.
He refers to the US and UK where respectively only 30% and 33% believe improvement is needed, while 72% of business in the US and 44% in the UK say it will lead to increased complexity.
It should be kept in mind that in the U.S., revenue recognition issues resulted in 10% of reported restatements in 2010 and the United Kingdom’s accounting regulator has challenged several companies’ revenue recognition policies and disclosures.
Ed Nusbaum, CEO of Grant Thornton International said: “Although some argue that the current standards aren’t broken, we do think there are serious problems. Revenue is a key performance measure for every business and a single, global accounting standard in this area is critical.
“There is understandable concern about increased cost and complexity, but we believe that the IASB and FASB are moving in the right direction, and we’re pleased they’re moving together.”
The IASB and FASB have amended their proposals to simplify application and reduce unnecessary disruption to established accounting practices. For example, the latest exposure draft is expected to result in most construction and services sector businesses continuing to recognise revenue as they perform under a contract, much more in line with current practice. The Boards have added practical expedients to simplify application in some areas, including contracts with embedded financing and onerous obligations.
Encouragingly, support for change was greatest in India (59% believe improvement is needed), the Association for South East Asian Nations (ASEAN) countries (56% believe that improvement is needed) and Latin America (48% believe that improvement is needed).
The IASB and FASB’s joint latest proposal was published in November 2011, following a previous Exposure Draft in June 2010 and a Preliminary Views document in 2008. The comment deadline is 13 March 2012. Grant Thornton will submit a global comment letter on or before that date.