New rule to ring in costly accounting change for telcos

Reuters

* Big change for European telcos, software firms

* Rule could make it easier for firms to float in U.S.

* Asia property sector may also benefit

By Huw Jones

LONDON, Oct 30 (Reuters) - Standard setters have reachedbroad agreement on the first global rule telling companies howto book revenues in a reform that may encourage listings andbump up IT costs for telcos.

Revenue is the most important line in a company's earningsstatement and policymakers want to make it easier for investorsto compare firms and help bring down the cost of capital bymaking markets more efficient and transparent.

The new rule is part of wider efforts to create a single setof global accounting standards.

The International Accounting Standards Board (IASB), whoserules are used in over 100 countries, including in Europe, Asiaand Canada, and the Financial Accounting Standards Board (FASB)which sets U.S. rules, voted on the new rule on Wednesday.

"I think we are substantially converged," FASB ChairmanRussell Golden told a joint meeting of the two boards.

The rule will be published in 2014 and take effect in 2017.

Daniel Feather, a partner at accounting firm EY, saidcompanies using IASB rules will feel the biggest impact as theyhave had little guidance on how to book revenue from sales thatinvolve multiple elements, such as a product and back upservicing.

The United States has had such guidance for a decade.

"When the rules were introduced in the United States it washuge with many companies having to change processes, controls,legal and sales training, to identify and keep track ofdifferent elements of each contract they were selling," Feathersaid.

The rule will particularly affect telecom, software,outsourcing, life science and construction as they offerso-called "multiple elements arrangements" whereby products andservices are bundled with no separate pricing of the differentparts.

NO FREE HANDSET

Phone companies often give a "free" handset to customers whotake out a network contract, and then book revenues for eachmonthly payment received. Under the new rule the company willhave to recognise some revenue upfront from the handset as well,requiring far more detailed tracking of sales.

"It is going to impact reported revenues for telcos andrequire a lot of work behind the scenes. For many telcos, itwill accelerate revenue recognition and introduce a disjointbetween revenue and cash collection," said Brian O'Donovan ofaccounting firm KPMG's international standards group.

The change could cost tens of millions of pounds for telcosand will be significant for other sectors such as technology andoutsourcing, EY's Feather said.

Any company with complex contracts will have to spend timeestimating the revenue from up-front elements versus theon-going services that accompany products they sell, Feathersaid.

"But we are seeing some software and technology companieswanting to adopt the new rule early as they will be able to telltheir story in a better way that is also more understandable toUnited States investors," Feather said.

"This could also help during U.S. IPOs and cross-bordermerger negotiations because revenue recognition is usually anarea of focus," Feather added.

Property developers, especially from countries like Malaysiaand Singapore, are also likely to welcome the new rule whichwill allow them to book revenue as a project proceeds ratherthan having to defer until completion.

The new rule is likely to come into force on January 1, 2017but U.S. companies may need to start preparing as early as nextyear as they must have two full years of data for comparison. (Editing by David Cowell)

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