Revenue recognition for professional services
A draft UITF Abstract 'Revenue recognition and service contracts' was issued for comment at the end of November (see UITF Information Sheet 70). It seeks to clarify how the relevant accounting standards - FRS 5 Application Note G 'Revenue Recognition' and SSAP 9 'Stocks and long-term contracts' - should be applied in accounting for contracts for services, including services rendered by professional service firms (for example, firms of accountants and solicitors).
Specifically, the draft Abstract addresses the following questions:
- In what circumstances should a contract to provide services be accounted for as a long-term contract?
- How should revenue attributable to a contract for services that is accounted for as a long-term contract be determined?
- How should revenue be recognised on contracts for services that are not accounted for as long-term contracts?
The UITF concluded that revenue should recognised as the seller's performance takes place, whether or not the contract is long-term. Where, as is often the case, the substance of a contract for services is for the supply of time, this will reflect the time spent on the contract. Comments were requested by 11 January.
Waste electrical and electronic equipment
A draft Abstract 'Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment' was issued in November (see Information Sheet 69). It is based on a draft IFRIC Interpretation D10 which clarifies when producers of electrical goods should recognise certain liabilities relating to waste management costs that arise from market share. The relevant UK and international standards, FRS 12 and IAS 37 'Provisions, Contingent Liabilities and Contingent Assets', are virtually identical.
The issue arises in relation to the EU Directive on Waste Electrical and Electronic Equipment, which will make producers responsible for financing the costs of end-of-life decommissioning of waste equipment from private households.
One model for allocating costs will make current producers responsible (rather than the original producers), in proportion to their market share by type of equipment. The draft proposes that the obligating event that gives rise to a liability is participation in the market in a measurement period, rather than the equipment's manufacture or sale. Comments are requested by 11 February.
Emission rights
The IFRIC issued Interpretation IFRIC 3 'Emission Rights' in December. It specifies the accounting for companies participating in 'cap and trade' schemes aimed at reducing greenhouse gas emissions. The UITF concluded, for the reasons explained in Information Sheet 71, that it will not issue a UITF Abstract at this time.
Co-operative entities
The IFRIC issued IFRIC 2 'Members' Shares in Co-operative Entities and Similar Instruments' in November. It gives guidance on the classification of members' shares in co-operative entities (and other instruments that give the holder the right to request redemption) either as financial liabilities or as equity under IAS 32 'Financial Instruments: Disclosure and Presentation'.
IFRIC 2 is similar to the draft Interpretation D8 issued in June, a version of which was issued as a draft UITF Abstract. It is expected that a final Abstract will be issued shortly now that FRS 25 has been issued implementing IAS 32 for entities subject to UK accounting standards.
Rights to 'call' a pension fund deficit
The UITF considered a question on whether rights of pension fund trustees to 'call' a pension fund deficit should be disclosed in a sponsoring entity's accounts. The UITF noted that there could be situations, including a change in control of the sponsor, in which trustees have contingent rights to require revised contributions from the sponsoring entity. In certain circumstances this might give rise to a greater liability than the amount recorded in the balance sheet calculated in accordance with FRS 17 'Retirement Benefits'.
The UITF noted that FRS 17 requires any agreed contribution rates for future years to be disclosed and FRS 12 requires contingent liabilities to be disclosed, unless the possibility of a transfer of economic benefits is remote. If required by FRS 12, an entity should therefore disclose contingent liabilities arising from retirement benefit schemes. In the light of these requirements the UITF decided not to develop an Abstract.
Service concessions
As reported in previous editions of Inside Track, IFRIC has been continuing to develop the appropriate accounting for service concession arrangements. This has significant potential implications for the UK, given the scale of Private Finance Initiative (PFI) contracts. IFRIC has now approved for issue, subject to a number of amendments agreed at its December meeting, three draft interpretations:
- Determining the Accounting Model;
- The Financial Asset Model; and
- The Intangible Asset Model.
These will be issued shortly for public comment. IFRIC is proposing that the interpretations should come into effect for accounting periods beginning on or after 1 January 2006.
IFRIC round-up
In December, the IFRIC issued draft Interpretation D11 'Changes in Contributions to Employee Share Purchase Plans' and final Interpretations IFRIC 4 'Determining whether an Arrangement contains a Lease' and IFRIC 5 'Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds'.
D11 clarifies the accounting under IFRS 2 'Share-based Payment' when an employee ceases to contribute to an employee share purchase plan such as a 'Save-As-You-Earn' (SAYE) scheme and, as a consequence, is no longer able to buy shares in the plan. D11 proposes that the employer should account for this event as a cancellation and, therefore, should recognise immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period. D11 also addresses the situation where an employee changes from one plan to another.
IFRIC 4 provides guidance on identifying leases in arrangements that in substance convey rights to use assets and, therefore, come within the scope of the leasing standard.
IFRIC 5 provides guidance for entities that contribute to funds established to finance future decommissioning liabilities, which includes the recognition of separate assets and liabilities and the treatment of the right to receive reimbursements.
