Accounting Standards Board

UITF Abstract Published on Revenue Recognition and Service Contracts

ASB PN 265

10 March 2005

The Accounting Standards Board (ASB) published today Urgent Issues Task Force (UITF) Abstract 40 ‘Revenue recognition and service contracts’, giving guidance on the recognition of turnover derived from contracts for professional and other services.

The Abstract was developed in response to requests that the UITF should clarify how the relevant accounting standards FRS 5 Application Note G ‘Revenue Recognition’ (issued in November 2003) and SSAP 9 ‘Stocks and long-term contracts’ (last revised in 1988) should be applied in respect of contracts for services that are not accounted for as long-term contracts. The main point at issue is when the applicable accounting literature requires or allows revenue to be recognised as contract activity progresses or on contract completion.

The Abstract explains that as a matter of principle there is no difference between the accounting required for long-term contracts and other contracts for services. The overriding consideration is whether the seller has performed, or partially performed, its contractual obligations. A principal conclusion of the Abstract is that where the substance of a contract is that the seller’s contractual obligations are performed gradually over time, revenue should be recognised as contract activity progresses to reflect the seller’s partial performance of its contractual obligations. In these circumstances it is inappropriate to defer recognition of revenue until contract completion.

Notes to Editors

The ASB is an operating board of the Financial Reporting Council (FRC). The FRC is a unified, independent regulator. Its mission is to promote confidence in corporate reporting and governance. The FRC incorporates five operating boards: the ASB, the Auditing Practices Board, the Financial Reporting Review Panel, the Accountancy Discipline and Investigation Board and the Professional Oversight Board for Accountancy.
The role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
The Urgent Issues Task Force (UITF) is a committee of the Accounting Standards Board (ASB) and comprises a number of people of major standing in the field of financial reporting. Its main role is to assist the ASB in areas where an accounting standard or Companies Act provision exists, but where unsatisfactory or conflicting interpretations have developed or seem likely to develop.
Where the UITF reaches a consensus on an issue (which is achieved only when at least eleven members vote and no more than two dissent) the ASB promulgates the consensus in the form of a UITF Abstract.
A UITF consensus should be regarded as part of the basis for determining what constitutes a true and fair view. Such pronouncements may consequently be taken into consideration by the Financial Reporting Review Panel in deciding whether a company’s financial statements call for review.
The ASB has up to ten Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who represent a variety of interests, are part-time.
Press enquiries: Ian Mackintosh (ASB Chairman) on 020 7492 2434 or Hans Nailor (UITF Technical Director) on 020 7492 2431.