Revenue recognition for professional services

The UITF has considered requests for guidance concerning revenue recognition in respect of contracts for professional services, including the relationship between FRS 5 Application Note G ‘Revenue Recognition’ and SSAP 9 ‘Stocks and long-term contracts'. Among the issues are: when should a contract to provide services be accounted for as a longterm contract? how should revenue and profit be recognised on contracts that are not long-term contracts?

The UITF discussed a draft Abstract at its meeting in October. The UITF requested that a further draft be prepared which, if necessary, will be considered at its next meeting in November.

Co-operative entities

The UITF has responded to IFRIC D8 ‘Members’ Shares in Co-operative Entities’, which deals with the classification as liabilities or equity of financial instruments issued by co-operative and other entities that give the holder the right to request redemption.

The UITF supported IFRIC’s proposals, but noted that it draws attention to some of the difficult issues that arise in the context of the current distinction between debt and equity. For example, it is not entirely clear that the distinction between an unconditional prohibition on redemption and a prohibition based on liquidity criteria can be unambiguously applied in all cases.

An accounting standard implementing IAS 32 will shortly be issued by the ASB. The intention is that the finally agreed IFRIC interpretation will be implemented as a UITF Abstract.

Retirement benefits

The UITF has responded to IFRIC D9 ‘Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions’. The response drew attention to the need for a final Interpretation to address the proposed amendment to IAS 19 described on page 3. The UITF issued a proposed version of IFRIC D9 (in Information Sheet 67) which was adapted to reflect the requirements in FRS 17 equivalent to those proposed in the IAS 19 amendment.

Emission rights

In May 2003 the UITF issued a draft Abstract on accounting for emission rights (Information Sheet 61), based on IFRIC’s draft Interpretation D1 ‘Emission Rights’. The UITF had reservations about the proposed accounting model (particularly the effect of differences in accounting for emissions allowances, government grants and liabilities to deliver allowances), and these were shared by many respondents. IFRIC had expected to issue revised proposals in the light of IASB’s intention to amend IAS 38 ‘Intangible Assets’ - to permit allowances traded in an active market to be measured at fair value with changes in value recognised in profit or loss - and IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’.

However, amendments to IAS 20 and IAS 38 are unlikely to be finalised for some time. IFRIC has therefore decided that earlier guidance is necessary, given that the EU  Emissions Trading Scheme starts in 2005, and expects to issue an Interpretation based on the consensus in D1 in November. The UITF will consider whether and how to take forward its draft Abstract when the IFRIC Interpretation is finalised.

Waste electrical and electronic equipment

IFRIC is expected shortly to issue a draft Interpretation concerning liabilities arising from market share. The issue arises in relation to the EU Directive on Waste Electrical and Electronic Equipment. The Directive, which is expected to be implemented into UK law later this year, will make producers of electrical and electronic equipment responsible for costs of end-of-life collection, recovery and environmentally-friendly disposal. The draft will address the issue of when a liability should be recognised if an obligation for the cost of waste management arises from a producer's future participation in the market, ie based on future market share. The UITF is monitoring the forthcoming legislation and will decide whether to issue equivalent proposals and any additional UK-specific guidance.

Determining whether an arrangement contains a lease

In November, IFRIC expects to issue a final Interpretation that provides guidance on identifying leases in arrangements that are not leases in form but in substance convey rights to use assets. Outsourcing and take-or-pay contracts are examples of arrangements that would need to be examined.

There are two important consequences. First, the guidance will ensure that any finance leases contained in such arrangements are identified and reported as such. Secondly, arrangements that are deemed to contain operating leases will be subject to the disclosures about operating lease commitments required by IAS 17. The UITF does not currently intend to issue IFRIC's Interpretation as an addition to UK accounting standards because many of the arrangements would be covered by FRS 5, for which there is no equivalent international standard.

Service concessions

IFRIC has been continuing to consider the appropriate accounting for service concession arrangements. As reported in the last edition of Inside Track, this has significant potential implications for the UK, given the scale of Private Finance Initiative (PFI) contracts.

IFRIC is proposing to issue three draft interpretations on Service Concession Arrangements:

• Determining the Accounting Model;
• The Financial Asset Model; and
• The Intangible Asset Model

with a concession arrangement being characterised as one where one party (the ‘grantor’), usually a public sector body, grants a concession to another party (the ‘operator’) to develop, finance and operate a property and related services over a period of time.

The draft interpretations are designed to deal with how the operator should account for the rights it receives under the concession when the grantor has the asset of the property.

The IFRIC discussions to date suggest that one of two models could apply:

• the financial asset model, where the operator recognises a receivable or an ‘available-for-sale’ asset; or
• the intangible asset model, where the operator recognises an intangible asset.

Whether the financial asset recognised is a receivable or an available-for-sale asset depends on whether the operator's income may vary significantly with variations in demand. In accordance with IAS 39 the financial asset will be classified as available-for-sale when the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

In any other case, the intangible asset model should apply. Under this model, the operator provides construction services to the grantor in exchange for an intangible asset - the right to charge users for its services. The model,  however, also implies that the operator should recognise revenue and any profit or loss on construction when the exchange is made ie when the construction of the structure is complete.

IFRIC plans to vote on the issue of the draft interpretations at its November meeting, after which they will be exposed for public comment. IFRIC is proposing that the interpretations should come into effect for accounting periods beginning on or after 1 January 2006.