UITF Abstract 40 'Revenue recognition and service contracts' was issued on 10 March, giving guidance on the recognition of turnover derived from contracts for professional and other services.

Since the ASB issued Application Note G: Revenue Recognition as an Amendment to FRS 5 'Reporting the Substance of Transactions', questions have arisen as to how revenue should be recognised on contracts for services that are not accounted for as long-term contracts under SSAP 9 'Stocks and long-term contracts'. Although many of the requests for guidance related to professional services rendered by firms of accountants and solicitors, the UITF concluded that the same principles should be applied in accounting for all service contracts and so the Abstract applies generally to contracts involving the rendering of services.

When applying Application Note G and SSAP 9 together, the main point at issue is whether revenue should be recognised as contract activity progresses or on contract completion. The UITF had been advised that conflicting interpretations of the standards were being applied in practice; comments by respondents to the draft Abstract provided further evidence of divergent views.

Application Note G requires a seller to recognise revenue to the extent that the seller obtains a right to consideration in exchange for its performance - this may be when some, but not all, of its contractual obligations have been fulfilled. If the seller has performed some, but not all, of its contractual obligations, it is required to recognise revenue to the extent that it has obtained the right to consideration through its performance. The UITF concluded that the principles of revenue recognition in Application Note G are the same for long-term and other contracts for services. The overriding consideration is whether the seller has performed, or partially performed, its contractual obligations.

Abstract 40 provides additional guidance on the considerations that should inform the choice of appropriate accounting polices. These should have regard to the substance of contracts. A principal conclusion 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. The amount of revenue should reflect the accrual of the right to consideration as contract activity progresses, taking account of both the value of the work performed and any uncertainties as to the amount that the customer will accept and pay. When, on the other hand, the right to consideration is contingent on a specified future event or outcome outside the seller's control, revenue is not recognised until that event occurs.

The accounting required by Abstract 40 is similar to IAS 18 'Revenue' in relation to the rendering of services. Abstract 40 is mandatory for accounting periods ending on or after 22 June 2005.