New Revenue Accounting Rule Unlikely to Alter Credit Ratings

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By David R. Jones

The upcoming international financial reporting standard on revenue recognition appears unlikely to alter companies’ credit ratings, at least in the short term, a Moody’s analyst told Bloomberg BNA.

“A change in accounting doesn’t change the economics of a transaction,” Moody’s vice president-senior accounting analyst Kevyn Dillow told Bloomberg BNA April 27 about the impacts of IFRS 15: Revenue from Contracts with Customers.

As a result, most companies will continue to conduct business much as they have before IFRS 15 comes into force for reporting periods beginning on or after Jan. 1, 2018.

Dillow’s comments echoed the conclusions of an April 20, 2017, analysis from Moody’s Investors Service, which found that it’s too soon to gauge the standard’s potential impact on company credit ratings.

“As more companies begin disclosing how they’re affected, our view will develop, likely on an industry by industry basis,” according to the report.

No Near-Term Credit Change

Dillow said that company credit ratings probably won’t change in the near term unless a company alters its business practices as a result of implementing the standard.

“A more common impact will be a shift of revenues recognized during different points of customer transactions, with revenue accelerated in some cases and decelerated in others,” Dillow said in an April 27 public statement.

Cash flows will provide a critical barometer of how companies are putting IFRS 15 into practice, Moody’s vice president-senior credit officer Jeanine Arnold also told Bloomberg BNA.

Profound Effect on Reporting

Although IFRS 15 and its parallel standard in U.S. generally accepted accounting principles, ASU 2014-09, likely will have a scant impact on credit ratings in the short run, the standard’s’ effects on how companies account for revenue will be profound and far-reaching, the report said.

“All companies using US GAAP or IFRS are required to apply the new standard for all customer transactions, impacting all industries and most regions across the world,” Moody’s said.

Industries Most Affected

Dillow said that companies in the aerospace and defense industries, along with telecommunications and software-licensing companies, will see the greatest impacts on their accounting practices.

IFRS 15 will affect “those industries with long-term contracts with variable elements,” Arnold said.

As an example, the report highlighted the changes in accounting that engine manufacturer Rolls Royce Holdings PLC must implement.

Rolls Royce currently recognizes all revenue from engine sales over the product’s life cycle, Moody’s said.

This means income from engine maintenance and sales of parts is smoothed over for a contract’s duration, which can span 20 years or more.

“After applying IFRS 15, the company will recognize the initial product sale independent of the aftermarket products, resulting in a more volatile pattern of revenue and margin that more closely reflects the pattern of cash flow,” the report said.

Companies have known since 2014 that changes in recognizing revenue were coming. Arnold said that Rolls Royce already has taken steps to provide quantitative explanations of the standard’s anticipated effects on revenue recognition.

Restatement After Adoption

All companies will find it essential to explain in their financial reports the reasons for the accounting changes, Dillow said, as they must restate their financial results after they adopt the new standard.

Though changes to revenue recognition will take some effort for companies to implement, the new standard—comprising a five-step model that all companies must adopt—should prove a boon to analysts, investors and others who assess financial reports.

Moody’s called IFRS 15 a notable improvement on current accounting practices for recognizing revenue, which can make it difficult to compare financial statements even among companies in the same line of business.

“The new standard introduces one model to apply to all industries, improving consistency of principles and drastically expands required disclosures,” the report said.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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