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Revenue accounting rules issued in May by two leading accounting boards could greatly affect incentive compensation, a professional services company said July 11 in an article on its website.
Because employee compensation plans generally are linked to revenue, especially for sales representatives, changes in how revenue is recognized would affect many of these arrangements, the PricewaterhouseCoopers article said.
The new rules, written by the Financial Accounting Standards Board and the International Accounting Standards Board, were issued May 28 and become effective for public companies in 2017. In the U.S., private companies and nonprofit entities would have until 2018 to apply them.
The new rules apply to companies domestic and foreign, but some companies likely would feel the effects more than others, the article said. The amount of revenue recognized during a period is a direct driver of most sales-compensation plans and may affect bonus pools, long-term incentive plans or stock-compensation programs linked to previously defined performance measures, the article said.
Bonus plans and other incentive compensation agreements may need to be reviewed because such agreements often are based on metrics derived from revenue, the article said. While revenue contracts might remain the same, many companies could record revenue differently under the new rules, which may result in more volatility and less predictability in bonuses and other employee compensation, it said.
The new rules, which were 12 years in the making, generally aligned standards on revenue reporting. The accounting standards offer a one-stop, comprehensive source for how companies and nonprofit enterprises are to report revenue, long a problematic area of accounting for the boards.
The rules affect “any entity that either enters into the contract with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.” The rules are aimed at improving, simplifying and strengthening revenue recognition principles and practices. They also would reduce inconsistencies in accounting treatments and provide for comparability among companies and across capital markets, FASB and IASB said.
The new standards are to have broad effect globally, at least in the process by which revenue is recognized. For many companies, revenue reporting practices would not change, board officials said May 28.
Sectors expected to see major changes and faster or slower recognition of revenue include telecommunications, computer software, construction, real estate sales and asset management.
To contact the editor on this story: Michael Trimarchi at firstname.lastname@example.org.
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