Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
9. Installation fees
The treatment depends upon whether the installation fees are significant. If
not then merely include the fees in the sales price of the goods. Therefore the
revenue recognition point will be that for the sale of goods, which is
normally delivery.
10. Right of return
The risk here is that revenues are recognised and then the customer
effectively cancels the sale, thereby challenging the assumption that the
revenue recognition criteria have been met. If an enterprise is exposed to
predictable returns then it is probable that the full amount of revenue can be
recognised and a provision made separately for the cost of the returns. If
however there is a significant amount of unpredictable returns then it may be
that revenue recognition must be postponed until the patterns of return
become more predictable.
11. Consignment sales
This is a situation where sales are made but the goods remain with the seller.
In general terms, once legal title passes then a sale can be recorded.
However, further conditions such as payment terms should be normal and
the goods are on hand and ready for delivery. These conditions should really
only be an issue in very unusual circumstances.
Basic analytical steps
So what can users actually do to help gain a reasonable understanding of such a
broad and important area? The following identifies some basic analytical steps:
1. Gain a thorough understanding of the revenue recognition issues in their
sector.
2. Understand the accepted practice and related GAAP support (or lack thereof)
in the sector.
3. Document the accounting policy chosen by each entity in the sector and
consider any divergence and how this might impact on comparable company
analysis.
4. Watch out for signs of trouble relating to revenues:
a. Unexpected changes in revenues
b. Increasing disparity between profit and cash
c. Unexpected ballooning of accounts receivable in working capital
d. Change in the segment mix, especially if unexpected and or
inconsistent with strategy
e. Significant revenues or increasing proportion coming from a related
party
97