Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
1.5 Case example
It is actually quite difficult to use case studies to illustrate revenue recognition
points as the disclosures under various GAAPs tend to be somewhat limited. The
main issue to look at, as outlined in the paragraph above, is the revenue
recognition policy for the company. To illustrate the point we have reproduced
extracts from the accounting policies of two property companies:
Exhibit 4.6: Property company revenue recognition
Turnover
Turnover represents amounts received and receivable in respect of housing,
land and commercial property sold and amounts receivable in respect of
construction and other work completed during the year. Turnover excludes
the sale of properties taken in part exchange. In the case of long term
contracts turnover is recognised on a percentage of completion basis.
Source: Crest Nicholson Annual Report 2003
Profits on Sale of Properties
Profits on sale of properties are taken into account on the completion of
contract. Profits arising from the sale of trading properties acquired with a
view to resale are included in the profit and loss account as part of the
operating profit of the group. Profits or losses arising from the sale of
investment properties are calculated by reference to book value at the end
of the previous year, adjusted for subsequent capital expenditure, and
treated as exceptional items.
Source: Hammerson Directors’ Report and Financial Statements 2003
As we can see Hammerson recognises the revenues based on completion whereas
another choice would be on the basis of exchange of contracts. In certain
circumstances these events may be months apart. The absence of detailed rules
leaves the choice to the company. Furthermore Crest Nicholson employs the
‘percentage complete’ methodology for long term contracts. This is consistent
with IFRS. Under other GAAPs the completed contract method is used. This will
change with the advent of IFRS.
We can also see this in the context of a telecoms business such as Deutsche
Telekom below. This policy reflects the basic principle that irrespective of when
the company will actually receive the cash it is the ‘performance’ (called delivery
here) that drives recognition (see bold highlight).
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