FRS 5: recognising revenue

You are referring here to the new amendment, Application Note G, to FRS 5 which became applicable to accounting periods ending on or after 23 December 2003.

The main principle behind it is that an intermediary should recognise revenue when the right to the consideration arises. Where that right is achieved prior to the performance of the obligations, revenue should be recognised to the extent the obligations are fulfilled. Therefore, if the obligations include claims handling, revenue should only be recognised to the extent that the obligations are fulfilled. Revenue should be allocated to the obligations on a fair value basis.

The Institute of Chartered Accountants in England and Wales has issued guidance (Tech 5/04- see www.icaew.co.uk/technicalpolicy).

To calculate the deferral:

- identify the contracts where post-placement activities arise;

- identify the post-placement activities;

- ascertain the periods over which the activities take place;

- identify the associated costs;

- consider if there should be a further uplift to recognise fair value.

The costs assessment should include direct costs and related overheads. Any uplift should be appropriate and be in some way linked to overall profitability.

A calculation based on the above will give a figure to be deferred from the income line and form a "deferred revenue" asset in the balance sheet.