Ron Nissen, executive chairman at National Telecoms Group (NTG), said his company had been forced to revise its accounts for the 2003 financial year with regards to revenue recognition of some 14,000 separate contracts with 7,000 customers, after the Australian Securities and Investment Commission (ASIC) deemed its reporting did not comply with Australian standards.
“That's what we are talking through with ASIC. It's somewhat unclear at the moment, because the accounting rules in regard to these sorts of transactions aren't clear,” Nissen said. “I think a lot of businesses could have the same problems.”
Nissen had nothing but praise for the way ASIC has handled the matter but said the issue was taking “considerable” company resources to resolve.
“Our CFO overall has probably spent 20 percent of his time on this issue over the last few months. We have to look at all 14,000 contracts and then look at all the revenue that's come in month by month,” he said. “It's disruptive, not so much for the actual costs, which I wouldn't like to put a figure on, but the direct cost of the time.”
Nissen said that when NTG's initial filings were deemed not to comply, the company took “the unusual step” of getting a second opinion, from another major accountancy firm. “And the only thing which is constant is that the opinions are all different,” he said.
On 8 July, NTG's board announced it would revise its revenue accounting policy for contracts relating to its Synergy suite of telephony and Internet products. NTG is working to defer an unspecified amount of revenue from equipment sales to third-party finance companies.
The revenue deferral is intended to correspond to the amount of discounts NTG offers to 7,000 Synergy customers on its airtime contracts above that provided normally by its competitors.
Nissen said that each Synergy contract consisted of two separately-signed agreements. One is for the equipment which is leased to the financial company and the other is for the provision of telecommunications. “The customer is aware that they are separate contracts. Because they're signed at the same time, they're considered to be related and what isn't clear is what the statement should be, particularly when one contract has revenue coming in over a period [of time] and the other has revenue up front,” Nissen said.
NTG has been in discussions with ASIC about its revenue recognition policy since early December 2002. An agreed basis for revenue deferral had still not been decided at the time of going to press.
“With Synergy, we effectively offer the customer a dollar rebate that continues every month for the period of the agreement. If we offer, say, a $400 rebate, and he buys $400 worth of goods and services, he gets a $400 rebate, but if he buys $800 of goods he still gets a $400 rebate. So it's difficult to predict what the level of revenue will be,” Nissen said.
He said accounting standard compliance could have increasing business impact as time went on, especially as more internationalised accounting standards were adopted in Australia and IT companies continued to diversify into services.
“Some of these accounting standards are going to be difficult to interpret. Yet a lot of this business about revenue recognition has no impact on cashflow in a business at all. Day-to-day business is cashflow, not revenue,” he said. The revenue deferral is expected to lower the revenue reported for 2001 and 2002 but should lift them in future.
Reports for the financial year ending 30 June 2003 will also reflect the changes, NTG company secretary Nick Geddes said in a statement to the ASX. “I would prefer not to be a test case with this, but it's clearly important to us as a profit company that we do the right thing,” Nissen said. “And the board has considered and decided there's no suggestion that the company has been doing anything untoward in its position.”
Greg Pound, chief accountant at ASIC, said that--although more international accounting standards would be introduced by 2005--the Australian standards on revenue recognition had been in accord with international ones for several years. Thus, any company whose financial reporting was compliant with current Australian standards should have few problems.
“Those companies handling the Australian standards as they should be already shouldn't be having any difficulty. With NTG, it was a difference of interpretation of the existing Australian standards,” he said.
However, Pound said Australian companies in the process of developing new business streams which might combine recurring revenue and upfront goods and services-based revenue might conceivably have difficulties. “If businesses are developing new products then they might need to look into it again,” he said.
Companies needed to be sure they got advice on their financial reporting from a qualified accountant with a Chartered Practising Accountant (CPA), National Institute of Accountants (NIA) or similar designation, Pound said. Some people who traditionally called themselves accountants were little more than payroll clerks, he pointed out. “Really, any company looking to prepare themselves should be monitoring what these international standards will require. A lot of companies are putting in place a project team [to do that],” he said. “It's incumbent now upon boards and auditors to sit down and look at the impact of requirements that will be law in 2005.”
Australian accounting standards had always been good, Pound said, but globalisation meant companies now needed to be in accord with global accounting standards as well if they wanted to remain competitive.
“From a regulatory point of view, we're interesting in investment protection and providing information in that broader marketplace,” Pound said.
Recent highly publicised corporate collapses both in Australia and overseas--such as One.Tel and WorldCom--made financial reporting reforms more urgent, according to Pound. The Howard government began a Corporate Law Economic Reform Program (CLERP) five years ago to modernise business regulation, centred on free market principles, investor protection and quality disclosure of information to the market. The most recent phase of the program, CLERP 9, builds on those reforms, promoting laws that take account of the volatile business environment and ensure clear guidance on corporate behaviour and effective enforcement where breaches occur.