New reporting rules could put near-term tech earnings under pressure
New revenue recognition rules could have a notable negative impact on the tech space, according to investment bank Berenberg.
IFRS 15 is a new international financial reporting standard that came into effect at the start of 2018. The regulation sets out how companies should recognise revenue over multi-year contracts, and for many that will mean spreading income evenly across the contract length. Previously companies have been allowed to book all multi-year revenue upfront.
Berenberg believes this is likely to force some companies to book lower revenues than previously anticipated yet still having to sink upfront costs, such as implementation expenses. That could have a negative impact on current earnings per share estimates which in turn could impact their share price rating.
Berenberg calculates that online training business Learning Technologies (LTG:AIM) and Accesso Technology (ACSO:AIM), the theme parks software supplier, may also see earnings estimates trimmed potentially by as much as 10%.
The accounting changes will have no impact on company cash flows.
While the reporting changes could temporarily drag down share prices, more conservative rules on how multi-year sales are booked should go down well with investors if IFRS 15 delivers better transparency. (SF)