Logistics Ltd provides professional advisory services to develop internal and external reporting systems to facilitate the integration of various forms of capital (financial, mechanical, human, intellectual, natural and social) in the business models of their clients. The contracts take up to 18 months, culminating in the delivery of a report to clients outlining the design of integrated information systems, as well as specifications and procedures for implementation.

Until recently, Logistics Ltd progressively recognised revenue from providing services in accordance with AASB 118/IAS 18 Revenue. It recognised revenue and expenses and hence, profit, based on the stage of completion of its contracts with customers.

With the move to AASB 15/IFRS 15 Revenue from Contracts with Customers, the company needs to change the way it accounts for revenue. It is not permitted to recognise revenue under AASB 15/IFRS 15 until the report is delivered to the customer on completion of the contract.

The financial accountant estimated that the change in accounting policy would result in a 30% reduction in revenue and a 50% reduction in profit in the year of adoption of the new standard. The managing director thought this would be misleading to investors because the amount of work and cash inflows was expected to remain stable. She complains, ‘Investors will think Logistics Ltd is performing poorly and the share price will decline’.
Required Drawing on your understanding of the efficient markets hypothesis (refer to chapter 2), prepare a response to the managing director’s concern. Include in your response any recommended action that Logistics Ltd could take to reduce the likelihood of a negative impact on its share price.