Darwin Ltd provides advisory services to develop reporting systems to facilitate the integration of various forms of capital 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, Darwin Ltd progressively recognised revenue from providing services in accordance with AASB 118/IAS 18 Revenue.

The managing director of Darwin Ltd recently attended a presentation on the implementation of AASB 15/IFRS 15 Revenue from Contracts with Customers, where she discovered that the company would need to change the way it accounted for revenue. It would not be 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 Darwin Ltd is performing poorly and the share price will decline.

Required:

Refer to the efficient market hypothesis and prepare a response to the managing directors concern. Include in your response any recommended action that Darwin Ltd could take to reduce the likelihood of a negative impact on its share price. (5 marks)