Revenue recognition entails matters concerning when and how income should be booked after the completion of the process of earning. GAAP, the short form for Generally Accepted Accounting Standard and IFRS abbreviation for International Financial Reporting Standards are the two International Accounting Standard Boards tasked with the responsibility of setting revenue recognition procedures.
The revenue recognition rules according to GAAP are detailed with respect to particular industries like the software and real estate. The IFRS guidance on the other hand is applied universally. Also featured in GAAP are exceptions for particular transaction types and public companies are needed in following additional rules that have been set by SEC (Securities and Exchange Commission). These features are not found in the IFRS reporting.
There are only two specific standards with which IFRSs are concerned with; on Revenue-IAS 18 and on Construction Contracts-IAS 11. The US GAAP on the other hand talks of a few concepts and then offers detailed revenue recognition rules for various industries.
Timing of Revenue recognition
This could be different in various situations particularly when it comes to price contingencies. For IFRS it is easy to recognize revenue while prices are yet to be fixed unlike for the US GAAP. IFRS allows recognition of revenue if the revenue can be reliably measured and if it is possible that economic benefits allied to the transaction will stream to the organization. GAAP on the other hand sets the criterion of determinable or fixed pricing for purposes of recognizing revenue. Therefore, it is not until the contingency is resolved that revenue will be recognized; hence the amount has to be set.
In a sale of goods contract, revenue will only be recognized if delivery is made for a defined agreement and for a determinable or fixed fee that you are reasonably sure you will receive. IFRS on the other hand will only allow recognition when the ownership rewards and risks are transferred to the buyer and the buyer gains control over the goods; meaning that the buyer pays.
Rendering of Service
GAAP requires that revenue recognition be stretched out over the period in which the software services are rendered. As such, all the revenue cannot be booked upfront for the service agreement as it puts into consideration that since the service provider may fail to deliver certain elements later on, this could trigger refunds. IFRS however allows upfront revenue recognition possibility when some performance amounts have occurred. Even though a refund may be triggered, one may book the delivered elements of a contract that is multi element.
Under GAAP, the standard method allowed is the â€˜completed contract method’ where the construction has to be finished before revenue is recognized. Large construction projects nonetheless may use the â€˜percentage of completion method’ where revenue received has to match the percentage of completed work. IFRS on the other hand does not allow the completed contract method and only allows the percentage of completion method in certain circumstances. Revenue can only be recognized on the recoverable costs incurred. It also allows contracts to be segmented or combined unlike GAAP.
Classification of Financial Assets
Financial assets are classified in various categories while GAAP recommends their classification in different pronouncements. According to IFRS 9, assets are classified depending on the instrument’s nature whereas US GAAP looks at the legal classification form.
The US GAAP prohibits capitalizing development costs incurred internally while this is allowed by IFRS after fulfillment of certain conditions under IAS 38.
IFRS prohibits the Last-In-First-Out (LIFO) inventory measurement while the US GAAP allows it. Hence, this is a major difference for the US companies who apply LIFO in their operating results and whose cash-flows are very different for IFRS compared to GAAP.