Most approaches are standardized in order to prepare and present the accounting information in ways that are easily understandable by consumers of the information. Both of them have benefits and shortcomings, some of which will be analyzed in the paper. International Financial Reporting Standards are interpretations and standards used in presenting accounting information. These standards are generally used to govern the preparation and presentation of accounting information, through the use of regulations and rules.
These stakeholders may require the financial information to be prepared under local accounting standards. This improves reliability and relevance of financial statements of the company and strengthens the trust of stakeholders. There are many countries in the world that currently permit or require IFRS for the purpose of statutory financial reporting, while many other countries have already incorporated IFRS into their local framework of accounting.
This has been very successful for companies that are entering into the international market and are expanding globally.
Secondly, transactions related to mergers and acquisitions are on the rise. Companies are looking outside their borders to look for the potential targets and buyers and therefore, understanding of IFRS Revenue recognition ifrs vs gaap crucial.
Various accounting bodies from around the world are making continuous effort to bring uniformity in accounting standards and make the financial statements more comparable and reliable. Revenue is an important element of financial statement.
Revenue recognition guidance under GAAP is extensive and highly detailed. On the other hand, revenue recognition under IFRS is covered by two revenue standards and four revenue-focused interpretations.
These accounting standards and interpretations are based on general principles without any exception for specific industry and without further guidance.
According to the recognition criteria, no revenue will be recognized until exchange transaction occurs. The recognition criteria for each of these categories include the probable inflow of economic benefits to the entity, transfer of significant risks and rewards of ownership to the buyer, and that revenue and cost can be reliably measured.
The principles related to these categories are generally applied without significant exceptions Revenue recognition ifrs vs gaap rules. The recognition criterion is based on company specific evidence that the product has been delivered.
GAAP — A Highly specialized guidance is available for recognizing software revenue and one of its aspects focuses on the requirement to demonstrate VSOE of fair value so that different software elements can be separated for accounting purpose.
It is actually beyond the general requirement of fair value of GAAP. The price of an item that is separately sold on a regular basis is considered a best evidence of the fair value of that item.
However, in certain circumstances, a reasonable estimate of fair value, i. Contingent Consideration GAAP — The guidance related to contingent consideration is addressed within SEC Staff Accounting Bulletin SAB and according to that guidance, no revenue related to contingent consideration should be recognized until the contingency is resolved as it is not appropriate to recognize revenue on the basis of probability of factors achieved.
For example, no revenue will be recognized even when the services have clearly been rendered or delivery has occurred. IFRS — If there is a probable inflow of economic benefits to the entity and revenue can be reliably measured, contingent consideration will be recognized assuming other revenue recognition criteria is met.
In case any of the criteria is not met, no revenue will be recognized until all the criteria are satisfied. Multiple Element Arrangements GAAP — Where there are multiple deliverables in revenue arrangements, the arrangements are divided into separate unit of accounting provided deliverables meet all of the specified criteria defined under GAAP.
A recognition criterion for revenue is then evaluated separately for each specific unit of accounting. Two models are currently used to account for customer loyalty program, a multiple element accounting model and incremental cost model.
IFRS — The revenue is usually recognized on the basis of each transaction, but in certain circumstances, it is important to separate a transaction into identifiable components so that the substance of the transaction can be reflected. Also, at the same time, it may be required to combine two or more transactions when they are linked in such a way that a commercial nature of a transaction cannot be understood without referring to a series of transactions as a whole.
It is a requirement of IFRS that loyalty and other similar programs should be accounted for as multiple element arrangements. The fair value of the award credits, which are earned by customers on purchase of goods and services, should be deferred and recognized separately once all the revenue recognition criteria are met.
Sales of Services GAAP — Cost-to-cost method for service arrangements is not allowed under GAAP unless the contract falls under the scope of specific guidance for certain production type contracts or construction contracts. Companies usually apply the completed performance method or proportional performance method for such service transactions that do not qualify for these contracts.
Where no output measure is available, input measures other than cost-to-cost may be used that will measure progression toward completion.
Revenue related to the sales of services is recognized on a discernible pattern and if it does not exist, straight line method will be appropriate to use.
Revenue can also be deferred if a service transaction cannot be reliably measured. The revenue cannot be recognized from a service arrangement until the expiry of right of refund.
However, companies may be able to recognize revenue over a service period under certain circumstances if certain criteria available in the guidance are met. IFRS — Service transactions are accounted for under the stage of completion method, also known as percentage of completion method.
The stage of completion can be determined by a number of methods and also include cost to cost method.
Straight line method can be used to recognize revenue if services are rendered based on indeterminate number of acts over a certain period and there is no other method that can represent the stage of completion appropriately.
Moreover, revenue can be recognized to the extent of recoverable expenses incurred if the outcome of such transactions cannot be reliably measured and so, a zero profit model will be used instead of completed performance model. If it is not probable to recover cost due to the uncertain outcome of a transaction, revenue is deferred until a more accurate estimate can be made.GAAP vs IFRS on Revenue Recognition.
In recent years, the overall market has tremendously evolved and many companies begin to have stakeholders from around the world. By now, most companies are aware that FASB issued an Accounting Standards Update (ASU) for revenue recognition related to contracts with customers in May (ASU , Revenue From Contracts With Customers (Topic )).Some companies may have already started planning the implementation for financial statement purposes.
General Differences. GAAP rules for revenue recognition are detailed regarding specific industries, such as real estate and software. IFRS guidance is universal; Standard 18 sets forth general.
This intensive, three-day course is designed for financial executives of U.S. subsidiaries of foreign companies, U.S. companies accessing foreign capital markets, those with international investors, or any other company reporting under IFRS.
UK GAAP vs. IFRS The basics 1 Introduction The UK’s Accounting Standards Board (ASB) has issued an Exposure Draft FRED 43 Application of Financial Reporting Standards outlining its plans for the future of financial reporting in the UK and the Republic of Ireland.
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