Revenue Recognition GAAP vs.

IFRS
A. The Concept of Revenue
IAS 18 defines revenues as follows: Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Includes both revenues & gains. Under US GAAP, CON 6 defines revenues as: inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Separate definition for Gains. Although the definitions of revenue under IFRS and US GAAP differ, the application of IFRS and US GAAP in practice often yields the same results.

B. Applicable Authoritative Guidance The primary IFRS guidance applicable to revenue recognition accounting includes: IAS 18 Revenue IAS 11 Construction Contracts IFRIC 13: Customer Loyalty programmes SIC 31: Revenue -Barter Transactions Involving Advertising.. Some examples of the US GAAP and SEC guidance applicable to revenue recognition accounting include: SAB 101 Revenue Recognition (amendment by SAB 104) EITF 00-21 Revenue Arrangements with Multiple Deliverables FAS 48 Revenue Recognition When Right of Return Exists FAS 5 Accounting for Contingencies EITF 99-19 Reporting Revenue Gross as a Principal versus Net.. EITF 01-09 Accounting for Consideration Given by a Vendor EITF 99-17 Accounting for Advertising Barter Transactions ARB 43 Restatement and Revision of Accounting Research SoP 81-1 Accounting for Performance of Construction.. SoP 97-2 Software Revenue Recognition FAS 66 Accounting for Sales of Real Estate US GAAP is generally much more rules-based than IFRS in addressing specific types of revenue recognition, measurement, and presentation matters. Standards Setters (FASB, AICPA & SEC) have prescribed specific revenue guidance that must be applied by companies in certain industries, including but not limited to software developers, motion film producers, not-for profit entities, cable television providers, and franchisors. In total, there are more than 180 US accounting standards that relate to revenue recognition! Conversely, IFRS contains one comprehensive accounting standard, IAS 18, which applies to a wide range of revenue related transactions. As a result, IAS 18 embodies all of the principles of revenue recognition, measurement and classification under the IFRS framework.

C. Sale of goods -GAAP CON 5 indicates that revenue should not be recognized until it is realized or realizable and earned. As per SAB 104 SAB 101), revenue is realized or realizable and earned only when all of the following conditions are met: -Persuasive evidence of an arrangement exists, -Delivery has occurred or services have been rendered, -The sellers price is fixed or determinable, and -Collectability is reasonably assured.

Sale of goods -IFRS

Under IFRS, revenue from the sale of goods should be recognized when all of the following conditions have been fulfilled: -The entity has transferred to the buyer the significant risks and rewards of ownership of the goods, -The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, -The amount of revenue can be measured reliably, -It is probable that the economic benefits associated with the transaction will flow to the entity, and -The costs incurred or to be incurred in respect of the transaction can be measured reliably. ALL of the above provisions must be met to recognize revenue from product sales under IFRS. While these points are different from the ones under IFRS, in many situations, US GAAP and IFRS will lead to similar revenue recognition results.

D. Recognizing Revenue from Service Transactions

Key Difference:
IFRS requires the use of the percentage of completion method in recognizing revenues under service arrangements. This approach is prohibited under US GAAP, unless the service is included with the scope of SoP 81-1. Service Revenue -IFRS If the criteria of IAS 18 are met, IFRS requires that revenue from service transactions be recognized by reference to the stage of completion of the transaction at the balance sheet date. This means that revenues from service transactions should be recognized on a percentage of completion basis, presuming reliable indicators of progress towards completion exist. Example 1: Writers, Inc. helps large publishing companies

update medical texts for changes and advances in practice. Writers, Inc. is paid a flat fee of $100,000 in exchange for agreeing to update 10 textbooks.
Writers, Inc. would recognize a percentage of the $100,000 in revenues as it successfully completes updating each textbook. Service Revenue US GAAP Under US GAAP, the percentage of completion method is only applicable to entities engaged in performing long-term construction contracts and, in specific circumstances, to developers of software. Under US GAAP, service providers should first determine whether the services they provide are within the scope of specific accounting literature (e.g., SOP 81-1, FTB 90-1). Presuming that a transaction does not fall specifically within the scope of higher-level GAAP, SAB 104 (SAB 101) should be applied to the transaction.

E. Rights of refund on service transactions Key Difference: Under IFRS, A service arrangement that contains a right of refund must be considered to determine whether the outcome of the contract can be estimated reliably. When reliable estimation is NOT possible, revenue is recognized only to the extent of the costs incurred. Under US GAAP, a right of refund may preclude recognition of revenues from a service arrangement until the right of refund expires.

F. Recognizing Revenue from LT Construction Contracts Key Difference: IFRS allows Percentage of Completion only. Completed Contract method is prohibited. IFRS requires the percentage of completion method unless the outcome cannot be reasonably estimated. If the outcome cannot be reasonably estimated, the zero-profit (cost recovery) method should be used. Under US GAAP percentage of completion method is preferred but not required. Completed Contract method should be used if revenues and costs are difficult to estimate.

G. Problem

with current models under GAAP & IFRS

GAAP:
Too many rules and standards; Inconsistency among standards.

IFRS:
Lack of guidance.

Convergence Joint Project by FASB and IASB:

The FASB and IASB are currently conducting a joint project to develop concepts for revenue recognition and a standard based on those concepts. The goals of the project are as follows: 1. Converging U.S. and International standards. 2. Eliminating inconsistencies in the existing conceptual guidance. 3. Providing conceptual guidance that would be useful in addressing future revenue recognition issues. 4. Eliminating inconsistencies in existing standards-level authoritative literature and accepted practices. 5. Filling voids in guidance that have developed over time. 6. Establishing a single comprehensive standard on revenue recognition FASB Discussion Paper on Revenue Recognition (December 19, 2008) Proposed Model: Contract-based Revenue Recognition Principle; Definition of Contract: A contract is an agreement between two or more parties that creates enforceable obligations; Revenue Recognition: Revenue should be recognized on the basis of increase in an entitys net position in a contract with a customer.

The Boards are considering two new models: 1. Customer Consideration Model, and 2. Measurement Model Both models require the identification of rights (asset) and obligation (liability) at contract inception with a customer. A contract would be an asset (a contract asset) to the entity if the remaining rights exceed the remaining obligations. A contract would be a liability (a contract liability) to the entity if the remaining obligations exceed the remaining rights. Subsequently, as each performance obligation in the contract is satisfied, either the contract asset will increase or the contract liability will decrease. This increase in asset or decrease in liability from satisfying the performance obligations (transferring goods and services to the customer) is recognized as revenue.