IFRS VS US GAAP Revenue recognition – In May 2014, the FASB and IASB issued their long-awaited converged standards on revenue recognition, Revenue from Contracts with Customers. The revenue standards, as amended, were effective for calendar year-end companies in 2018 (2019 for non-public entities following US GAAP). The new model impacts revenue recognition under both US GAAP and IFRS, and, with the exception of a few discrete areas as summarized below, eliminates many of the existing differences in accounting for revenue between the two frameworks. Nearly all industries having contracts in the scope of the new standards are affected, and some will see pervasive changes.
The following discussion captures a number of the more significant GAAP differences under both the new revenue standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area. IFRS VS US GAAP Revenue recognition
One of the criteria that contracts must meet before an entity applies the revenue standards is that collectibility is probable. While US GAAP and IFRS both use the word “probable,” there continues to be a difference in its definition between the two frameworks. Despite different thresholds, as noted in the basis for conclusions, in most situations, an entity will not enter into a contract with a customer if there is significant credit risk without also having protection to ensure it can collect the consideration to which it is entitled. Therefore, we believe there will be limited situations in which a contract would pass the “probable” threshold under IFRS but fail under US GAAP. IFRS VS US GAAP Revenue recognition
Probable is defined in US GAAP as “likely to occur,” which is generally considered a 75%-80% threshold.
ASC 606 contains more guidance on accounting for non-refundable consideration received if a contract fails the collectibility assessment.
IFRS defines probable as “more likely than not,” which is greater than 50%.
Non cash consideration
Any non cash consideration received from a customer needs to be included in the transaction price. Non cash consideration is measured at fair value. IFRS VS US GAAP Revenue recognition
ASC 606 was amended to specify that non cash consideration should be measured at contract inception and addresses how to apply the variable consideration guidance to contracts with non cash consideration.
Non cash consideration paid to a customer is recognized as contra-revenue, unless it is payment for a distinct good or service.
This is true even if such payments are in the form of share-based payments, which would be valued as non cash consideration following ASC 606.
IFRS 15 has not been amended to address non cash consideration, and as a result, approaches other than that required by ASC 606 may, where appropriate, be applied under IFRS 15.
Given the lack of non cash consideration guidance in IFRS 15, these types of share-based payments would be valued following guidance in IFRS 2.
Licenses of intellectual property
The revenue standards include specific implementation guidance for accounting for the licenses of intellectual property. The overall framework is similar, but there are some differences between US GAAP and IFRS. IFRS VS US GAAP Revenue recognition
ASC 606 specifies that an entity should consider the nature of its promise in granting a license (i.e., whether the license is a right to access or right to use intellectual property) when applying the general revenue recognition model to a combined performance obligation that includes a license and other goods or services.
IFRS 15 does not contain the same specific guidance. However, it is common to expect entities to reach similar conclusions under both standards.
ASC 606 defines two categories of intellectual property – functional and symbolic – for purposes of assessing whether a license is a right to access or a right to use intellectual property.
Under IFRS 15, the nature of a license is determined based on whether the entity’s activities significantly change the intellectual property to which the customer has rights. We expect that the outcome of applying the two standards will be similar; however, there will be fact patterns for which outcomes could differ.
ASC 606 was amended to use different words to explain that a contract could contain multiple licenses that represent separate performance obligations, and that contractual restrictions of time, geography, or use within a single license are attributes of the license. ASC 606 also includes additional examples to illustrate these concepts.
IFRS 15 was not amended and does not include the same additional examples; however, the IASB included discussion in the basis for conclusions regarding how to account for restrictions within a license.
ASC 606 specifies that an entity cannot recognize revenue from the renewal of a license of intellectual property until the beginning of the renewal period.
IFRS 15 does not contain this specific guidance; therefore, entities applying IFRS might reach a different conclusion regarding when to recognize license renewals.
Practical expedients at transition
ASC 606 and IFRS 15 have some differences in practical expedients available to ease application of and transition to the revenue standards. Additionally, the two standards define a “completed contract” differently. IFRS VS US GAAP Revenue recognition
ASC 606 provides a “use of hindsight” practical expedient intended to simplify the transition for contracts modified multiple times prior to the initial application of the standard. An entity applying the expedient will determine the transaction price of a contract at the date of initial application and perform a single, standalone selling price allocation (with the benefit of hindsight) to all of the satisfied and unsatisfied performance obligations in the contract from inception.
IFRS 15 provides a similar “use of hindsight” practical expedient; however, entities can choose to apply the expedient either at the beginning of the earliest period presented or at the date of initial application.
ASC 606 permits entities using the modified retrospective transition approach to apply the new standard to either all contracts or only contracts that are not yet complete as of the date of initial application. The US GAAP standard defines a completed contract as a contract for which all (or substantially all) of the revenue was recognized in accordance with legacy revenue guidance before the date of initial application.
IFRS 15 permits entities to apply the new standard either to all contracts or only contracts that are not yet complete as of the date of initial application under the modified retrospective transition approach. The IFRS standard defines a completed contract as a contract for which the entity has transferred all of the goods or services identified in accordance with legacy revenue guidance.
IFRS 15 also permits entities using the full retrospective transition approach to not restate contracts that are completed contracts as of the beginning of the earliest period presented.
Shipping and handling
Entities that sell products often deliver them via third-party shipping service providers. Management needs to consider whether the entity is the principal for the shipping service or is an agent arranging for the shipping service to be provided to the customer when control of the goods transfers at shipping point. IFRS VS US GAAP Revenue recognition
ASC 606 allows entities to elect to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than an additional promised service.
IFRS 15 does not provide this election. IFRS reporters (and US GAAP reporters that do not make this election) are required to consider whether shipping and handling services give rise to a separate performance obligation.
Presentation of taxes collected from customers
Entities often collect amounts from customers that must be remitted to a governmental agency. The revenue standards include a general principle that requires management to assess each type of tax, on a jurisdiction-by-jurisdiction basis, to conclude whether to net these amounts against revenue or to recognize them as an operating expense. IFRS VS US GAAP Revenue recognition
ASC 606 allows entities to make an accounting policy election to present all taxes collected from customers on a net basis.
IFRS 15 does not provide this election. IFRS reporters (and US GAAP reporters that do not make this election) must evaluate each type of tax on a jurisdiction-by-jurisdiction basis to determine which amounts to exclude from revenue (as amounts collected on behalf of third parties) and which amounts to include.
Interim disclosure requirements
The general principles in the US GAAP and IFRS interim reporting standards apply to the revenue standard. IFRS VS US GAAP Revenue recognition
The FASB amended its interim disclosure standard to require disaggregated revenue information, and added interim disclosure requirements relating to contract balances and remaining performance obligations (for public companies only).
The IASB amended its interim disclosure standard to require interim disaggregated revenue disclosures, but did not add additional disclosures.
Impairment loss reversal
The revenue standards require entities to recognize an impairment loss on contract costs (that is, capitalized costs to acquire or fulfill a contract) when certain conditions are met.
Consistent with other US GAAP impairment guidance, ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers, does not permit entities to reverse impairment losses recognized on contract costs.
Consistent with other IFRS impairment guidance, IFRS 15 requires impairment losses to be reversed in certain circumstances similar to the existing standard on impairment of assets.
See also: The IFRS Foundation
IFRS VS US GAAP Revenue recognition
IFRS VS US GAAP Revenue recognition IFRS VS US GAAP Revenue recognition IFRS VS US GAAP Revenue recognition IFRS VS US GAAP Revenue recognition