What are the differences between IFRS and U.S. GAAP for revenue recognition?
Companies all over the world are required to periodically collect and release financial information about the current state of the business. This allows both existing and potential investors to understand the company’s current financial state, how it is spending money and whether the company is successful. It also allows an evaluation of multiple companies in the industry and comparison of their financial states and methods. Show
In order to make sure this sort of comparison is easy and documents are understandable, accounting standards called IFRS and GAAP have been made to guide firms in their records and revenue recognition. U.S. GAAP vs. IFRS: The BasicsThe two main systems used in today’s economy for revenue recognition are GAAP, or generally accepted accounting principles, and IFRS, which stands for international financial reporting standards. GAAP is a set of accounting principles and rules used in the United States. IFRS is a global set of accepted standards and is used in over 120 countries across Europe, Africa and Asia. Understanding both systems, how they differ and how each one applies good accounting practices is important for anyone working with financial information and accounting transactions like revenue recognition. What Is Revenue Recognition?Revenue recognition by definition is whenever income earned is shown on a balance sheet or in your company’s books. The way this information is tracked varies depending on whether GAAP or IFRS standards are being followed. Under GAAP, the revenue recognition principle requires that revenue be recognized when it is earned rather than when it is in hand. This means that you must note revenue when you have signed a contract for a service or an order has been placed by a customer. You should not wait for your customer’s payment to transfer to your account before noting the payment in your company’s books. Under IFRS and according to the International Accounting Standards Board's Framework for the Preparation and Presentation of Financial Statements (the accounting standard-setting body for IFRS), revenue is recognized when “it is probable that any future economic benefit" will arise and can be recognized. In addition, the IASB framework indicates that revenue should be earned before it can be recognized. U.S. GAAP Definition of RevenueWhen it comes to revenue recognition, GAAP is firm. This is a standard GAAP principle that identifies the specific conditions under which revenue can be recognized. In most instances, GAAP requires this to occur when certain “critical events” have transpired. For instance, if a product is sold, the revenue recognition step occurs as soon as payment occurs. In a store, this would transpire when a customer swipes a credit card. If you offer a service, this would occur when the customer remits payment on the invoice you sent. If, however, a good deal of time passes between when a product or service is ordered and you supply it to a customer, you may need to treat the recognition of this revenue differently. All treatment of revenue is outlined under GAAP standard ASC 606. Generally speaking, revenue can be recognized under GAAP when it is realized rather than actually in hand. For products sold in a store, this is immediate but may take longer depending on your business cycle. GAAP Percentage of Completion Revenue RecognitionGAAP also approves the treatment of revenue in certain situations using the percentage of completion method. This allows for your accounting department to bill clients as you progress through a job rather than all up front or at the completion of the entire project. Take, for instance, a construction project. Rather than bill the client $10,000 at the start of the project, you might choose to bill 20% upon the signing of the contract, 30% when the work is started, another 30% at the halfway point and then 20% when the work is completed. Once again, under GAAP, this revenue should be recognized as soon as the income is realized (when the contract is signed). IFRS 15 and Revenue RecognitionPart 15 of the IFRS standards speak to revenue recognition. In essence, the recognition of revenue under these rules requires the following steps to be taken:
More on GAAPGAAP is the standard used for financial reporting in the U.S. Adopted by the Securities and Exchange Commission, GAAP contains the standards and formats to be used when creating accounting reports. All public businesses in the U.S. are required to follow GAAP when doing any sort of financial reporting. This ensures that all companies are using the same set of rules, guidelines and principles when submitting their financial information to the public, which means reports are easily understandable, consistent across all industries and easily comparable. GAAP consists of a set of core principles — they’re often discussed as smaller groups of principles, concepts and constraints — that provide the framework for tracking financial transactions, company value and other accounting information. These principles define and standardize the approach to be taken when producing these financial records and documents. One such principle is the revenue recognition principle, but it’s essential that it be employed properly alongside other GAAP rules. Basic GAAP PrinciplesIn order to understand how to treat revenue recognition under GAAP, it’s essential to have a basic comprehension of the system’s principles. The first set of GAAP principles are assumptions made to better define the scope of the reporting with regard to the company’s ongoing activities.
How to Use GAAPThe next set of principles are accounting principles that dictate how information is to be used, valued and recorded.
Accounting Constraints Under GAAPThe final set of GAAP principles that must be understood to properly account for revenues sets forth constraints that direct the way the accountant makes decisions.
IFRS vs. GAAP Balance SheetIFRS is the set of standards used for financial reporting for most major countries (over 120) outside of the U.S. These standards were developed by an international board and are meant to ensure consistency and accuracy of financial reporting for ease of understanding and comparison across international borders. The IFRS system is in many ways principle-based; the framework describes a set of concepts and principles and a set of required documents that make up a company’s financial report. It defines a set of terms to use as a framework, which includes assets, liabilities, equity, income and expenses. There are also specific sets of IFRS guidelines for the following types of documents that must be understood in order to properly account for revenues under IFRS:
GAAP vs. IFRS and RevenuesThe biggest difference conceptually between GAAP and IFRS when it comes to revenues is often summed up to say that GAAP is a rules-based system, whereas IFRS is a principle-based system. What exactly does this mean? GAAP has many more specific requirements, rules and details than IFRS. The IFRS system is based on concepts, which may leave more room for interpretation but is likely to better represent the economics and accounting of a company’s financial transactions. In either case, both systems are fairly clear when it comes to documentation of revenues, so consistency within each system is key. U.S. GAAP vs. IFRS TransactionsGAAP and IFRS differ specifically in the ways they approach certain types of transactions as well:
Danielle Smyth is a writer and content marketer from upstate New York. She has been writing on business-related topics for nearly 10 years. She owns her own content marketing agency, Wordsmyth Creative Content Marketing, and she works with a number of small businesses to develop B2B content for their websites, social media accounts, and marketing materials. In addition to this content, she has written business-related articles for sites like Sweet Frivolity, Alliance Worldwide Investigative Group, Bloom Co and Spent. How is revenue recognized under GAAP and IFRS?Generally accepted accounting principles (GAAP) require that revenues are recognized according to the revenue recognition principle, a feature of accrual accounting. This means that revenue is recognized on the income statement in the period when realized and earned—not necessarily when cash is received.
What are the main differences between IFRS and U.S. GAAP?The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP.
What are 3 differences between GAAP and IFRS?IFRS is a globally adopted method for accounting, while GAAP is exclusively used within the United States. GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle. GAAP uses the Last In, First Out (LIFO) method for inventory estimates.
What section of U.S. GAAP covers revenue recognition?ASC 606 is a revenue recognition standard that applies to all business entities that enter into contracts to provide goods or services to customers; including non-profit, private, and public companies. Considering this, both private and public companies need to comply with ASC 606. Who issued ASC 606?
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