The Status of the Convergence of IFRS and US GAAP Revenue Recognition

Dave Van Damme

Revenue recognition has been one of the most difficult topics for the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) to address in the convergence project. US Generally Accepted Accounting Principles (GAAP) are comprised of broad concepts and various requirements that result in different accounting for what, on the surface, seem to be similar transactions. Issues of revenue recognition in the US have been dealt with on an ad hoc basis which has lead to an inconsistent, overwhelming set of standards. While International Financial Reporting Standards (IFRS) have fewer requirements, they too are difficult standards to apply. Revenue is a key indicator of a company’s financial performance and the standard setters for GAAP and IFRS are being careful to not promulgate authoritative reporting requirements that have unintended consequences.

Here is the time-line of major events for the revenue recognition convergence project:

June 2002

Revenue recognition added to the International Accounting Standards Board (IASB) convergence project agenda.

December 2008

IASB issues the Discussion Paper; Preliminary Views on Revenue Recognition in Contracts with Customers

June 2010

IASB issues the Exposure Draft; Revenue from Contracts with Customers is published

November 2011

IASB re-issues the revised Exposure Draft; Revenue from Contracts with Customers

Presently, the plan is to complete re-deliberations by the end of 2012 and final revenue recognition standards should be completed in early 2013; however, the plan is meant to be dynamic and ever-changing to global needs and issues. The re-issued revised Exposure Draft will continue to evolve as deliberations progress. That being said, the effective date would be no earlier than periods starting in early 2015. The revised final draft would supersede most recognition guidance and would have industry-specific guidance.

Some of the key concepts in the re-issued revised Exposure Draft are as follows:

Warranties – Warranties are to be accounted for separately when it (i) provides service beyond a specified level, and (ii) the option to purchase the warranty is separate.

Costs of contracts – The current costs associated with contracts are capitalized under the revised exposure draft only if certain requirements are met.

Goods and services – The new set of standards will require separate obligations for goods and services bundles. The revenue recognition will be based on when the obligation is completed by transfer to the customer. This new system may interfere with some companies’ current accounting systems.

Various – Credit losses related to bad debts, contract modifications, transaction prices, revenue constraints, and various tax implications are also specifically addressed.

What does this mean to you?

Regardless of the industry in which your company operates, it is important to determine what changes the updated revenue recognition standards will have on your financial reporting. Does your present accounting system support the required revenue recognition method and supply the necessary information? Do your current financing agreements require compliance with financial covenants that do not anticipate the impact the updated standards will have on the computations? What about compensation agreements or other matters that are driven by revenue? Now is the time to anticipate these matters so you have the ability to successfully manage implementation of the updated standards.