GAAP vs IFRS – Revenue Recognition

GAAP vs. IFRS Revenue Recognition

 

GAAP and IFRS are two very different forms of accounting. They have some aspects that are nearly identical, while others are completely different. One example of an aspect that sits more on the different end of the spectrum would be how each accounting method recognizes their revenue. They have some parts that work out the same, but overall, are very different with their rules and regulations on revenue recognition. GAAP and IFRS recognize their revenue in ways that are very different and cause economic transactions that seem similar to be quite different when revenue is recognized.

As we view each of these two different accounting systems, some people may ask why it matters how they relate. Well, that could be answered in a plethora of ways. Mainly, it is to see how distant the two methods are, and see if the world is any closer to harmonizing their accounting methods into one shared method of accounting (Daske). The end goal is mutually agreed to be the convergence of each method, or more so everyone converting to one of the two methods. Where one has the strict guidelines to cause a set track to follow, the other has broad rules but nothing specific for the given industries. These differences cause a lot of debate as to which is better for use, the IFRS system or the US GAAP system.

When looking at GAAP as opposed to IFRS, the biggest difference is the initial way that revenue is broken down into. For GAAP, revenue is either realized or realizable, and then earned.  Revenue under the rules of GAAP should not be recognized until an exchange transaction occurs (PWC). IFRS is broken down into four categories instead. These are sale of goods, rendering of services, others’ use of an entity’s assets, and construction contracts. These are set from two primary standards for revenue transactions (PWC). Overall, the breakdown of revenue in IFRS has broader categories than the GAAP system.

One of the major ways that GAAP and IFRS are different in their revenue recognition would be that GAAP uses a lot of industry specific guidance. GAAP, for example, requires vendor-specific objective evidence, or VSOE, of fair value to determine an estimation of the selling price (PWC). Along with this, IFRS does not have any requirement that can even be related to this regulation of GAAP (PWC). This lack of industry specific requirements shows how IFRS is a broader based system of accounting as opposed to GAAP. This allows for more leeway for the reporting of financial strength through what is considered as revenue.

IFRS has a standard 18 set principles that are applicable to each industry just like the one before. Not only does GAAP have industry specific rules and regulations as stated above, but they even allow exceptions for certain transactions. Along the same lines, they also request additional information from public companies, as stated by the SEC (Bank). This means that GAAP causes more work after the initial data is stated, since the SEC can create rules for GAAP.

When rendering a service, GAAP and IFRS disagree on the procedure at hand. If there are multiple elements that are in a contract, you must not book the revenue until all of the elements are complete, unless they all have individual values that can stand alone. IFRS on the other hand allows you to mark these all down, as long as each one has commercial substance (Bank). This, while not altering the end value, affects how the services are recorded and when they are recorded, meaning some could be put in next month if they are not complete. GAAP will all be placed together unless each element can stand alone.

All in all, GAAP and IFRS are two very different and quite independent systems of accounting. They both hold advantages and disadvantages when compared to the other. The biggest differences within their revenue recognition would be from the broad spectrum of how many rules are in place, and whether they are across the board or only for the industry. They then have differences in certain areas of revenue as well, like rendering of services. These two methods are different in many ways, and the world does not appear to be near an agreement as to which will conquer the accounting world.

 

 

 

 

Works Cited

 

Bank, Eric. “IFRS Vs. GAAP Revenue Recognition.” Small Business. Demand Media, 2015. Web. 3 Nov.      2015.

 

Daske, Holger. “Economic Benefits of Adopting IFRS or US-GAAP – Have the Expected Cost of Equity    Capital Really Decreased?” J Bus Fin & Acc Journal of Business Finance Accounting 0.0 (2006): 329-60. Web. 23 Oct. 2015.

 

IFRS and US GAAP: Similarities and Differences. PricewaterhouseCoopers LLP, 2008. PWC.com. Web. 3 Nov. 2015.