IFRS Vs. GAAP Revenue Recognition

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The Financial Accounting Standards Board sets U.S. generally accepted accounting principles, or GAAP, while the International Accounting Standards Board sets the international financial reporting standards, or IFRS. At the time of publication, U.S. GAAP is scheduled to start converging with IFRS by the end of 2014. The two standards are conceptually similar but differences exist in several areas, including revenue recognition.

Facts

Under both GAAP and IFRS, you do not recognize revenue until it is earned. GAAP guidance has separate rules for specific industries, according to an Ernst & Young summary of the differences between the two standards. A single standard -- International Accounting Standard 18 -- exists under IFRS, which contains general principles and examples.

Goods and Services

Under U.S. GAAP, publicly traded companies recognize revenue when product or service delivery occurs, which means that ownership risks and benefits transfer from seller to buyer. Revenue should consist of a fixed and determinable fee, and there should be reasonable assurance that the seller will collect the sale proceeds from the buyer. Specific rules also exist for service revenues, especially those associated with software and long-term construction and production contracts. Under IFRS, revenue recognition occurs when ownership transfers from seller to buyer and when the revenue can be measured reliably. Companies can recognize partial completions of service contracts when they can measure revenues and costs reliably, and there is a probability of realizing profits.

Receivables

Receivables refer to cash or cash equivalents deferred into the future. Cash equivalents are liquid assets, such as Treasury bills, certificates of deposit and money market accounts. Discounting involves calculating the present value of a future cash flow using a discount or interest rate. Discounting of receivables is necessary in limited situations under GAAP, according to the Ernst & Young summary. Under IFRS, however, receivables are a form of financing, and companies should discount all future receipts using an appropriate discount rate.

Considerations: Construction

Under GAAP, construction contract revenues use either the percentage-completed or the completed-contract methods. Under IFRS, you cannot use the completed contract method, which means that companies recognize construction revenue using the percentage-completion method or use the recoverable costs. Revenues defer until the end of the contract in the completed-contract method. Revenues are recognized in the applicable period in the percentage-completed method.

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