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Differences Regarding Revenue Recognition Between IFRS and GAAP
IASB, which develops IFRS Standards, and FASB, which develops GAAP standards have jointly succeeded in their efforts to converge their different accounting methods in order to have a uniform universal standard. Despite their many successes, there still exists some differences between IFRS and GAAP in the newly developed revenue recognition standard, which will be effective from December. Two of the main differences between these standards are on how to treat a sale of a good and construction contracts.
In the sale of a good, GAAP requires individuals to recognize a sale once goods have been delivered to the customer according to the agreement. Further, the agreed fixed fee or the reasonable fee that the entity expects to collect determines the selling price. In IFRS, a sale is recognized once there is reasonable transfer of risks and rewards of ownership from a buyer to a seller (FASB, 2016). In this case, the buyer is expected to enjoy some economic benefits from the sale.
In construction contracts, GAAP uses the completed contract method. The completed contract method requires individuals to complete a project before recognizing revenue. Nonetheless, GAAP also permits large construction projects to use “percentage of completion method.” In this case, businesses are allowed to segment construction contracts. On the contrary, IFRS does not permit for the use of completed contract method (FASB, 2016). In IFRS, a business is permitted to only recognize revenue on the recoverable costs that they have incurred.
The most appropriate method that SEC can use in adopting the IFRS standards is the endorsement strategy. In this method, a country performs detailed scrutiny of all IFRS standards and amendments. In effect, the country endorses whole or part of the standard, which is appropriate for its jurisdiction. This method has been effectively used by European Union, in which certain standards such as IFRS 9 were removed (Nobes, 2011). Through this strategy, SEC may fail to adopt the revenue recognition standard as presented by the IFRS and istead modify it to fit into US existing accounting principles.
Financial Accounting Standards Board, FASB. (2016). Accounting Standards Update: Revenues From Contracts With Customers (Topic 606). No. 2014-02, p. 1-150.
Nobes, C. (2011). International Variations in IFRS Adoption and Practice: Research Report 124. London, UK: Association of Certified Public Accountants.