International Financial Reporting Standards and Revenue Recognition
Revenue recognition is a very important component of financial accounting and reporting. The accounting principles governing revenue recognition can have a big impact on corporate accounting and the way contracts are structured with customers. As a part of ongoing discussions to converge U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), some proposals to change revenue recognition have been discussed. The following will discuss revenue recognition as it stands under U.S. GAAP and IFRS, as well as proposed changes to the revenue recognition principle.
Revenue Recognition under U.S. GAAP
Staff Accounting Bulletin, Topic 13 states,
“The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met: 1. Persuasive evidence of an arrangement exists; 2. Deliver has occurred or services have been rendered; 3. the seller’s price to the buyer is fixed or determinable; and 4. Collectability is reasonably assured.” Revenue recognition under U.S. GAAP can vary depending on industry, but the criteria listed by Topic 13 are generally applied when recognizing revenue. Guidance for industry specific principles are covered under other U.S. GAAP pronouncements. Also under U.S. GAAP, “any costs or losses that may be expected in connection with any returns shall be accrued in accordance with FASB St. No. 5 Accounting for Contingencies. Sales revenue and costs of sales reported in the income statement shall be reduced to reflect estimated returns” (FAS 48 par. 7).
Revenue Recognition under IFRS
Under IFRS, guidance regarding revenue recognition are governed under two general accounting standards. According to IFRS, “revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably” (IAS 18). Revenue Recognition for specific industries are not addressed under IFRS and
Revenue Recognition under U.S. GAAP
Staff Accounting Bulletin, Topic 13 states,
“The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met: 1. Persuasive evidence of an arrangement exists; 2. Deliver has occurred or services have been rendered; 3. the seller’s price to the buyer is fixed or determinable; and 4. Collectability is reasonably assured.” Revenue recognition under U.S. GAAP can vary depending on industry, but the criteria listed by Topic 13 are generally applied when recognizing revenue. Guidance for industry specific principles are covered under other U.S. GAAP pronouncements. Also under U.S. GAAP, “any costs or losses that may be expected in connection with any returns shall be accrued in accordance with FASB St. No. 5 Accounting for Contingencies. Sales revenue and costs of sales reported in the income statement shall be reduced to reflect estimated returns” (FAS 48 par. 7).
Revenue Recognition under IFRS
Under IFRS, guidance regarding revenue recognition are governed under two general accounting standards. According to IFRS, “revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably” (IAS 18). Revenue Recognition for specific industries are not addressed under IFRS and