Revenue Recognition Ifrs vs Gaap

Revenue Recognition: IFRS and FASB Convergence
With the growth of international business there is a need to standardize financial statements globally. Presently there are “approximately 120 foreign private issuers currently that report to the Commission using IFRS financial statements.” By standardizing accounting practices investors will be able to make informed decisions based on comparability and accuracy of financial statements. The SEC released this statement in 2008, “We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information.” The SEC has created a “Roadmap” or plan to convert US GAAP over to IFRS. According to The Committee of Sponsoring Organization of the Treadway Commission (COSO) Analysis of Fraudulent Financial Reporting 1998-2007, the most common fraud technique involved improper revenue recognition. This fact emphasizes the importance of proper revenue recognition and detailed standards in place to guide companies. The International Accounting Standards Board (IASB) developed standard IAS 18, which defines the accounting treatment for revenue arising from certain types of transactions and events. According to IAS 18, “revenue is recognized when it is probable that future economic benefits will flow in the entity and these benefits can be measured reliably.” The development of IAS 18 began with an Exposure Draft E20 in 1981. IASB formally issued standard IAS 18 in December of 1982, but the effective date wasn’t until January 1, 1984. In order to keep in pace with the rapidly changing business environment, IASB published another exposure draft on revenue recognition in May of 1992 by the name E41. The new exposure draft provided a more clear and operational definition of revenue recognition. According to the exposure, “Revenue is the gross inflow of cash, receivables or other considerations arising from the sale of goods, from rendering services and from the use by others of enterprise resources yielding interest, royalties and dividends.” IAS 18 understands that any approach to revenue recognition cannot hope to capture the complexities of all types of business activities. Listed are the IAS 18 Revenue recognition criteria: * Significant risks and rewards transferred

* Seller retains no control
* Revenue can be measured
* Economic benefits will probably flow to the seller
* Costs can be measured
* Stage of completion can be measured

Revenue from sales or service transactions should be recognized when performance is satisfied. The fair value of assets/services should be used to determine the amount of revenue involved. Recognition of revenue requires that revenue is measurable; it is probable that future economic benefits will flow to the company and when specific criteria for each type of revenue stream have been met where the ability to assess the ultimate collection with reasonable certainty is lacking, revenue recognition is postponed. Revenue recognition in GAAP is a set of standardized rules dealing with how and when revenue should be recorded in organizational bookkeeping. There are certain standards that must be met before revenue can be recorded as well as listed on the financial statements in accordance with GAAP. GAAP has two specific requirements for revenue recognition that were implemented by the FASB. The first one requires that revenue must either be realized or realizable before revenue recognition can occur. Cash received is considered realized and realizable refers to the promise of payment to be received. The second requirement is that the revenue has to be earned by the company offering a product or service in return for payment. The two requirements above must be met before a company is allowed to recognize the revenues as well as record them as income on their financial statements. Revenue recognition rules generally apply to accrual-based accounting rather...
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