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US GAAP versus IFRS - Revenue recognition - EY - United States


Revenue recognition

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Revenue recognition under both US GAAP and IFRS is tied to the completion of the earnings process and the realization of assets from such completion. Under IAS 18, Revenue, revenue is defined as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity other than increases relating to contributions from equity participants." Under US GAAP (which is primarily included in ASC 605, Revenue Recognition), revenues represent actual or expected cash inflows that have occurred or will result from the entity's ongoing major operations.

Under both US GAAP and IFRS, revenue is not recognized until it is both realized (or realizable) and earned. Ultimately, both US GAAP and IFRS base revenue recognition on the transfer of risks, and both attempt to determine when the earnings process is complete. Both sets of standards contain revenue recognition criteria that, while not identical, are similar. For example, under IFRS, one recognition criterion is that the amount of revenue can be measured reliably, while US GAAP requires that the consideration to be received from the buyer is fixed or determinable.

Significant differences

Despite the similarities, differences in revenue recognition may exist as a result of differing levels of specificity between the two GAAPs. There is extensive guidance under US GAAP, which can be very prescriptive and often applies only to specific industries.

For example, under US GAAP there are specific rules for the recognition of software revenue and sales of real estate, while comparable guidance does not exist under IFRS. In addition, the detailed US rules often contain exceptions for particular types of transactions.

Further, public companies in the US must follow additional guidance provided by the SEC staff. Conversely, a single standard (IAS 18) exists under IFRS, which contains general principles and illustrative examples of specific transactions.

Exclusive of the industry-specific differences between the two GAAPs, following are the major differences in revenue recognition.

Sale of goodsPublic companies must follow SAB 104, Revenue Recognition, which requires that delivery has occurred (the risks and rewards of ownership have been transferred), there is persuasive evidence of the sale, the fee is fixed or determinable and collectibility is reasonably assured.Revenue is recognized only when risks and rewards of ownership have been transferred, the buyer has control of the goods, revenues can be measured reliably and it is probable that the economic benefits will flow to the company.
Rendering of servicesCertain types of service revenue, primarily relating to services sold with software, have been addressed separately in US GAAP literature. All other service revenue should follow SAB Topic 13. Application of long-term contract accounting (ASC 605-35, Revenue Recognition — Construction-Type and Production-Type Contracts) generally is not permitted for non-construction services.Revenue may be recognized in accordance with long-term contract accounting, including considering the stage of completion, whenever revenues and costs can be measured reliably and it is probable that economic benefits will flow to the company.
Multiple elementsSpecific criteria are required in order for each element to be a separate unit of accounting, including delivered elements must have standalone value. If those criteria are met, revenue for each element of the transaction may be recognized when the element is complete.IAS 18 requires recognition of revenue related to an element of a transaction if that element has commercial substance on its own; otherwise, the separate elements must be linked and accounted for as a single transaction. IAS 18 does not provide specific criteria for making that determination.
Deferred receipt of receivablesDiscounting to present value is required only in limited situations.Considered to be a financing agreement. Value of revenue to be recognized is determined by discounting all future receipts using an imputed rate of interest.
Construction contractsConstruction contracts are accounted for using the percentage-of-completion method if certain criteria are met. Otherwise, the completed contract method is used.

Construction contracts may be, but are not required to be, combined or segmented if certain criteria are met.
Construction contracts are accounted for using the percentage-of-completion method if certain criteria are met. Otherwise, revenue recognition is limited to recoverable costs incurred. The completed contract method is not permitted.

Construction contracts are combined or segmented if certain criteria are met. Criteria under IFRS differ from those in US GAAP.


The FASB and the IASB are currently conducting a joint project to develop a single revenue recognition standard for all contracts with customers. The Boards re-exposed their proposal in November 2011.

The core principle is that an entity would recognize revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.

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