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3 Major Differences between IFRS 15 and the old revenue recognition standards

By Ali Hussain Almohashi posted 04-25-2017 10:18 AM

  

A collaboration between the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued IFRS 15 and ASC 606, Revenue From Contracts With Customers. IFRS 15 and ASC 606 are the same with only minor differences. This collaboration was created because multiple accounting revenue-recognition standards existed, so inconsistencies arose when accounting for contract revenues, and the other reason is to attain high-quality accounting standards globally which is the ultimate goal of ISAB. The standard was issued in May 2014 and it should be implemented beginning in early 2018.

Three important differences between IFRS 15 and ASC 606 and earlier revenue recognition standards should be noted to help accountants, auditors and users of the financial statements understand and implement the new standard.

 

1.One framework with many judgments and estimations

 

The differences between the revenue recognition standards of FASB and IASB were significant. The US Generally Accepted Accounting Principles (GAAP) issued by FASB has over 180 papers regarding revenue recognition which include specific industry guidance, while the IFRS issued by IASB has further differing standards for contract revenues from customers including IAS 11, IAS 18, and IFRIC 13. The use of these varying standards meant that inconsistencies arose between financial statements issued  which affect the goal of having a comparable financial statement; all previous standards are now being replaced by one framework but with many possible judgments and estimations.

IFRS 15/ASC 606 is an objective-based standard, meaning that reporting entities have the flexibility to choose various methods based on the standard’s principles and objectives. The reporting entity shall determine which methods provide the most relevant and useful information for its business and the external users of their financial statements.

The American Institute of Certified Public Accountants (AICPA) created sixteen industry task forces to guide implementation of revenue recognition practices through producing a discussion of the boards’ Joint Transition Resource Group for Revenue Recognition (TRG). Though the recommendations of AICPA’s task force and TRG are non-authoritative, accountants and auditors may nevertheless benefit from consulting these discussions in making judgments and estimations.

 

2.Detailed disclosure

 

The IFRS 15/ASC 606 standard’s detailed disclosure requirements arose in part because regulators and the board members believed that existing financial statements inadequately disclosed revenue information and because of the nature of the new revenue recognition standard which requires more judgments and estimation. Thus, new guidelines were needed to provide more detailed disclosers requirements regarding revenue recognition.

The new standard specifies that financial statements disclose sufficiently detailed information to enable the user to understand the nature, amount, timing, and uncertainty of cash flow and revenue related to customer contracts. Contract details, significant judgments, any changes to judgments, as well as assets related to the contract cost, must now be clearly disclosed.

 

3.From income statement to balance sheet

 

Under the existing GAAP, the entity recognizes revenue when it is both realized (or realizable) and is earned. This approach centers on the income statement. As the entity, your revenue would be realized when you receive the consideration (payment); if you are entitled and guaranteed to receive the consideration in the future, your revenue would be realizable. And, revenue is earned when the customer owes you, and you can increase your account-receivable balance; the earning process is complete when you deliver the goods or render the service.

The core principle of IFRS 15/ASC 606 is to “ . . . recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Thus, under the new recognition standard, the focus shifts from the income statement to the balance sheet. As stated above, the revenue should depict the transfer of goods or services. Consequently, entities will need to make certain changes to their balance sheets under the new revenue recognition standard: moving an asset out of the balance sheet, or satisfying liability to recognize revenue, would require the entity to create new assets and liability accounts.

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