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Inherent Difference Between US GAAP and IFRS on Revenue Recognition - Case Study Example

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Inherent Difference Between US GAAP and IFRS on Revenue Recognition

In case either requirement fails, the seller must defer revenue recognition, and accounting guidance provides special procedures for single arrangements that contains multiple deliverables and for long-term contracts (Gill, 2007). US GAAP on Revenue Recognition A firm’s gross accounts receivable reflects the amounts customers have promised to pay, and balance sheet displays these receivables net of estimated uncollectible accounts (Gill, 2007). When the seller decides that receivables have become uncollectible, it writes off the receivable because of their significant for analyzing liquidity and profitability; thus, accounts receivable are an input to several ratios used by financial analysis. Therefore, revenue recognition under the GAAP state that the seller recognizes revenue only when the transaction meets the following conditions: Stickney, Weil and Schipper (2009) indicate that the seller is purposed to earn recognized revenue, meaning that the seller has substantially accomplished what he or she has promised the customer. In addition, the revenue is realized or realizable, meaning that the seller has received cash or same asset that she or he can convert into cash. Meanwhile, the Securities and Exchange Commission (SEC) of the United States has issued Staff Accounting Bulletin No. 104 (SAB) that summarizes the following four conditions for revenue recognition (Walton, 2009). 1. There exist influential proof of an arrangement exists. 2. Delivery of the service has been settled. 3. The seller’s maintain constant price of the price to the buyer. 4. It is certain that the seller can measure the amount of revenue and is reasonably certain to collect it. According to Stickney, Weil and Schipper (2009), Conditions 2, 3, 4 of SAB 104 are similar to the two conditions stated in the concepts statement 5 of SAB 104 that requires persuasive evidence that the seller has an arrangement with customer in the form of a contract, or prior business dealings practices. The arrangement states the responsibilities of the seller and its customers with respect to the nature and delivery of goods or services, the risks assumed by buyer and seller, the timing of cash payments, and similar factors. IFRS ON Revenue Recognition According to Tarantino and Cernauskas (2009), the IFRS distinguishes between revenue from sales of goods and revenue from sales of services with regard to sales of goods. The IFRS specifies five conditions for recognizing revenue: conditions 1 and 2 apply only to the sale of goods. 1. The seller has passed risk over to the buyer in order to evaluate the significant risks and rewards of ownerships of the goods. 2. The seller has not maintained either efficient control or the kind of involvement that is associated with ownership. 3. The total of income can be measured consistently. 4. It is probable that the seller will obtain the monetary remuneration related with the transaction. 5. The costs obtained from the sellers can be calculated reliably. With regard to services, IFRS specifies conditions 3, 4 and 5 plus one additional; that is, the stage of completion of the transaction at the end of the reporting period can be measured reliably (Gill, 2007). ...Show more

Summary

Inherent Difference between US GAAP and IFRS on Revenue Recognition Name Instructor Task Date Introduction Revenue recognition is a single largest recurring financial statement item for most firms and a significant determinant of operating profitability. According to Stickney, Weil and Schipper (2009), revenue represents inflows of assets from transactions with customers…
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