This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Revenue recognition: Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, indicates that revenue is recognized when it is realized or realizable and earned. However, beyond those broad guidelines, a single, comprehensive revenue recognition standard does not exist in U.S. GAAP. Rather, guidance on revenue recognition is found in a collection of transaction-specific, industry-specific, or other specialized guidance. Further, the SEC staff provides detailed guidance on revenue recognition for U.S. public entities in Staff Accounting Bulletin (SAB) Topic 13, "Revenue Recognition."

Under IFRSs, IAS 18, Revenue, is the primary source of guidance on revenue recognition, including the sale of goods, rendering of services, and use by others of an entity's assets (interest, royalties, and dividends). Three other sources of authoritative guidance on revenue recognition in IFRSs are IAS 11, Construction Contracts; SIC-31, Revenue — Barter Transactions Involving Advertising Services; and IFRIC Interpretation 13, Customer Loyalty Programmes.

On May 28, 2014, the FASB and IASB issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09 (codified in ASC 606) by the FASB and as IFRS 15, Revenue From Contracts With Customers, by the IASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.

The table below summarizes these differences and is followed by a detailed explanation of each difference.

Subject
U.S. GAAP
IFRSs
Concept/objective
realized or realizable and earned.
According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized.
Definition of revenue
Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."
Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent."
Paragraph 7 of IAS 18 defines revenue 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."
Sale of goods or products
SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:
  • There is persuasive evidence of an arrangement.
  • Delivery has occurred (e.g., an exchange has taken place).
  • The sales price is fixed or determinable.
  • Collectibility is reasonably assured.
In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP.
Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met:
  • The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods."
  • The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold."
  • The "amount of revenue can be measured reliably."
  • "[I]t is probable that the economic benefits associated with the transaction will flow to the entity."
  • The "costs incurred or to be incurred in respect of the transaction can be measured reliably."
Rendering services
>Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:
  • There is persuasive evidence of an arrangement.
  • Service has been rendered.
  • The sales price is fixed or determinable.
  • Collectibility is reasonably assured.
Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date.
Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion.
Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable."
Software arrangements
ASC 985-605 provides guidance on recognizing revenue in a software arrangement.
There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate.
Construction-type contracts
ASC 605-35 provides guidance on construction-type contracts.
ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable.
ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized.
IAS 11, Construction Contracts, provides guidance on construction-type contracts.
Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs.
Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized.
Milestone method
ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements.
There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements.
Multiple-element arrangements
ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605).
Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies:
  • "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction."
  • Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole."
Bill-and-hold arrangements
The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances.
Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same.
Gross versus net
ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent).
Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider.
Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent.
Customer loyalty programs
Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model.
IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement.
Rebates, discounts, incentives, and other consideration
ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received.
Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers.
Specific industry and other guidance
Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions.
IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions.

Concept/Objective

Under U.S. GAAP, paragraph 83 of Concepts Statement 5 provides the following overriding concept for the recognition of revenues:

Further guidance for recognition of revenues and gains is intended to provide an acceptable level of assurance of the existence and amounts of revenues and gains before they are recognized. Revenues and gains of an entity during a period are generally measured by the exchange values of the assets (goods or services) or liabilities involved, and recognition involves consideration of two factors (a) being realized or realizable and (b) being earned, with sometimes one and sometimes the other being the more important consideration.

a. Realized or realizable. Revenues and gains generally are not recognized until realized or realizable. [Footnote omitted] Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. Revenues and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Readily convertible assets have (I) interchangeable (fungible) units and (ii) quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price.
b. Earned. Revenues are not recognized until earned. An entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, [footnote omitted] and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Gains commonly result from transactions and other events that involve no "earning process," and for recognizing gains, being earned is generally less significant than being realized or realizable.

Paragraph 84 of Concepts Statement 5 states the following:

In recognizing revenue and gains:

a. The two conditions (being realized or realizable and being earned) are usually met by the time product or merchandise is delivered or services are rendered to customers, and revenues from manufacturing and selling activities and gains and losses from sales of other assets are commonly recognized at time of sale (usually meaning delivery). [Footnote omitted]
b. If sale or cash receipt (or both) precedes production and delivery (for example, magazine subscriptions), revenues may be recognized as earned by production and delivery.
c. If product is contracted for before production, revenues may be recognized by a percentage-of-completion method as earned — as production takes place — provided reasonable estimates of results at completion and reliable measures of progress are available. [Footnote omitted]
d. If services are rendered or rights to use assets extend continuously over time (for example, interest or rent), reliable measures based on contractual prices established in advance are commonly available, and revenues may be recognized as earned as time passes.
e. If products or other assets are readily realizable because they are salable at reliably determinable prices without significant effort (for example, certain agricultural products, precious metals, and marketable securities), revenues and some gains or losses may be recognized at completion of production or when prices of the assets change. Paragraph 83(a) [see above] describes readily realizable (convertible) assets.
f. If product, services, or other assets are exchanged for nonmonetary assets that are not readily convertible into cash, revenues or gains or losses may be recognized on the basis that they have been earned and the transaction is completed. Gains or losses may also be recognized if nonmonetary assets are received or distributed in nonreciprocal transactions. Recognition in both kinds of transactions depends on the provision that the fair values involved can be determined within reasonable limits. [Footnote omitted]
g. If collectibility of assets received for product, services, or other assets is doubtful, revenues and gains may be recognized on the basis of cash received.

Concepts Statement 5 only broadly describes the characteristics of, and when to recognize, revenue and is often difficult to apply to specific transactions. The SEC staff provides detailed guidance on the characteristics of revenue recognition in SAB Topic 13.

Under IFRSs, paragraph 74 of the IASB Framework defines income as follows:

The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent.

Further, paragraph 83 of the IASB Framework describes the recognition of the elements (i.e., income) in the financial statements as follows:

An item that meets the definition of an element should be recognised if:

a. it is probable that any future economic benefit associated with the item will flow to or from the entity; and
b. the item has a cost or value that can be measured with reliability.

Paragraphs 92 and 93 of the IASB Framework apply these two general concepts of recognition to the recognition of income and mention that income is recognized when it can be measured reliably and it is earned.

IAS 18 provides the following objective for recognition of revenues:

Income is defined in the Framework for the Preparation and Presentation of Financial Statements [footnote omitted] as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income encompasses both revenue and gains. Revenue is income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends and royalties. The objective of this Standard is to prescribe the accounting treatment of revenue arising from certain types of transactions and events.

The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria.

While the overall concepts and objectives of revenue recognition in U.S. GAAP may differ from those in IFRSs, the principles underlying revenue recognition in both sets of standards are similar. Therefore, differences in the manner in which revenue is recognized for basic, single-element revenue transactions would generally be unexpected. However, for more complex or industry-specific transactions, the manner in which revenue is recognized under U.S. GAAP could differ dramatically from that under IFRSs because IFRSs often lack specific guidance on such transactions and the underlying principles in U.S. GAAP and IFRSs may therefore be interpreted differently. An entity should carefully consider the specific facts and circumstances of each transaction when determining whether revenue recognition differences between U.S. GAAP and IFRSs exist.

Definition of Revenue

Under U.S. GAAP, Concepts Statement 6 defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."

Under IFRSs, IAS 18 defines revenue 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."

While these definitions may not directly result in significant differences in the manner in which revenue is recognized, they can influence an entity's interpretation of the revenue recognition guidance. This may lead to differences in the way revenue is recognized for a particular transaction under U.S. GAAP and IFRSs.

Sale of Goods or Products

Under U.S. GAAP, revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:

  • There is persuasive evidence of an arrangement.
  • Delivery has occurred (e.g., an exchange has taken place).
  • The sales price is fixed or determinable.
  • Collectibility is reasonably assured.

ASC 605-15 specifies how an entity should account for sales of products when the buyer has a return privilege, "whether as a matter of contract or as a matter of existing practice." ASC 605-15-25-1 provides specific criteria for recognizing revenue in situations in which a right of return exists. For example, ASC 605-15-25-1(f) requires the amount of future returns to be reasonably estimable.

Under IFRSs, paragraph 14 of IAS 18 states that the following conditions must be satisfied before revenue from the sale of goods can be recognized:

a. the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
b. the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
c. the amount of revenue can be measured reliably;
d. it is probable that the economic benefits associated with the transaction will flow to the entity; and
e. the costs incurred or to be incurred in respect of the transaction can be measured reliably.

The guidance on the sale of goods or products under U.S. GAAP may differ from that under IFRSs, but the manner in which revenue is recognized in basic product sales arrangements is generally similar under the two sets of standards. In more complex arrangements, such as those involving multiple deliverables, the determination of an appropriate revenue recognition model can be more difficult (i.e., there is greater potential for differences in how revenue is recognized under the two sets of standards depending on how the guidance is interpreted). An entity should carefully consider individual facts and circumstances when determining whether differences exist.

Rendering Services

Under U.S. GAAP, other than the limited guidance in ASC 605-20, there is no specific guidance on the rendering of services. Therefore, the broad revenue recognition concept in Concepts Statement 5 would apply. That is, revenue from service arrangements should not be recognized until earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:

  • There is persuasive evidence of an arrangement.
  • Service has been rendered.
  • The sales price is fixed or determinable.
  • Collectibility is reasonably assured.

Service revenue is usually recognized on the basis of the proportional performance as of the balance sheet date, but other methods may be more appropriate depending on the specific facts and circumstances of the arrangement. For a discussion of guidance that can be used by analogy to determine other appropriate methods of accounting for service arrangements, see Deloitte guidance related to ASC 605-20.

Under IFRSs, when the outcome of a service arrangement can be estimated reliably, revenue is recognized by reference to the stage (percentage) of completion of the transaction as of each balance sheet date. That is, revenue is recognized on the basis of the percentage of work completed as of the reporting date. (Paragraph 21 of IAS 18 refers to the requirements for stage of completion in IAS 11.) Paragraph 20 of IAS 18 states that the following conditions must be met before the outcome of a transaction can be estimated reliably:

a. the amount of revenue can be measured reliably;
b. it is probable that the economic benefits associated with the transaction will flow to the entity;
c. the stage of completion of the transaction at the balance sheet date can be measured reliably; and
d. the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. [Footnote omitted]

Further, paragraph 23 of IAS 18 states the following:

An entity is generally able to make reliable estimates after it has agreed to the following with the other parties to the transaction:

a. each party's enforceable rights regarding the service to be provided and received by the parties;
b. the consideration to be exchanged; and
c. the manner and terms of settlement.

Paragraph 23 goes on to state that an entity usually will also need to have an "effective internal financial budgeting and reporting system" to make reliable estimates. Further, paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable."

While the guidance on revenue recognition in service arrangements in IFRSs is more specific than that in U.S. GAAP, the manner in which revenue is recognized in basic service arrangements is generally similar under U.S. GAAP and IFRSs (both sets of standards prescribe a proportional performance approach). For more complex arrangements, such as those involving multiple deliverables (multiple services or a combination of products and services), the determination of an appropriate revenue recognition model can be more difficult (i.e., there is greater potential for differences in how revenue is recognized under the two sets of standards depending on how the guidance is interpreted).

Software Arrangements

Under U.S. GAAP, ASC 985-605 applies to all entities that generate revenue by licensing, selling, leasing, or marketing computer software that is more than incidental to an arrangement (with certain exceptions). ASC 985-605-25-3 provides that an entity should recognize revenue from a software arrangement if all of the following criteria are satisfied:

  • "Persuasive evidence of an arrangement exists."
  • "Delivery has occurred."
  • "The vendor's fee is fixed or determinable."
  • "Collectibility is probable."

The amount and timing of revenue recognition are complicated in arrangements that involve multiple software deliverables (e.g., software products, upgrades or enhancements, postcontract customer support, or other services). The software provider often charges a single fee that must be allocated to the various deliverables on the basis of vendor-specific objective evidence (VSOE) of fair value (generally the price charged by the vendor when the same element is sold separately). If VSOE cannot be established for all deliverables, revenue is generally deferred until VSOE can be established or delivery has occurred. Further, ASC 985-605-25-12 states that "the delivery of an element is considered not to have occurred if there are undelivered elements that are essential to the functionality of the delivered element, because the customer would not have the full use of the delivered element." While these are some of the main concepts of revenue recognition under ASC 985-605, other requirements in this subtopic apply to specific circumstances. In addition, other U.S. GAAP literature provides relevant interpretive guidance.

Under IFRSs, there is no specific guidance on software revenue recognition. Therefore, the overall concepts in IAS 18 would apply to software arrangements. That is, revenue is recognized when "it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably." The uniqueness of products and services sold in the software industry may make it difficult for an entity to apply these overall concepts when determining how to recognize revenue for software arrangements under IFRSs. It may sometimes be appropriate for an entity to consider the guidance in U.S. GAAP when determining the appropriate accounting for software arrangements under IFRSs.

Because of the specific guidance in U.S. GAAP that limits revenue recognition in software arrangements in certain circumstances, IFRSs may allow for the recognition of revenue in software arrangements before it is recognized under U.S. GAAP. However, while IFRSs may seem less restrictive, an entity should carefully consider the unique nature of software products and services in evaluating the appropriate accounting for software arrangements under IFRSs.

Construction-Type Contracts

Under U.S. GAAP, ASC 605-35 provides guidance on construction-type contracts. The following two methods are acceptable for an entity to use in accounting for long-term construction-type contracts under U.S. GAAP:

  • Percentage-of-completion method — ASC 605-35-25-51 through 25-54 state, in part, that under this method, revenue is recognized as work on a contract progresses. Revenue should be based on the percentage of estimated total income that (1) "incurred costs to date bear to estimated total costs after giving effect to estimates of costs to complete based on most recent information” or (2) “may be indicated by such other measure of progress toward completion as may be appropriate having due regard to work performed."
  • Completed-contract method — ASC 605-35-25-88 indicates that under this method, revenue is recognized when the contract is substantially completed. A contract is considered substantially completed when the costs that remain are not significant to the overall cost of the project.

When the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. Under ASC 605-35, the customer must approve the scope and price of change orders before the related revenue can be recognized.

Under IFRSs, IAS 11 provides guidance on construction-type contracts. IAS 11 indicates that the percentage-of-completion method is used to account for construction contracts when an entity is able to estimate reliably the outcome of a contract. Under the percentage-of-completion method, contract revenue and expenses are recognized as work progresses rather than when the work is complete. When an entity is unable to estimate reliably the outcome of a contract, it recognizes contract revenue only to the extent of contract costs incurred for which it believes it will be reimbursed. Use of the completed-contract method is prohibited under IFRSs. Under IAS 11, when it is probable that a customer will approve the scope and price of a change order, the related revenue can be recognized.

Thus, entities using the completed-contract method and entities in arrangements with significant change orders may recognize revenue under U.S. GAAP differently from how they would do so under IFRSs. Otherwise, the accounting for construction-type contracts under U.S. GAAP is generally similar to that under IFRSs. However, depending on the specific facts and circumstances of an arrangement and an entity's interpretation of the overall principles in both U.S. GAAP and IFRSs, revenue recognition for similar construction arrangements could differ under the two sets of standards.

Milestone Method

Under U.S. GAAP, ASC 605-28 requires entities to determine whether the milestone method (record the milestone payment in its entirety in the period received) is appropriate for a particular research or development arrangement by first identifying all milestones in the arrangement and then individually assessing, only at inception of the arrangement, whether those milestones are substantive. A milestone is considered substantive if consideration earned from achievement of the milestone (1) is commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered item, (2) relates solely to past performance, and (3) is reasonable in comparison to all of the deliverables and payment terms in the arrangement. Further, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration.

Under IFRSs, there is no specific guidance on the application of the milestone method for recognizing revenue in research or development transactions. Entities would apply the provisions of IAS 18 as appropriate. Depending on the specific facts and circumstances of an arrangement and an entity's interpretation of the overall principles in IFRSs, revenue recognition for research or development arrangements under IFRSs could differ from how entities recognize revenue for similar arrangements under U.S. GAAP by using the milestone method.

Multiple-Element Arrangements

Under U.S. GAAP, ASC 605-25 establishes detailed criteria for determining whether each deliverable in a revenue arrangement should be separately considered for recognition. ASC 605-25-25-5 requires that for revenue to be separately recognized for deliverables in an arrangement, the delivered element(s) must have stand-alone value to the customer. If an arrangement contains a general right of return for the delivered element(s), delivery of the undelivered element(s) must be probable and within control of the vendor. Further, for revenue to be separately recognized for any delivered elements that might otherwise meet the criteria for separation, the undelivered elements must have objective and reliable evidence of fair value. For entities that have adopted the guidance in ASU 2009-13 objective and reliable evidence of fair value for the undelivered elements is not required for separate accounting of the deliverables (provided that the other two criteria are met).

If a delivered item does not qualify for separation, the item would be combined with other applicable deliverables in the arrangement. Recognition of revenue of the combined deliverables would be determined as a single unit of accounting.

While the guidance in ASC 605-25 may apply to many arrangements, it does not apply to deliverables in an arrangement within the scope of other authoritative literature that provides guidance on determining separate units of accounting and allocating arrangement consideration to those separate units. In those situations, the other authoritative literature would apply. For example, ASC 985-605 requires that revenue be allocated to various elements in an arrangement on the basis of VSOE of fair value (i.e., generally the price charged by the vendor when the same element is sold separately).

Under IFRSs, in accordance with paragraph 13 of IAS 18, the basic revenue recognition criteria are usually applied separately to each transaction unless either of the following conditions applies:

  • "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction."
  • Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole."

IFRSs do not provide further detailed guidance on the appropriate application of these concepts. However, paragraph 11 of the Illustrative Examples to IAS 18 discusses a particular example involving a multiple-element arrangement that includes a product and subsequent servicing. In the example, the servicing is deemed to be a component separate from the product and is recognized over the service period. The amount allocated to the servicing is based on the expected costs of the servicing plus a reasonable profit margin (not necessarily fair value). Because the guidance on segmenting multiple-element transactions in IFRSs is limited, understanding the "substance" of a transaction is important to determining the appropriate accounting. An entity should also consider the guidance in IFRIC 13, which discusses revenue recognition in certain multiple-element arrangements. While the scope of IFRIC 13 focuses specifically on customer loyalty award credits, it may be appropriate to consider such guidance since it is similar to the guidance in IAS 18.

Because the overall concepts for revenue recognition in U.S. GAAP are similar to those in IFRSs, significant differences between U.S. GAAP and IFRSs are unlikely for typical multiple-element arrangements. However, depending on the facts and circumstances of a particular arrangement, the impact of the differences on revenue recognition could be dramatic if separation is deemed inappropriate under U.S. GAAP but acceptable under IFRSs. Moreover, because detailed guidance on certain aspects of multiple-element arrangements is provided in U.S. GAAP but not in IFRSs, the separation of elements and allocation of consideration in such arrangements under U.S. GAAP may differ from how elements are separated and consideration is allocated under IFRSs. Such differences may ultimately affect how revenue is recognized for multiple-element arrangements under the two sets of standards.

Bill-and-Hold Arrangements

Under U.S. GAAP, for revenue to be recognized, delivery generally must have occurred. The fact that delivery has occurred constitutes sufficient evidence that the risks and rewards of ownership have passed to the buyer (i.e., the earnings process is complete). SAB Topic 13.A.3(a) states that the following criteria must be met for revenue to be recognized before delivery of the product (i.e., in bill-and-hold arrangements):

1. The risks of ownership must have passed to the buyer;
2. The customer must have made a fixed commitment to purchase the goods, preferably in written documentation;
3. The buyer, not the seller, must request that the transaction be on a bill and hold basis. [Footnote omitted] The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis;
4. There must be a fixed schedule for delivery of the goods. The date for delivery must be reasonable and must be consistent with the buyer's business purpose (e.g., storage periods are customary in the industry);
5. The seller must not have retained any specific performance obligations such that the earning process is not complete;
6. The ordered goods must have been segregated from the seller's inventory and not be subject to being used to fill other orders; and
7. The equipment [product] must be complete and ready for shipment.

Non-SEC entities also generally use these criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for bill-and-hold arrangements. The criteria are rigidly applied and restrict revenue recognition when delivery has not occurred to limited circumstances.

Under IFRSs, delivery does not necessarily need to have occurred for revenue to be recognized. IAS 18 accepts that the risks and rewards of ownership may be transferred to the buyer even though the goods have not yet been delivered. Paragraph 1 of the Illustrative Examples to IAS 18 indicates that in a customer-requested bill-and-hold arrangement, revenue would be recognized when title transfers to the customer, provided that:

a. it is probable that delivery will be made;
b. the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised;
c. the buyer specifically acknowledges the deferred delivery instructions; and
d. the usual payment terms apply.

In addition, IAS 18 indicates that revenue recognition may be appropriate in layaway sales if certain criteria are met. That is, as illustrated in the example in paragraph 3 of the Illustrative Examples to IAS 18, revenue may be recognized on layaway sales "when a significant deposit is received provided the goods are on hand, identified and ready for delivery" if experience indicates that most layaway sales are consummated.

While the objective for recognizing revenue in bill-and-hold arrangements under U.S. GAAP and IFRSs may be consistent (i.e., the risks and rewards of ownership have been transferred to the buyer), the criteria in IFRSs may be deemed less restrictive or limiting than those in U.S. GAAP (SAB Topic 13). Therefore, in certain limited circumstances, entities accounting for bill-and-hold arrangements under IFRSs may meet the criteria for revenue recognition while entities with the same circumstances under U.S. GAAP would not meet the criteria for revenue recognition. However, while IFRSs may seem less restrictive, an entity should carefully consider the facts and circumstances when evaluating the appropriate accounting of a particular bill-and-hold arrangement under IFRSs to ensure that the accounting is in line with the overall principles of revenue recognition.

Gross Versus Net

Under U.S. GAAP, ASC 605-45 provides guidance on whether a company should report revenue on the basis of the gross amount billed to the customer or the net amount retained by the company (i.e., the amount billed to a customer less any amounts paid or payable to a supplier). This guidance is used to determine whether a company earns revenue from the sale of goods or services as a principal or essentially earns a commission or fee as an agent. Such guidance provides factors and indicators to consider; a determination of the appropriate accounting is based on the relative strength of each factor and indicator. Further, ASC 605-45 provides guidance on whether to report revenue on a gross or net basis for specific situations and circumstances, such as amounts billed for shipping and handling costs, reimbursements received for out-of-pocket expenses, and taxes collected from customers and remitted to governmental authorities.

Under IFRSs, paragraph 8 of IAS 18 states that in an agency relationship, "gross" amounts collected by the agent on behalf of the principal are not benefits that flow to the agent and therefore are not revenue. The agent's revenue is the "net" amount of the commission. Paragraph 8 also notes that "[a]mounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes" are not considered revenue. Determining whether a seller is an agent or principal is based on the particular facts and circumstances of each arrangement.

In its Improvements to IFRSs issued in April 2009, the IASB added an example in the Illustrative Examples to IAS 18 that lists four features indicating that an entity is acting as a principal and one feature indicating that an entity is acting as an agent. These features are generally consistent with the factors given in ASC 605-45 and reduce the differences between U.S. GAAP and IFRSs regarding gross versus net revenue recognition.

Customer Loyalty Programs

Under U.S. GAAP, there is no specific guidance on accounting for customer loyalty programs; therefore, practice varies. In fact, such arrangements are specifically excluded from the scope of ASC 605-25 and ASC 605-50. Because there is no specific guidance on customer loyalty programs in U.S. GAAP, entities have typically accounted for these programs by using one of the following methods:

  • Multiple-element approach — The arrangement is accounted for as a multiple-element arrangement under ASC 605-25 by analogy. Thus, a portion of the revenue from the initial transaction(s) is generally deferred until redemption (this is similar to the accounting under IFRSs).
  • Incremental-cost approach — The award provided under the loyalty program is treated as a cost and accrued for at the time of the initial transaction.

The multiple-element approach is acceptable in most situations under U.S. GAAP; however, the incremental-cost method is acceptable only in certain circumstances. For example, the incremental-cost method may be inappropriate when the value of an award is significant in relation to the overall arrangement.

Under IFRSs, IFRIC 13 applies to loyalty award credits (e.g., points, airline miles) granted to customers as part of a sales transaction that the customers can redeem for free or discounted goods or services. IFRIC 13 requires that the award credits be accounted for as a separate identifiable component of the sales arrangement (i.e., as a multiple-element arrangement) and that the fair value of the consideration received be allocated between the award credits and the other components in the arrangement. This treatment applies irrespective of whether the entity supplies the awards or whether the award is supplied by a third party. The incremental-cost approach, which, as discussed above, is acceptable under U.S. GAAP in certain circumstances, would not be acceptable under IFRSs.

Because the incremental-cost approach is sometimes acceptable under U.S. GAAP, entities applying U.S. GAAP may not be required to defer revenue in certain arrangements involving customer loyalty programs, while entities applying IFRSs are required to defer revenue in all arrangements involving customer loyalty programs.

Rebates, Discounts, Incentives, and Other Consideration

Under U.S. GAAP, ASC 605-50 provides guidance on whether a vendor is required to account for certain types of consideration given to a reseller as an expense or a reduction in revenue. ASC 605-50-45-3 states that "[i]f the consideration consists of a free product or service . . . or anything other than cash . . . or equity instruments . . . , the cost of the consideration shall be characterized as an expense (as opposed to a reduction of revenue) when recognized in the vendor's income statement." Otherwise, consideration is presumed to be a reduction of revenue (and recognized as such). However, that presumption can be overcome (in which case, the consideration would be characterized as an expense) if the vendor receives an identifiable benefit (goods or services) and the vendor can reasonably estimate the fair value of this benefit. Further, ASC 605-50-45-7 states that "if a vendor demonstrates that characterization of [particular] amounts as a reduction of revenue results in negative revenue for a specific customer on a cumulative basis (that is, since the inception of the overall relationship between the vendor and the customer), then the amount of the cumulative shortfall may be characterized as an expense."

Under IFRSs, paragraph 10 of IAS 18 indicates that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." IFRSs do not contain specific guidance on other types of consideration or incentives; rather, the general revenue concepts in IAS 18 should be applied.

Because the guidance on incentives and other consideration in U.S. GAAP is more specific than that in IFRSs, entities with similar facts and circumstances may report revenue for such transactions differently under the two sets of standards. That is, an entity applying U.S. GAAP needs to meet certain criteria to overcome the presumption that incentives and other consideration are a reduction of revenue, while an entity applying IFRSs does not. Therefore, an entity applying IFRSs may conclude that certain incentives or other consideration represents a cost (not a reduction of revenue) even though the consideration does not meet the specific criteria in U.S. GAAP. Thus, while net income may be the same under both U.S. GAAP and IFRSs, revenues reported under IFRSs would be higher.

Specific Industry and Other Guidance

Under U.S. GAAP, there is other revenue recognition guidance that applies to specific industries and transactions. This guidance includes the following: ASC 952-605, Franchisors: Revenue Recognition.

  • ASC 470-40, Debt: Product Financing Arrangements.
  • ASC 928-605, Entertainment — Music: Revenue Recognition.
  • ASC 922-605, Entertainment — Cable Television: Revenue Recognition.
  • ASC 944-605, Financial Services — Insurance: Revenue Recognition.
  • ASC 920-605, Entertainment — Broadcasters: Revenue Recognition.
  • ASC 730-20, Research and Development: Research and Development Arrangements.
  • ASC 310-20, Receivables: Nonrefundable Fees and Other Costs.
  • ASC 958-605, Not-for-Profit Entities: Revenue Recognition.
  • ASC 912-605, Contractors — Federal Government: Revenue Recognition.
  • ASC 605-20, Revenue Recognition: Services (addresses treatment of separately priced extended warranty and product maintenance contracts).
  • ASC 470-10-25-1 and 25-2, Debt: Overall (addresses treatment of sales of future revenues).
  • ASC 926-605, Entertainment — Films: Revenue Recognition.

IFRSs generally do not provide revenue recognition guidance that applies to these industries or guidance that applies to many specific circumstances or situations; rather, the general revenue concepts in IAS 18 should be applied. Therefore, the accounting under IFRSs may differ from that under the U.S. GAAP subtopics listed above.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.