Question

Analyze and evaluate the potential impact a change from U.S. GAAP to IFRS would have on U.S. companies for revenue recognition of goods and services. This includes both the impact on specific amounts in the financial statements, in addition to the impact on various stakeholders associated with a company (e.g., creditors, investors, suppliers, management, employees, etc.).

Answer 1

International Financial Reporting Standards are a set of accounting standards developed by the International Accounting Standards Board. Approximately 120 nations require IFRS for domestic listed companies although some companies have fully conformed with IFRS.

The major advantage of adapting IFRS is, all the companies can resent it's financial statements on the same basis as it's foreign competitors which makes comparisons easy. However, there are disadvantages too.

Listed below are the major differences between U.S.GAAP and IFRS regarding revenue recognition and its impact.

• The major dfference between U.S GAAP and IFRS lies in the definition of Revenue.
• Under U.S GAAP, revenue is recognized when it is realised or realisable or earned. A single comprehensive standard where it defines Revenue does not exsists in U.S GAAP.
• Under IFRS, revenue recognition standards are more simpler and straight forward. IFRS defines revenue as gross inflow of economic benefit resulting in an increase in equity accounts. This leads to difference in how sales, service and deffered revenue are recognised and reported.
• Another difference when it comes to revenue recognition of goods and services is IFRS does not Last In, First Out (LIFO). This will make impact on valuation of closing stock.
• In U.S. GAAP, revenue from sale of goods is not recognised untill it is realised or realisable or earned and the sale price should be fixed or determinable. In IFRS, revenue from sale of goods is recognised when certain conditions are fulfilled i.e., the seller has transferred ownership to the buyer, the amount of revenue is measurable, and the economic benefit should flow to the entity.
• In U.S GAAP, revenue from Service should be recognised when the Service has been rendered, price for providing the service has been fixed, and there is an aggrement between service receiver and provider. In case of IFRS, revenue from rendering a service can only be recognised if, the revenue associated to the transaction shall be recognised with percentage of completion of the transaction at the balance sheet date.