Question

The difference between IFRS and GAAP are well documented and in the 2000's and early 2010's several convergence projects were undertakem by IASB and FASB in the effort to align the two. One of the projects relate to revenue recongnition and specifically that of construction contracts. You are to critically reflect on the cponvergence projects taking into account the following:

(a) the differences in revenue recognition (of construction contracts) between IFRS and GAAP?

(b) Why it is importatant to consider the differences in IFRS and GAAP in general?

(c) Potential for lobbying to take place in final outcome of convergence projects.

Answer 1

(a) There are few differences in revenue recognition (of Construction Contracts) between IFRS and GAAP

1. Under GAAP, standard method of revenue recognition is completed contract method, where revenue is recognized when the contract is complete. Whereas under IFRS, this method is banned.

2. Under GAAP large construction projects, can also use percentage of completion method, in which revenue is matched to the percentage of work completed. Under IFRS, this method can be used under certain conditions, otherwise revenue should be recognized only if any cost incurred is recoverable.

3. Both GAAP and IFRS allow to combine or segment construction contracts but on different criteria.

(b) In the global economy, it is important to consider the differences in IFRS and GAAP. IFRS are adopted by approx 110 countries, which aims to develop a common global presentation of the companies accounting affairs, whereas GAAP is US based. Financial statements prepared and presented as per GAAP are different from IFRS. To remove this difference, it is required to remove the difference in IFRS and GAAP.

(c) Most of the Convergence projects are evolved over time. Some of the projects are taken by IASB in its own right.