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IFRS Principal differences between UK and US GAAP and IFRS

IFRS Principal differences between UK and US GAAP and IFRS

IFRS Principal differences between UK and US GAAP and IFRS: List of differences in UK and US GAAP and IFRS

Revenue recognition—general

The concept of IFRS being principles- based, and US GAAP being principles- based but also rules-laden, is perhaps nowhere more evident than in the area of revenue recognition.

This fundamental difference requires a detailed, transaction-based analysis to iden- tify potential GAAP differences.

Differences may be affected by the way companies operate, including, for example, how they bundle various products and services in the marketplace.



Revenue recognition guidance is extensive and includes a significant volume of litera- ture issued by various US standard setters.

Generally, the guidance focuses on revenue being (1) either realized or real- izable and (2) earned. Revenue recogni- tion is considered to involve an exchange transaction; that is, revenue should not be recognized until an exchange transaction has occurred.

These rather straightforward concepts are augmented with detailed rules.

A detailed discussion of industry-specific differences is beyond the scope of this publication. For illustrative purposes only, we note that highly specialized guidance exists for software revenue recognition.

One aspect of that guidance focuses on the need to demonstrate VSOE of fair value in order to separate different soft- ware elements in a contract. This require- ment goes beyond the general fair value requirement of US  GAAP.



Two primary revenue standards capture all revenue transactions within one of four broad categories:

•    Sale of goods

•    Rendering of services

•    Others’ use of an entity’s assets (yielding interest, royalties, etc.)

•    Construction  contracts

Revenue recognition criteria for each of these categories include the probability that the economic benefits associated with the transaction will flow to the entity and that the revenue and costs can be measured reliably. Additional recognition criteria apply within each broad category.

The principles laid out within each of the categories are generally to be applied without significant further rules and/

or exceptions.

The concept of VSOE of fair value does not exist under IFRS, thereby resulting in more elements likely meeting the separa- tion criteria under IFRS.

Although the price that is regularly charged by an entity when an item is sold separately is the best evidence of the item’s fair value, IFRS acknowl- edges that reasonable estimates of fair value (such as cost plus a reasonable

margin) may, in certain circumstances, be acceptable alternatives.

IFRS Principal differences between UK and US GAAP and IFRS

Contingent consideration— general

Revenue may be recognized earlier under IFRS when there are contingencies associ- ated with the price/level of consideration.




General guidance associated with contin- gencies around consideration is addressed within SEC Staff Accounting Bulletin (SAB) Topic 13 and the concept of the seller’s price to the buyer being fixed

or determinable.

Even when delivery clearly has occurred (or services clearly have been rendered), the SEC has emphasized that revenue related to contingent consideration should not be recognized until the contingency

is resolved. It would not be appropriate to recognize revenue based upon the prob- ability of a factor being achieved.




For the sale of goods, one looks to the general recognition criteria as follows:

•    The entity has transferred to the buyer the significant risks and rewards of ownership;

•    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;

•    It is probable that the economic bene- fits associated with the transaction will flow to the entity; and

•    The costs incurred or to be incurred with respect to the transaction can be measured reliably.

IFRS specifically calls for consideration of the probability of the benefits flowing to the entity as well as the ability to reli- ably measure the associated revenue. If it were probable that the economic benefits would flow to the entity and the amount of revenue could be reliably measured, contingent consideration would be recog- nized assuming that the other revenue recognition criteria are met. If either

of these criteria were not met, revenue would be postponed until all of the criteria are met.

IFRS Principal differences between UK and US GAAP and IFRS

Multiple-element arrangements—general

While the guidance often results in the same treatment under the two frameworks, careful consideration is required, as there is the potential for significant differences.




Revenue arrangements with multiple deliverables are separated into different units of accounting if the deliverables in the arrangement meet all of the speci- fied criteria outlined in the  guidance.

Revenue recognition is then evaluated independently for each separate unit of accounting.

US GAAP includes a hierarchy for deter- mining the selling price of a deliverable. The hierarchy requires the selling price to be based on VSOE if available, third-party evidence (TPE) if VSOE is not available,  or estimated selling price if neither VSOE nor TPE is available. An entity must make its best estimate of selling price (BESP)

in a manner consistent with that used to determine the price to sell the deliver- able on a standalone basis. No estima- tion methods are prescribed; however, examples include the use of cost plus a reasonable margin.

Given the requirement to use BESP if neither VSOE nor TPE is available, arrangement consideration will be

allocated at the inception of the arrange- ment to all deliverables using the relative selling price method.

The residual method is precluded.

The reverse-residual method (when objective and reliable evidence of the fair value of an undelivered item or items does not exist) is also precluded unless other US GAAP guidance specifically requires the delivered unit of accounting to be recorded at fair value and marked to market each reporting period thereafter.




The revenue recognition criteria usually are applied separately to each transac- tion. In certain circumstances, however, it is necessary to separate a transaction

into identifiable components to reflect the substance of the transaction.

At the same time, two or more transac- tions may need to be grouped together when they are linked in such a way that the commercial effect cannot be under- stood without reference to the series of transactions as a whole.

The price that is regularly charged when an item is sold separately is the best evidence of the item’s fair value.

At the same time, under certain circum- stances, a cost-plus-reasonable-margin approach to estimating fair value would be appropriate under IFRS. The use of the residual method and, under rare circumstances, the reverse residual method may be acceptable to allocate arrangement consideration.

IFRS Principal differences between UK and US GAAP and IFRS

Sales of services—general

A fundamental difference in the guid- ance surrounding how service revenue should be recognized has the potential to significantly impact the timing of revenue recognition.



US GAAP prohibits the use of the cost- to-cost revenue recognition method for service arrangements unless the contract is within the scope of specific guidance for construction or certain production-type contracts.

Generally, companies would apply the proportional-performance model or the completed-performance model. In circumstances where output measures do not exist, input measures (other than cost-to-cost), which approximate progression toward completion, may be used. Revenue is recognized based on a discernible pattern and, if none exists, then the straight-line approach may

be appropriate.

Revenue is deferred if a service transac- tion cannot be measured reliably.



IFRS requires that service transactions be accounted for by reference to the stage

of completion of the transaction (the percentage-of-completion method). The stage of completion may be determined by a variety of methods, including the cost-to-cost method. Revenue may be recognized on a straight-line basis if the services are performed by an indeter- minate number of acts over a specified period and no other method better repre- sents the stage of completion.

When the outcome of a service trans- action cannot be measured reliably, revenue may be recognized to the extent of recoverable expenses incurred. That is, a zero-profit model would be utilized, as opposed to a completed-performance model. If the outcome of the transaction is so uncertain that recovery of costs is not probable, revenue would need to be deferred until a more accurate estimate could be made.

Revenue may have to be deferred in instances where a specific act is much more significant than any other acts.

Sales of services—right of refund

Differences within IFRS and US GAAP provide the potential for revenue to be recognized earlier under IFRS when services-based transactions include a right of refund.




A right of refund may preclude recogni- tion of revenue from a service arrange- ment until the right of refund expires.

In certain circumstances, companies may be able to recognize revenue over the service period—net of an allowance—if certain criteria within the guidance

are satisfied.




Service arrangements that contain a right of refund must be considered to deter- mine whether the outcome of the contract can be estimated reliably and whether

it is probable that the company would receive the economic benefit related to the services provided.

When reliable estimation is not possible, revenue is recognized only to the extent of the costs incurred that are probable of recov

IFRS Principal differences between UK and US GAAP and IFRS

Construction  contracts

There are a variety of differences between the two frameworks with potentially far- reaching consequences.

Differences ranging from the transactions scoped into the construction contract accounting guidance to the application of the models may have significant impacts.



The guidance generally applies to accounting for performance of contracts for which specifications are provided

by the customer for the construction of facilities, the production of goods, or the provision of related services.

The scope of this guidance generally has been limited to specific industries and types of contracts.
















Completed-contract method

Although the percentage-of-completion method is preferred, the completed- contract method is required in certain situations, such as when management is unable to make reliable estimates.

For circumstances in which reliable estimates cannot be made, but there is an assurance that no loss will be incurred on a contract (e.g., when the scope of the contract is ill-defined but the contractor is protected from an overall loss), the percentage-of-completion method based on a zero-profit margin, rather than the completed-contract method, is used until more-precise estimates can be made.



The guidance applies to contracts specifi- cally negotiated for the construction of a single asset or a combination of assets that are interrelated or interdependent in terms of their design, technology, and function, or their ultimate purpose or use. The guid- ance is not limited to certain industries and includes fixed-price and cost-plus construc- tion contracts.

Assessing whether a contract is within the scope of the construction contract standard or the broader revenue standard continues to be an area of focus. A buyer’s ability to specify the major structural elements of

the design (either before and/or during construction) is a key indicator (although not, in and of itself, determinative) of construction contract accounting.

Construction accounting guidance is gener- ally not applied to the recurring production of goods.


Completed-contract method

The completed-contract method is prohibited.

IFRS Principal differences between UK and US GAAP and IFRS

Construction contracts (continued) Percentage-of-completion method

Within the percentage-of-completion model there are two acceptable approaches: the revenue approach and the gross-profit approach.







Combining and segmenting contracts

Combining and segmenting contracts is permitted, provided certain criteria are met, but it is not required so long as the underlying economics of the transaction are reflected fairly.

Percentage-of-completion method

IFRS utilizes a revenue approach to percentage of completion. When the final outcome cannot be estimated reliably,

a zero-profit method is used (wherein revenue is recognized to the extent of costs incurred if those costs are expected to be recovered). The gross-profit approach is not allowed.


Combining and segmenting contracts

Combining and segmenting contracts is required when certain criteria are met.

Sale of goods— continuous transfer

Outside of construction accounting under IFRS, some agreements for the sale of goods will qualify for revenue recognition by reference to the stage of completion.




Other than construction accounting,

US GAAP does not have a separate model equivalent to the continuous transfer model for sale of goods.




When an agreement is for the sale of goods and is outside the scope of construction accounting, an entity

considers whether all of the sale of goods revenue recognition criteria are met continuously as the contract progresses.

When all of the sale of goods criteria are met continuously, an entity recog- nizes revenue by reference to the stage of completion using the percentage-of- completion method.

The requirements of the construction contracts guidance are generally appli- cable to the recognition of revenue and the associated expenses for such contin- uous transfer transactions.

Meeting the revenue recognition criteria continuously as the contract progresses for the sale of goods is expected to be relatively rare in practice.

IFRS Principal differences between UK and US GAAP and IFRS

Barter transactions

The two frameworks generally require different methods for determining the value ascribed to barter transactions.



US GAAP generally requires companies to use the fair value of goods or services surrendered as the starting point for measuring a barter transaction.


Non-advertising-barter    transactions

The fair value of goods or services received can be used if the value surren- dered is not clearly evident.



Accounting for advertising-barter transactions

If the fair value of assets surrendered in an advertising-barter transaction is not determinable, the transaction should be recorded based on the carrying amount of advertising surrendered, which likely will be zero.



Accounting for barter-credit transactions

It should be presumed that the fair value of the nonmonetary asset exchanged is more clearly evident than the fair value of the barter credits received.

However, it is also presumed that the fair value of the nonmonetary asset does not exceed its carrying amount unless there is persuasive evidence supporting a higher value. In rare instances, the fair value of the barter credits may be utilized (e.g., if the entity can convert the barter credits into cash in the near term, as evidenced by historical practice).



IFRS generally requires companies to use the fair value of goods or services received as the starting point for measuring a barter transaction.


Non-advertising-barter    transactions

When the fair value of items received is not reliably determinable, the fair value of goods or services surrendered can be used to measure the transaction.


Accounting for advertising-barter transactions

Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising services received. However, a seller can reliably measure revenue at the fair value of the advertising services it provides if certain criteria are met.


Accounting for barter-credit transactions

There is no further/specific guidance for barter-credit transactions. The broad prin- ciples outlined above should be applied.

IFRS Principal differences between UK and US GAAP and IFRS

Extended warranties

The IFRS requirement to separately allocate a portion of the consideration to each component of an arrangement on a relative fair value basis has the potential to impact the timing of revenue recog- nition for arrangements that include a separately priced extended warranty or maintenance contract.



Revenue associated with separately priced extended warranty or product maintenance contracts generally should be deferred and recognized as income on a straight-line basis over the contract life. An exception exists where experi-

ence indicates that the cost of performing services is incurred on an other-than- straight-line basis.

The revenue related to separately priced extended warranties is determined by reference to the separately stated price for maintenance contracts that are sold separately from the product. There is no relative fair market value allocation in this instance.



If an entity sells an extended warranty, the revenue from the sale of the extended warranty should be deferred and recognized over the period covered by the warranty.

In instances where the extended warranty is an integral component of the sale

(i.e., bundled into a single transaction), an entity should attribute consideration based on relative fair value to each component of the bundle.

Discounting of revenues

Discounting of revenue (to present value) is more broadly required under IFRS than under  US GAAP.

This may result in lower revenue under IFRS because the time value portion of the ultimate receivable is recognized as finance/interest income.



The discounting of revenue is required in only limited situations, including receiv- ables with payment terms greater than one year and certain industry-specific situations, such as retail land sales or license agreements for motion pictures or television programs.

When discounting is required, the interest component should be computed based on the stated rate of interest in the instru- ment or a market rate of interest if the stated rate is considered unreasonable.



Discounting of revenue to present value is required in instances where the inflow of cash or cash equivalents is deferred.

In such instances, an imputed interest rate should be used for determining the amount of revenue to be recognized

as well as the separate interest income component to be recorded over time.

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