From the IFRS Institute – March 11, 2022
As the topline, revenue is a key performance indicator for users of financial statements where an understanding of GAAP differences is essential to benchmark against peers. A few years back, IFRS 15 and Topic 606 were introduced to account for revenue from contracts with customers under a common set of principles across IFRS Standards and US GAAP. Fast forward to 2022, implementation has settled but standard setting has not – for example, the FASB amended its guidance on licenses and on revenue contracts in business combinations. So, is revenue accounting still converged today? Here we summarize what we see as the current main differences between IFRS 15 and Topic 606.
What are the requirements of IFRS 15?
The core principle of IFRS 15 is that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. A company recognizes revenue under that principle by applying a 5-step model as follows.
- Step 1: Identify the contract(s) with a customer
- Step 2: Identify the performance obligations in the contract
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price to the performance obligations in the contract
- Step 5: Recognize revenue when (or as) the company satisfies a performance obligation
In many cases, companies apply the respective cost guidance under other standards – e.g. inventory standard – but IFRS 15 prescribes requirements specific to costs of obtaining and costs of fulfilling a customer contract, including amortization and impairment of the contract costs.
There are also disclosure requirements under IFRS 15 that provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the company’s contracts with customers.
How is IFRS 15 different from US GAAP?
While both IFRS 15 and Topic 606 remain substantially converged, certain differences exist that can affect comparability. Here we summarize what we see as the top 10 differences in revenue accounting and disclosures under IFRS Standards and US GAAP.
|IFRS 15||Topic 606||Consideration for preparers|
|Step 2: Identify the performance obligations in the contract: Shipping and handling activities – FASB policy election|
|No policy election. Shipping and handling activities undertaken after the customer has obtained control of the related goods may represent a separate performance obligation. If so, some revenue is allocated to the shipping activity and deferred until shipping and handling occurs.||Policy election to treat shipping and handling activities undertaken by the company after the customer has obtained control of the related goods as a fulfillment activity (i.e. not a separate performance obligation). All revenue and costs are then recognized on transferring control of the goods to the customer.||When the customer obtains control of the goods before shipping, the shipping and handling activities may be a separate performance obligation. The US GAAP policy election simplifies the accounting and accelerates recognition of the revenue and costs relating to the shipping and handling activities in comparison to IFRS Standards.|
|Step 3: Determine the transaction price: Measurement date for noncash consideration|
|No specific guidance. A company should apply judgment, based on the relevant facts and circumstances, to determine whether to measure non-cash consideration with reference to the date on which the contract is entered into, the date it is received or the date the performance obligation is satisfied.||Unlike IFRS Standards, the measurement date for non-cash consideration is the date of the contract inception.||Noncash consideration, such as shares or advertising, is measured at fair value for inclusion in the transaction price. Fair value can be measured at contract inception under both IFRS Standards and US GAAP. Other dates (e.g. when the consideration is received) are acceptable under IFRS 15 depending on the relevant facts and circumstances, but are not permitted under US GAAP.|
|Step 3: Determine the transaction price: Sales taxes – FASB policy election|
|No policy election. To determine whether to include sales taxes or duties in the transaction price, a company assesses whether it is primarily obliged for payment of the taxes or whether it collects the amount from the customer on behalf of the tax authorities. This determination requires an analysis of state or local tax authority requirements.||Policy election to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with the specific revenue-producing transaction and collected by the company from a customer - e.g. sales, use, value-added and some excise taxes.||
The IFRS 15 approach may result in some taxes being presented on a net basis and others on a gross basis.
The US GAAP policy election simplifies the accounting for sales taxes compared to IFRS Standards, but may yield a different presentation and transaction price when elected.
|Contract costs: Reversal of previously impaired assets arising from costs to obtain or fulfil a contract, when the impairment conditions cease to exist|
|Required||Prohibited||Under IFRS Standards, an impairment loss is reversed. The impairment reversal is limited to the carrying amount, net of amortization, that would have been determined if no impairment loss had been recognized when the carrying amount is no longer impaired.|
|Sales outside ordinary activities: Sales of in-substance nonfinancial assets|
Sales of nonfinancial assets, such as property, plant and equipment (IAS 16), intangible assets (IAS 38) and investment property (IAS 40), are accounted for using the measurement and derecognition guidance of IFRS 15.
Sales of a subsidiary or equity method investee are outside the scope of IFRS 15 and in scope of the deconsolidation guidance (IFRS 10 and IAS 28, respectively).
Sales of nonfinancial assets and in-substance nonfinancial assets scoped into Subtopic 610-20 are accounted for using the contract existence, separation, measurement and derecognition guidance in Topic 606.
Sales of a subsidiary that only has nonfinancial assets and/or in-substance nonfinancial assets and is not a business are scoped into Subtopic 610-20. This includes partial sale transactions.
Sales of a subsidiary or group of assets that constitutes a business or not-for-profit activity continue to be accounted for under the deconsolidation guidance (Topic 810).
|For example, if a subsidiary that has only a building and does not represent a business is sold for a fixed price plus a contingent fee:
|Onerous contracts: Determination of provisions for loss-making and onerous contracts|
Onerous revenue contracts are accounted for under IAS 371. A provision is recognized when the unavoidable costs of meeting the obligations under a contract exceed the economic benefits to be received. The unavoidable costs are the lower of the costs of fulfilling the contract and any compensation or penalties from the failure to fulfill it.
Amendments to IAS 37 effective for annual reporting periods beginning on or after January 1, 2022 clarify which costs should be used to identify onerous contracts. The cost of fulfilling a contract comprises costs that relate directly to the contract, and include (1) the incremental costs of fulfilling that contract – e.g. direct labor and materials; and (2) an allocation of other costs that relate directly to fulfilling contracts – e.g. an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract.
US GAAP has no general guidance for recognizing a provision for onerous contracts, but instead the specific recognition and measurement requirements of the relevant Codification Topics/ Subtopics apply.
For example, for long-term construction- and production-type contracts2, a company is allowed to determine the provision for losses at either the contract level (like IFRS Standards) or the performance obligation level (unlike IFRS standards).
|Under IFRS Standards, all revenue contracts (including service contracts) are in the scope of the onerous contracts guidance in IAS 37, and a loss is assessed for the contract as a whole.|
|Licensing of intellectual property: Renewal (or extension) of an existing license agreed before the start of the renewal period|
|No specific guidance. A company should choose an accounting policy, to be applied consistently, to recognize revenue for the renewal when either:
||The company does not recognize revenue for the renewal until the beginning of the renewal period.||Under IFRS Standards, depending on the accounting policy chosen, revenue for the renewal of an existing license could be recognized earlier than under US GAAP.|
|Business combination: Accounting for contract assets and contract liabilities from contracts with customers|
|The general business combination guidance (IFRS 3) applies. An acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date.||
ASU 2021-08 creates an exception to the general business combination guidance (Topic 805). An acquirer applies Topic 606, instead of fair value, to recognize and measure contract assets and contract liabilities arising from revenue contracts with customers.
The amendments in the ASU are effective for fiscal years beginning after December 15, 2022 for public business entities and December 15, 2023 for all other entities. Early adoption is permitted.
|If the contract assets and liabilities recognized in the business combination differ between IFRS Standards and US GAAP, goodwill will be affected as part of the acquisition accounting and revenue recognized post-acquisition will also be affected.|
|Disclosures: Remaining performance obligations|
|Disclosure relief in two situations. A company needs to disclose the aggregate amount of the transaction price allocated to unsatisfied or partially satisfied performance obligations and when it expects to recognize this amount as revenue, unless:
||Disclosure relief in four situations. In addition to the two exceptions under IFRS 15, Topic 606 permits not including variable consideration in the disclosure of remaining performance obligations when variable consideration:
||Under IFRS 15, the company may need to estimate certain variable consideration for disclosure purposes only, even when those estimates are not needed for the recognition of revenue.|
|Disclosures: Interim disclosures|
All entities are required to disclose:
Other annual disclosures about revenue are typically not required for interim financial reporting.
Public entities are required to disclose:
Non-public entities may elect not to provide certain disclosures required for public entities.
|IFRS 15 has fewer disclosure requirements for interim financial reporting than Topic 606.|
As stated3 by the Chair of the International Accounting Standards Board: “Now, it is one thing getting to converged Standards. It is yet another to keep converged Standards converged.” While IFRS 15 and Topic 606 were substantially converged when issued, the FASB and the IASB have since responded to their stakeholders’ needs differently, thereby opening the door to new GAAP differences. For example, the IASB has recently refined its guidance on onerous contracts in IAS 37 which may affect certain loss-making revenue contracts, while the FASB has developed further guidance on license renewals (and extensions) and customer contracts in business combinations.
These GAAP differences, combined with the various accounting judgments that often affect the recognition of revenue, mean that revenue and performance from customer contracts may be reported differently across peer companies. Dual preparers and users of financial statements should carefully assess the effect of key differences between IFRS Standards and US GAAP in this area.
- IAS 37, Provisions, Contingent Liabilities and Contingent Assets
- Subtopic 605-35
- Connectivity, core work and convergence—what next for IFRS Accounting Standards?, Speech from Andreas Barckow, at the AICPA and CIMA Conference on Current SEC and PCAOB Developments, December 7, 2021