Since 2014, both the Financial and International Accounting Standards Boards have relied on a joint set of revenue recognition documents that have made it much easier to comply with revenue reporting standards. Due to the similarities, however, IFRS Part 15 and the Accounting Standards Codification Topic 606 rules are easily confused. Essentially, these two seemingly opposite standards are legislatively interchangeable, but there are some vital points financial professionals will want to keep tabs on.
The two major areas where these standards conflict are collectability threshold figures and the impairment loss reversal process. According to ASC 606, any contract that meets the criteria in the initial document would require any collection service involved to demonstrate that it will take any given consideration from the clients in question.
It provides some flexibility by allowing the threshold to float between 75-80%. Those who work with IFRS Part 15 standards must set this same figure at a 50% hard cap that can’t change in the future.
IFRS rules also require entities to reverse any impairments owed on a recognized asset when doing so is within the overall guidance procedures laid out in a contract. Generally accepted accounting principles would prevent this from happening, thus making this a major point of contention between IFRS and ASC guidelines.
The two standards also handle intellectual property renewals somewhat differently. However, these variations largely have to do with timing and could theoretically be chalked up to how copyright and patent laws work in the United States as opposed to most of the world.
Accountants who find themselves pitting ASC 606 vs IFRS 15 rules like it is some sort of intellectual boxing match would also be interested to learn that the IFRS document never specified when and how to measure non-cash considerations. ASC 606 guidelines spell this out in no uncertain terms.
Organizations operating under a strict interpretation of IFRS 15 won’t get an option to create a framework to exclude all sales and value-added taxes from the transaction price specified in the contract. Those who work under ASC 606 rules have more liberty to do so.
Both of these standards are designed to be compatible to at least a large degree, which is why they might seem to be duplicating their efforts. They’re based on the same five-step workflow that makes revenue recognition much easier than it used to be. After identifying the contract with a customer and spelling out the performance obligations, the parties involved must determine a transaction price. Then can then allocate this price against all of the obligations in the document.
Finally, the financial revenue gets recognized when one of the parties satisfies everything specified in their obligation. This process works for sets of accounting standards on a conceptual level. Choosing which option to go with mostly involves identifying which region the contract is binding in.
American businesses are normally required to work with standards specified by the panel that manages GAAP rules, which means that they’ll generally have to ensure that their contracts are compliant with ASC 606 when it comes to revenue recognition. This is especially true of those who regularly make a substantial number of business-to-business sales.
Fulfilment obligations can quickly get confusing, so it’s important to use the same set of revenue recognition rules that everyone else in their sector does. Several relevant legal regulations may also guide their choice since this is an area in which governmental authorities have long sought to set some ground rules that help create a fair playing field.
Internationally-managed firms will generally use IFRS guidelines. While these rules may seem more permissive at first glance, they’re strict enough that those interested in entering into multiple contracts will certainly want to review all of the terms several times before finalizing them.
Nevertheless, financial reporting specialists who don’t already have copies of them will want to take a few moments to track down the long-form versions of the documents. Studying how these public papers impact revenue reporting can make the process of managing monetary records a great deal easier.