Top 10 differences between IFRS 15 and ASC Topic 606 for revenue recognition.
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.
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.
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.
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.
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.
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).
Onerous revenue contracts are accounted for under IAS 37 1 . 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 contracts 2 , 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).
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.
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.
As stated 3 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.
