Revenue recognition : goods and services - Research Paper Example

? U.S. GAAP vs. IFRS Research & Presentation “Revenue Recognition – Goods and Services” Introduction Accounting practices under US Generally AcceptedAccounting Principles (GAAP) present a collection of certain procedures, rules and conventions that are generally used for defining appropriate and accepted practices of accounting. From a critical perspective, it has often been argued that the GAAP policies currently followed in the US are quite distinct (Simlogic, 2012). Based on this understanding, accounting practices that are followed under the International Financial Reporting Standards (IFRS) system, will also be critically evaluated in contrast with US GAAP in treating revenue recognition transactions related to both goods and services. The study will comprise the major points of differences in relation to revenue recognition that will be identified under both the accounting practices (i.e. GAAP and IFRS). Analyzing these aspects, the study will ascertain the grounds on which the accounting treatment of the identified issue, i.e. revenue recognition will be different if US GAAP is replaced with the principles of IFRS. Correspondingly, the potential impacts to be caused on the US companies following such changes will also be assessed in this study. Current Scenario of Accounting Revenue Recognition under US GAAP In simple words, under the US GAAP guidelines, the transactions or the specific conditions which contribute to the realization of income is revenue constitute within the guidelines for revenue recognition. Under this particular guideline, revenues can only be recognized if they are measurable or have occurred after a specific event. However, the guidance that is provided by GAAP for revenue recognition is very extensive in US. Fundamentally, it is the Emerging Issues Task Force (EITF), the American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and the US Securities and Exchange Commission (SEC) principles that tend to shape the US GAAP guidelines for revenue recognition. Moreover, another characteristic of revenue recognition guidelines under the US GAAP is its industry specific nature. As a result, there are certain exemptions in particular industries when accounting for revenue recognition; while on the other hand, few industries face challenges with extra burden for additional guidelines and requisites (PWC, 2012). Currently, the US companies can be divided into a vivid list of approximately 200 specialized industries. Under such circumstances, it becomes quite challenging for the US companies to maintain uniformity in the accounting procedures centered towards revenue recognition as per the guidelines of US GAAP, which is entirely industry specific in nature. In the current phenomenon, the US companies, especially those operating in software or construction businesses, often have to face difficulties related to the measurement of contracts and uncountable revenue deliverables as per the US GAAP. To mitigate these challenges, US companies are often observed to develop particular approaches to account the various deliverables to revenue obtained from goods and services, such as accounting warranties in contractual transactions under the head of cost accrual, accounting sales commission as another deliverable in the period of sale as capitalization cost and similar others (Howard, n.d.) Implications of Changes from US GAAP to IFRS for US Companies Particular limitations exist between the guidelines of treating revenue recognition activities under the US GAAP and IFRS which can further determine the implications of convergence from one principle to another. For instance, being industry specific, the US GAAP guidelines for treating revenue recognition lacks in terms of universality. This further creates limitations when accounting for inter industrial transactions. Also, such discrepancies create hurdles when auditing and when interpreting the financial information of various industry components used in a particular company operation. In addition, as mentioned above, another characteristic of US GAAP treatment for revenue recognition is that only measurable factors are considered under this approach. Thus, US GAAP principles lack in measuring revenue or income obtained through customer loyalty, goodwill and other immeasurable but significant factors. Contextually, if the US companies start practicing the IFRS accounting principles, the implications of such transition might allow them to do away with these limitations. GAAP principles are being practiced and are used in the accounting functions before the IFRS principles have been formulated. This in turn has rendered a significant advantage to the IFRS guidelines to assess the limitations of GAAP and configure its principles accordingly. Thus, the implications of transforming the accounting principles from US GAAP to IFRS shall allow US companies to eradicate the complexities in respect of determining the separation of various components included in transactions which imbibe multiple variables. This shall further facilitate in the allocation of revenues generated to support appropriate components which in turn shall yield better return in the investments made. Contradictorily, changing the traditional accounting practices of US GAAP may lead to the aforementioned developments in US companies as well as it may raise certain discrepancies. In this regard, the challenges most likely to be witnessed by US companies when transforming to IFRS guidelines: they will include complexities and the increased need for educating their employees regarding the IFRS guidelines when recording transactions involving multiple components (Ernst&Young LLP, 2012). Analysis of Impacts from the Change from US GAAP to IFRS As mentioned above, there can be both merits and demerits associated with the impacts of the conversion of US GAAP to IFRS within US companies. For instance, on one hand, the conversion can result in increased efficiency to account multiple components including the immeasurable ones; on the other hand, it may also necessitate investments in training processes to make the employees competent enough to apply the IFRS in replacement of US GAAP. Moreover, subjected to the effective incorporation of the IFRS principles in accounting for revenue recognition, the US companies may also have to face significant challenges in maintaining transparency in the overall accounting practices during the initial period and may result in decreased number of investors, suppliers as well as creditors. However, on a positive note, as per the changing trends in marketing, the impact of such conversion from US GAAP to IFRS in accounting for revenue recognition may benefit the employees of US companies who crave for self-development and innovation. It will also enable the management to develop innovative processes of accounting as per the nature of the components included in their industrial operations; thus, transforming the entire accounting system from industry specific to component, which shall in turn facilitate the universality of the accounting treatments followed for revenue recognition (Ernst &Young LLP, 2012). Conclusion With reference to the above discussion, it can be apparently observed that both US GAAP and IFRS possess certain merits and demerits when accounting for revenue recognition. Whereas US GAAP follows a traditional method to account the multiple components involved in the revenue recognition process, IFRS follows an unconventional approach to accounting which renders an advantage to the companies to imbibe innovative thinking in the process. Additionally, the study revealed that although converting from US GAAP to IFRS may lead to certain managerial issues in US companies when accounting for revenue recognition, it may also assist in developing a component specific accounting method having wider applicability rather than being confined because of industry specific approach as followed under US GAAP principles. References Ernst &Young LLP. (2012). US GAAP versus IFRS. Retrieved from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf Howard, R. (n.d.). Revenue Recognition: Convergence between IFRS and US GAAP. Retrieved from http://www.deloitte.com/assets/Dcom-Ireland/Local%20Assets/Documents/ie_AccountancyIreland_RevenueRecognition_0609.pdf PWC. (2012). IFRS and US GAAP: similarities and differences. Retrieved from http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2012.pdf Simlogic. (2012). US GAAP vs IFRS. Retrieved from http://www.ifrsbox.com/us-gaap-vs-ifrs/ Read More