General Differences GAAP rules for revenue recognition are detailed regarding specific industries, such as real estate and software. IFRS guidance is universal; Standard 18 sets forth general principles and examples applicable to all industries.
The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP.
Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it. Typically, revenue is recognized when a critical event has occurred, and the dollar amount is easily measurable to the company.
The core principle of IFRS 15 is that revenue is recognised when the goods or services are transferred to the customer, at the transaction price. Revenue is recognised in accordance with that core principle by applying a 5-step model as shown below.
A completed contract under ASC 606 is defined as a contract in which all, or substantially all, the revenue has been recognized. Under IFRS 15, a completed contract is one in which the entity has transferred all goods or services.
GAAP vs. IFRS. A major difference between GAAP and IFRS is that GAAP is rule-based, whereas IFRS is principle-based. With a principle based framework there is the potential for different interpretations of similar transactions, which could lead to extensive disclosures in the financial statements.
Apple Inc., along with other companies like Cisco and other companies show their earnings in non-GAAP (generally accepted accounting principles) figures, as they are believed to reflect their earnings better.
The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met:
The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence.
5 Steps to the New Revenue Recognition Standard
According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.
Accounting requirements for revenue
Multiply total estimated contract revenue by the estimated completion percentage to arrive at the total amount of revenue that can be recognized. Subtract the contract revenue recognized to date through the preceding period from the total amount of revenue that can be recognized.