The difference between IFRS and GAAP are well documented and in the 2000\'s and
ID: 2539638 • Letter: T
Question
The difference between IFRS and GAAP are well documented and in the 2000's and early 2010's several convergence projects were undertakem by IASB and FASB in the effort to align the two. One of the projects relate to revenue recongnition and specifically that of construction contracts.
You are to critically reflect on the cponvergence projects taking into account the following:
(a) the differences in revenue recognition (of construction contracts) between IFRS and GAAP?
(b) Why it is importatant to consider the differences in IFRS and GAAP in general?
(c) Potential for lobbying to take place in final outcome of convergence projects.
Explanation / Answer
Solution : Revenue Recognition of constuction contracts
(a) US GAAP : The two methods stipulated are the completed contract method where all the revenue, gross profit and costs( costs are deferred untill completion) are recognized only upon completion of the contract and the percentage of completion method when the extent of progress , contact revenue,costs are reasonably estimable ;the terms of settlement are clearly specified and the obligations of both the parties are expected to be fulfilled.
( b) IFRS : There are two conditions to recognize revenue for contruction contracts :
Hence, the completed contract method is not allowed under IFRS. When the outcome of a long term construction contract cannot be reliably estimated, revenue recognition is limited to recoverable costs incurred. Contract costs must be recognized as an expense in the period in which they are incurred.
(b) IFRS rules can be seen as principle driven across all industries, while GAAP rules are highly specific and can vary widely with each case. Due to the differences in IFRS and GAAP , the presentation of the financial statments completely change, i.e. there can be a material impact on the balance sheet, financial ratios, taxes and can impact decision making ability to users of financial statments namely current investors, potential investors, lenders, creditors etc
(c) There are certain guidelines stipulated by IASB (International Accounting Standards Board) , on first time adoption of IFRS. In Feb 2010, the SEC ( Securities and Exchange Commision) directed its staff to study the effect that the adoption of IFRS's would have on thr U.S. Securities Market.The SEC intends to use the results of this study and the output of the convergence project between the FASB and the IASB to decide whether and if so when and how the converged standards would be incorporated into the U.S. financial reporting.
In the year of convergence,the accounting policies used in the opening IFRS statement of financial position must be those in effect at the end of the first IFRSs reporting period . Hence, there would always be a potential to inflate the assets/laibilites due to the change in accounting policies and principles due to convergence.