Accounting Examples

Above all, this site aims to be practical.

IFRS and US GAAP are thousands of pages long and written in a way that leaves many people scratching their heads.

IFRS in print is available at link: shop.ifrs.org or electronically at link: eifrs.ifrs.org.

US GAAP in print is available at at link: fasb.org or electronically at link: asc.fasb.org.

For example, IFRS 15 and ASC 606 have this to say about how project revenue should be recognized from 2018 onward.

IFRS 15.39 | ASC 606-10-25-31: For each performance obligation satisfied over time in accordance with paragraphs 35–37 | 606-10-25-27 through 25-29 , an entity shall recognise revenue over time by measuring the progress towards complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer (ie the satisfaction of an entity’s performance obligation).

IFRS 15.35 | ASC 606-10-25-27: An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

(a) the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs (see paragraphs B3-B4);

(b) the entity's performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5); or

(c) the entity's performance does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).

IFRS 15.36 | ASC 606-10-25-28: An asset created by an entity's performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation. Paragraphs B6-B8 provide guidance for assessing whether an asset has an alternative use to an entity.

IFRS 15.37 | ASC 606-10-25-29: An entity shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 35(c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity's failure to perform as promised. Paragraphs B9-B13 provide guidance for assessing the existence and enforceability of a right to payment and whether an entity's right to payment would entitle the entity to be paid for its performance completed to date.

IFRS 15.41 | ASC 606-10-25-33: Appropriate methods of measuring progress include output methods and input methods. Paragraphs B14–B19 | 606-10-55-16 through 55-21 provide guidance for using output methods and input methods to measure an entity’s progress towards complete satisfaction of a performance obligation. In determining the appropriate method for measuring progress, an entity shall consider the nature of the good or service that the entity promised to transfer to the customer.

IFRS 15.B14 | ASC 606-10-55-16: Methods that can be used to measure an entity’s progress towards complete satisfaction of a performance obligation satisfied over time in accordance with paragraphs 35–37 include the following:

(a) output methods (see paragraphs B15–B17); and

(b) input methods (see paragraphs B18–B19).

Output methods

IFRS 15.B15 | ASC 606-10-55-17: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered. When an entity evaluates whether to apply an output method to measure its progress, the entity shall consider whether the output selected would faithfully depict the entity’s performance towards complete satisfaction of the performance obligation. An output method would not provide a faithful depiction of the entity’s performance if the output selected would fail to measure some of the goods or services for which control has transferred to the customer. For example, output methods based on units produced or units delivered would not faithfully depict an entity’s performance in satisfying a performance obligation if, at the end of the reporting period, the entity’s performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the output.

IFRS 15.B16 | ASC 606-10-55-18: As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognise revenue in the amount to which the entity has a right to invoice.

IFRS 15.B17 | ASC 606-10-55-19: The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an entity without undue cost. Therefore, an input method may be necessary.

Input methods

IFRS 15.B18 | ASC 606-10-55-20: Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognise revenue on a straight-line basis.

IFRS 15.B19 | ASC 606-10-55-21: A shortcoming of input methods is that there may not be a direct relationship between an entity’s inputs and the transfer of control of goods or services to a customer. Therefore, an entity shall exclude from an input method the effects of any inputs that, in accordance with the objective of measuring progress in paragraph 39, do not depict the entity’s performance in transferring control of goods or services to the customer. For instance, when using a cost-based input method, an adjustment to the measure of progress may be required in the following circumstances:

(a) When a cost incurred does not contribute to an entity’s progress in satisfying the performance obligation. For example, an entity would not recognise revenue on the basis of costs incurred that are attributable to significant inefficiencies in the entity’s performance that were not reflected in the price of the contract (for example, the costs of unexpected amounts of wasted materials, labour or other resources that were incurred to satisfy the performance obligation).

(b) When a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation. In those circumstances, the best depiction of the entity’s performance may be to adjust the input method to recognise revenue only to the extent of that cost incurred. For example, a faithful depiction of an entity’s performance might be to recognise revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met:

   (i) the good is not distinct;

   (ii) the customer is expected to obtain control of the good significantly before receiving services related to the good;

   (iii) the cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation; and

   (iv) the entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal in accordance with paragraphs B34–B38).

This text seems to suggest that the new revenue recognition standard does away with old way of recognizing this revenue, percentage of completion, replacing it with an entirely new way, over time.

At lease that is the conclusion one company came to.

Not long ago, a client, the finance manager at a Czech subsidiary of a US based company, called in a panic.

The reason for his distress?

He had just received a new policy statement from the US.

In it he learned that starting in 2018: "The company recognizes revenue associated with a contract when or as the performance obligations within the contract are satisfied. Performance obligations are deemed to be satisfied when, or as, the control of a good or service is transferred to the customer.

"Control of a good or service has transferred to a customer when: The customer has the ability to direct the use of the asset and The customer has the ability to obtain substantially all of the remaining benefits from that good or service. Performance obligations may be satisfied at a point in time or over time. Thus, the timing of revenue recognition for a contract is impacted by how and when the performance obligations are satisfied. Following flowchart would help determining whether revenue can be recognized over time or point in time."

If this sounds familiar, it is likely because IFRS 15.31 | ASC 606-10-25-33 state: An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

IFRS 15.33 | ASC 606-10-25-25 state: Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

And IFRS 15.32 | ASC 606-10-25-24 point out: For each performance obligation identified in accordance with paragraphs 22–30 | 606-10-25-14 through 25-22, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with paragraphs 35–37 | 606-10-25-27 through 25-29) or satisfies the performance obligation at a point in time (in accordance with paragraph 38 | 606-10-25-30). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

What followed was not exactly a flow chart but it did have this to say about the old way of doing things: "Under the POC method revenue is recognized over the life-time of a contract in proportion to its percentage of completion. Contract progress is determined as the proportion of contract costs incurred for work performed up to date as a percentage of the estimated total contract costs."

And about the new way: "For each performance obligation that is satisfied over time, the company must determine how the progress of satisfying such an obligation will be measured in order to determine the timing of revenue recognition. The timing of revenue recognition should coincide with the transfer of control of good/service to the customer."

After reading this, he concluded the old procedure, percentage of completion using a cost to cost method, was out and an entirely new procedure, based on a transfer of control, was in.

Some companies take the time to write clear and thoughtful policy statements.

For example, one company had this to say about determining if lease includes a non-renewal penalty.

For all leases with option periods that are at the company's sole discretion, the subsidiary must make a determination at lease inception as to whether the option period is reasonably assured of renewal or if a purchase option is reasonably assured of being exercised (generally options that are not FMV options may be considered). This "reasonably assured of renewal" determination is based on the "penalty" that would be incurred if the subsidiary does not renew the lease. "Penalty" means that the lessee would forgo an economic benefit or suffer an economic detriment if it does not renew the lease. Thus, it is not a cash payment, but a loss of the ability to recover the investment in assets or continue to capture the economic benefit of restaurant profitability. Based on this, the company's includes renewal/extension periods when significant capital expenditures have been invested in the site. Thus, subsidiaries must use their own experience and the level of investment for each lease type in their portfolio to make the determination whether the option is "reasonably assured of renewal" in order to determine if option periods should be included or not.

Others prefer the Ctrl-c / Ctrl-v method, which is fine, as long as they take the time to absorb the true meaning of IFRS / US GAAP and give additional explanations where needed.

If not, it just causes confusion.

Obviously, this would require developing completely new procedures and internal controls, buying new software, extensive staff training, and months of agony until all the bugs were worked out.

All this, and no increase to his department's budget.

Imagine his relief when, after a meeting with our consultant and couple of follow-up calls between the consultant and his controller, he concluded that the timing of how revenue recognition coincided with the transfer of control of good/service to the customer could be expressed with a percentage derived by comparing cost to date with total cost. The only caveat, adequate internal controls had to be in place (they were).

IFRS 15.B18 | ASC 606-10-55-20 state: Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.

In other words, if a company recognizes revenue by applying a percentage determined by comparing cost to date with total cost, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the cost-to-cost method.

Similarly, IFRS 15.B15 | ASC 606-10-55-17 state: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered.

In other words, if a company recognizes revenue by applying a percentage determined by evaluating surveys, appraisals, milestones (a.k.a. benchmarks) or time, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the efforts-expended method.

Likewise, if a company recognizes revenue by applying a percentage determined by dividing the number of units delivered by total number units to be delivered, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the units-of-delivery method.

Obviously, care must be taken to evaluate whether the percentage used clearly represents the portion of the delivery that has been transferred into the control of the customer, but that is not an accounting issue. It is an internal control issue.

No wonder, so many publications try to explain them.

The volume and complexity has lead many books and web sites that try to explain, interpret or simplify the standards.

Some succeed. Some fail.

Among the better publications: link: Wiley IFRS or link: Wiley GAAP.

Among the better web sites: link: ifrsbox.com or link: accountingtools.com.

Among those that have taken simplification too far: link: wiley.com or link: accountingexplained.com or are useless to anyone but an absolute beginner: link: accountingcoach.com.

By practical we mean examples.

In our experience, words confuse people, examples do not.

Anyone who has ever worked for a company from the US, UK or any other English-speaking country has surely noticed that native English speakers, especially American native English speakers, are not particularly good communicating with non-native English speakers.

For example, to an English native speaker, it is fairly clear that over time revenue recognition is a principal while, for example, cost-to-cost is the method used to apply that principal.

To a non-native speaker, maybe not so much.

Not long ago, a client, the finance manager at a Czech subsidiary of a US based company, called in a panic.

The reason for his distress?

He had just received a new policy statement from the US.

In it he learned that starting in 2018: "The company recognizes revenue associated with a contract when or as the performance obligations within the contract are satisfied. Performance obligations are deemed to be satisfied when, or as, the control of a good or service is transferred to the customer.

"Control of a good or service has transferred to a customer when: The customer has the ability to direct the use of the asset and The customer has the ability to obtain substantially all of the remaining benefits from that good or service. Performance obligations may be satisfied at a point in time or over time. Thus, the timing of revenue recognition for a contract is impacted by how and when the performance obligations are satisfied. Following flowchart would help determining whether revenue can be recognized over time or point in time."

If this sounds familiar, it is likely because IFRS 15.31 | ASC 606-10-25-33 state: An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

IFRS 15.33 | ASC 606-10-25-25 state: Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

And IFRS 15.32 | ASC 606-10-25-24 point out: For each performance obligation identified in accordance with paragraphs 22–30 | 606-10-25-14 through 25-22, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with paragraphs 35–37 | 606-10-25-27 through 25-29) or satisfies the performance obligation at a point in time (in accordance with paragraph 38 | 606-10-25-30). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.

What followed was not exactly a flow chart but it did have this to say about the old way of doing things: "Under the POC method revenue is recognized over the life-time of a contract in proportion to its percentage of completion. Contract progress is determined as the proportion of contract costs incurred for work performed up to date as a percentage of the estimated total contract costs."

And about the new way: "For each performance obligation that is satisfied over time, the company must determine how the progress of satisfying such an obligation will be measured in order to determine the timing of revenue recognition. The timing of revenue recognition should coincide with the transfer of control of good/service to the customer."

After reading this, he concluded the old procedure, percentage of completion using a cost to cost method, was out and an entirely new procedure, based on a transfer of control, was in.

Some companies take the time to write clear and thoughtful policy statements.

For example, one company had this to say about determining if lease includes a non-renewal penalty.

For all leases with option periods that are at the company's sole discretion, the subsidiary must make a determination at lease inception as to whether the option period is reasonably assured of renewal or if a purchase option is reasonably assured of being exercised (generally options that are not FMV options may be considered). This "reasonably assured of renewal" determination is based on the "penalty" that would be incurred if the subsidiary does not renew the lease. "Penalty" means that the lessee would forgo an economic benefit or suffer an economic detriment if it does not renew the lease. Thus, it is not a cash payment, but a loss of the ability to recover the investment in assets or continue to capture the economic benefit of restaurant profitability. Based on this, the company's includes renewal/extension periods when significant capital expenditures have been invested in the site. Thus, subsidiaries must use their own experience and the level of investment for each lease type in their portfolio to make the determination whether the option is "reasonably assured of renewal" in order to determine if option periods should be included or not.

Others prefer the Ctrl-c / Ctrl-v method, which is fine, as long as they take the time to absorb the true meaning of IFRS / US GAAP and give additional explanations where needed.

If not, it just causes confusion.

Obviously, this would require developing completely new procedures and internal controls, buying new software, extensive staff training, and months of agony until all the bugs were worked out.

All this, and no increase to his department's budget.

Imagine his relief when, after a meeting with our consultant and couple of follow-up calls between the consultant and his controller, he concluded that the timing of how revenue recognition coincided with the transfer of control of good/service to the customer could be expressed with a percentage derived by comparing cost to date with total cost. The only caveat, adequate internal controls had to be in place (they were).

IFRS 15.B18 | ASC 606-10-55-20 state: Input methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.

In other words, if a company recognizes revenue by applying a percentage determined by comparing cost to date with total cost, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the cost-to-cost method.

Similarly, IFRS 15.B15 | ASC 606-10-55-17 state: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered.

In other words, if a company recognizes revenue by applying a percentage determined by evaluating surveys, appraisals, milestones (a.k.a. benchmarks) or time, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the efforts-expended method.

Likewise, if a company recognizes revenue by applying a percentage determined by dividing the number of units delivered by total number units to be delivered, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the units-of-delivery method.

Obviously, care must be taken to evaluate whether the percentage used clearly represents the portion of the delivery that has been transferred into the control of the customer, but that is not an accounting issue. It is an internal control issue.

While words like provisions, allowances, reserves, funds, adjustments, deferrals, costs, expenditures, just to name a few, often mean different things to different people, every accountant, regardless of language, culture or background, appreciates debits and credits.

Unfortunately, it is not possible for this site to avoid commentary altogether.

We do, however, try to keep it to a minimum.

And hide it here in these nifty drop down windows where it does not culler up the page (unless you click on them).

But, finding the balance between too much / not enough is not easy.

So, if you find that some examples could use less / more commentary, please post your comments or contact us directly:

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We are constantly adding new examples.

If you do not find the example you are looking for, please feel free to post to the discussion forum or contact us directly.


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