Accounting Examples

IFRS and US GAAP have around for a while.

IFRS first appeared in 1970s, while US GAAP has been around since the 1930s.

The original IFRS, comprising 31 standards known as IAS, was published in 1975 (link: ifrs.org).

It was not, however, widely used until 2005, when it was adopted by the European Union.

In the twentieth century, US GAAP was, by default, the world's only internationally accepted set of accounting principles.

As this did not sit well with the European Commission, in 2002 it decided to adopt IAS (link: europa.eu), which later became IFRS.

"[In 1995, the Commission] recognized that the existing Directives as such were not suitable for the information needs of international capital markets and consequently large companies were increasingly being drawn to use U.S. Generally Accepted Accounting Practices (U.S. GAAP) in addition to their local Generally Accepted Accounting Practices (GAAP). This increased costs and sometimes resulted in confusion when comparisons were made to local GAAP. Furthermore, at a political level, the European Union had no influence on accounting standards adopted under U.S. GAAP, nor were the standards necessarily appropriate in an E.U. context.

"For these reasons, the Commission proposed that the European Union should place its full weight behind the international standards being developed by the International Accounting Standards Committee with the objective of establishing a set of standards that would be acceptable in capital markets world-wide."

Alexander Schaub, The Use of International Accounting Standards in the European Union, 25 Nw. J. Int'l L. & Bus. 609 (2004-2005)

Since then, IFRS has spread to most countries (link: ifrs.org) and listed companies (link: ifrs.org).

The IFRS standards adopted by the EU are available on its server.

Being quasi law, E-IFRS is available from the EU (link: europa.eu).

While the IFRS standards published by the IASB are not law, the IFRS standards republished in the European Union's Official Journal are.

As part of its agreement with the IFRS Foundation, the EU has the make IFRS standards it has adopted (European-IFRS) available for free both in the original and in translation.

IFRS does, however, continue to be the copyrighted property of the IFRS Foundation.

Obviously, the main advantage of accessing IFRS through the EU is that access is free.

But, as always, one gets what one pays for.

Firstly, the EU only publishes those standards it has adopted.

Secondly, it does not publish supplemental ("B") guidance, such as the Basis for Conclusions, nor does its server have any features that make researching IFRS easier.

Thus, anyone who is serious about IFRS uses the full, IASB version (link: ifrs.org).

While not free, subscription has its benefits.

In addition to full access to all standards and all supplemental guidance, plus an archive of all published standards back to 1975, the site's robust search function is especially useful.

More importantly, subscribing bolsters the IASB's independence, helping it further its mission to make IFRS universally accepted throughout the world.

One reason the US SEC has not embraced IFRS is the influence the European political establishment exerts on IASB through its contributions (link: iasplus.com).

Obviously, £200 per year will not pay for the IASB's independence, but every little bit helps.

The first US GAAP comprised 51 standards published over 20 years starting in 1939.

While primarily a US system, it has been used worldwide the 1950s.

US GAAP's development has been somewhat convoluted, so its full text has only been freely available since 2009.

The first GAAP comprised the Accounting Research Bulletins created by the American Institute of Certified Public Accountants' Committee on Accounting Procedure (link: olemiss.edu).

The CAP was followed by the Accounting Principles Board, which took over standard setting in 1959.

The APB's opinions were GAAP (link: olemiss.edu) until 1973, when the current standard setter, the Financial Accounting Standards Board, started issuing its Statements of Financial Accounting Standards.

Unfortunately, the AICPA also issued its own Statements of Position (link: olemiss.edu) and recognized even more guidance.

A summary of US GAAP's pre-codification structure:

A

FAS, FIN: Financial Accounting Standards Board’s Statements of Financial Accounting Standards and Interpretations

APB, AIN: Accounting Principles Board’s Opinions and Interpretation

ARB: Committee on accounting Principles’ Accounting Research Bulletins

EITF: Consensus positions

SEC: SAB Staff Accounting Bulletins, SEC rules and interpretive releases

B

FTB: FASB Technical Bulletins

SOP: AICPA Statements of Position

AICPA: Industry Audit & Accounting Guides

C

EITF: Emerging Issues Task Force Consensus positions cleared by the FASB.

AICPA’s AcSEC Accounting Standards Executive Committee Practice Bulletins

D

FASB Implementation guides and Q&As.

AICPA accounting interpretations

Practices widely recognized and prevalent either generally or in the industry


This structure could only be simplified after the Sarbanes-Oxley Act gave US Securities and Exchange Commission the ability to finally decide who has the right to create US GAAP.

Specifically, SOX.SEC. 108 (link: gpo.gov) gives the SEC the right to designate a standard setter, not ratify individual standards.

This provision was included to prevent the SEC from cherry-picking standards, and so limits the influence of politics and politicians on standard setting.

Before then, it was the AICPA's Council that had this ability.

Unsurprisingly, the AICPA's Council used this ability to also recognize the AICPA's pronouncements (even though they were unavailable to the lay public)

In the past, the AICPA's pronouncements were generally available to AICPA members (family and friends) only.

Like the Liturgical Latin of old, this allowed AICPA members to project an aura of Ecclesiastical like infallibility that not only enchased their prestige, but proved quite lucrative.

Obviously, in a post Enron/WorldCom world, such an approach to standard setting is no longer consistent with standards of transparency and objectivity to which the profession is now held.

As a result, the AICPA no longer sets accounting standards.

Instead, it concentrates on its roles as the guardian of the CPA exam and profession's chief lobbyist (link: aicpa.org).

Unfortunately, some traditions die hard.

Like the AICPA of old, in addition to the FASB's standards, the SEC also recognizes its own pronouncements.

Fortunately, unlike the AIPCA of old, the SEC makes its pronouncements freely available on the ASC.

On July 1, 2009, the Accounting Standards Codification (link: fasb.org) made all US GAAP freely available to the general public.

Being quasi law, US GAAP's full text cannot be sold for profit.

While US GAAP standards are not law, their use is (indirectly) mandated by law.

This implies, like law, they must be available to those they govern at no charge.

Consequently, US GAAP is available for free, even though it is, in fact, a copyrighted work, and the property of the FAF.

However, the FASB is free to charge for premium services (such as search or copy functions).

While not absolutely necessary, these services make researching US GAAP much easier.

More importantly, they give those who use US GAAP the opportunity to directly support a standard setting process that is, without question, second to none.

Yet each year, they are new to someone who may, perhaps like some practical assistance these standards.

As a general rule, IFRS and US GAAP only apply to listed companies.

While some countries require or permit some private companies to apply IFRS, in most countries companies apply a national GAAP until they are listed.

While not semantically accurate, "national GAAP" generally refers to the statutory accounts required by law in many countries.

GAAP is an acronym for Generally Accepted Accounting Principles.

This implies that GAAP derives its authority from its being accepted by the profession.

In contrast, "statutory accounts", as their name implies, are law.

As such, they derive their authority from the sovereign power of the state.

Among the implications:

Not applying statutory accounts is generally a crime punishable by incarceration (at minimum of an entity's statutory representative, a.k.a. managing director).

Statutory accounts are generally procedural and legalistic (not judgmental or principles based).

Statutory accounts are generally used for taxation (focus on information useful to tax authorities rather than investors).

On a fundamental level, statutory accounts are generally based on a physical, rather than financial, capital maintenance concept.

While US GAAP has always been based on a financial concept, IFRS has yet to make up its mind.

CON 5.45: The full set of articulated financial statements discussed in this Statement is based on the concept of financial capital maintenance.

CON 5.47: A return on financial capital results only if the financial (money) amount of an enterprise's net assets at the end of a period exceeds the financial amount of net assets at the beginning of the period after excluding the effects of transactions with owners. The financial capital concept is the traditional view and is the capital maintenance concept in present financial statements. In contrast, a return on physical capital results only if the physical productive capacity of the enterprise at the end of the period (or the resources needed to achieve that capacity) exceeds the physical productive capacity at the beginning of the period, also after excluding the effects of transactions with owners. ...

Framework 4.65: The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements. Different accounting models exhibit different degrees of relevance and reliability and, as in other areas, management must seek a balance between relevance and reliability. This Conceptual Frameworkis applicable to a range of accounting models and provides guidance on preparing and presenting the financial statements constructed under the chosen model. At the present time, it is not the intention of the Board to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy. This intention will, however, be reviewed in the light of world developments.

The reluctance of IASB to exclusively embrace one concept is also one of the fundamental causes of the differences that still exist between IFRS and US GAAP.

Likewise, the logical inconsistency that comes from trying to reflect two, mutually exclusive models at the same time is one reason that US Securities and Exchange Commission is unlikely to adopt IFRS any time soon (perhaps ever).

The two capital maintenance concepts are, in turn, derived from two competing approaches value.

Under one, value is created physically, though labor.

Under the other, value is created financially, through exchange.

Since these two approaches are as immiscible as the economic systems they inspire, US investors and the regulators see no logic in adopting an accounting system that cannot make up its mind.

While politics, especially the influence dirigiste European politicians tend to have on the IASB, have certainly played thier part, the reluctance of the IASB decide, once and for all, what kind of system IFRS is supposed to be is a major reason that, after a decade of convergence, IFRS and US GAAP have again begun to diverge.

That being said, since "national GAAP" has become too ingrained in the vernacular to dislodge, this site has no choice but to use the term, even if it is both inaccurate and misleading.

In the European Union, for example, only companies whose securities trade on a regulated market are obligated to apply IFRS (link: europa.eu).

All others must, as a general rule, apply a national GAAP (link: europa.eu).

While some EU member states allow IFRS for accounting purposes, since no common tax base exists, IFRS accounts must (except in the UK and Ireland) be reconciled to national GAAP, which then serves as the basis for determining taxable income.

While the IASB publishes an IFRS for SME standard for Small and Mid-sized Enterprises (link: ifrs.org), this standard is not accepted for statutory accounting purposes by any EU country except Ireland and the United Kingdom.

Worldwide, the 85 jurisdictions that require or permit the IFRS for SME standard are:

Anguilla, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Bermuda, Bhutan, Bosnia and Herzegovina, Botswana, Brazil, Cambodia, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, Kazakhstan, Iraq, Ireland, Israel, Jamaica, Jordan, Kenya, Kosovo, Lesotho, Liberia, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mauritius, Montserrat, Myanmar, Namibia, Nicaragua, Nigeria, Pakistan, Palestine, Panama, Paraguay, Peru, Philippines, Qatar, Rwanda, Saint Lucia, Saudi Arabia, Serbia, Sierra Leone, Singapore, South Africa, Sri Lanka, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Swaziland, Switzerland, Tanzania, Trinidad & Tobago, Uganda, Ukraine, United Arab Emirates, United Kingdom, Uruguay, Venezuela, Yemen, Zambia, and Zimbabwe (link: ifrs.org).

In the United States, the Securities and Exchange Commission (link: sec.gov) likewise only requires registered companies to apply US GAAP.

On the other hand, US tax law (link: uscode.house.gov), requires entities with gross receipts of more than $5 million to use an accrual method of accounting.

As a result, more US accountants have experience with US GAAP, if not its full version, than international accountants with IFRS.

Private company GAAP (also known as non-SEC-GAAP or GAAP-Lite) is the GAAP applicable to private companies.

Unlike full GAAP, GAAP-Lite excludes guidance provided by the SEC and SEC Staff, and includes guidance specific to private companies.

While not a separate standard like IFRS-SME ( link: ifrs.org), GAAP-Lite does try to make life simpler for accountants working at companies not listed on an exchange (link: fasb.org).

For example, unlike their public counterparts, private company accountants are allowed to amortize goodwill instead of having to regularly test it for impairment (conceivably forever).

As a result, many accountants have no firsthand experience with either IFRS or US GAAP until their company lists on a capital market or is acquired by listed company.

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 to many books and sites that try to explain, interpret or simplify the standards.

Some succeed. Some fail.

Among the better publications: Wiley IFRS (Google) and GAAP (Google).

Among the better web sites: accountingexplained (link) or accountingtools (link).

Among the publications or sites that have taken simplification too far: IFRS and US GAAP: A Comprehensive [sic] Comparison (link) or accountingcoach (link).

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.

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