There are top 10 key differences that have been identified between IFRS 15 and ASC 606. This selection is based on the potential impact on earnings that these differences may have, as well as the complexity they may create to comply with both GAAPs.
From the IFRS Institute – February 2017
The new revenue standards, IFRS 15 and ASC 606, originally published in May 2014, are substantially converged. However, in 2016 the IASB and the FASB issued separate amendments to clarify their respective guidance and, in the case of the FASB, to provide some practical expedients to the requirements.
Except for the amendment to the principal vs. agent guidance (revenue being presented on a gross or net basis), these amendments may create differences in certain areas. This is in addition to the differences that already existed in the original versions of the standards. The FASB made more changes to its standard by providing more application guidance and additional practical expedients.
We have identified the 10 key differences between IFRS 15 and ASC 606 that we believe are the most significant. This selection is based on the potential impact on earnings that these differences may have (excluding certain industry-specific implications), as well as the complexity they may create to comply with both GAAPs.
|Step of the revenue model||Difference|
|Step 2: Distinct goods and services||Shipping and handling activities – FASB policy election|
|Step 3: Transaction price||Measurement date for noncash consideration|
|Step 3: Transaction price||Sales taxes – FASB policy election|
|Reversal of previously impaired contract acquisition and contract fulfillment costs|
Sales outside ordinary activities
|Sales of in-substance nonfinancial assets|
|Onerous contracts||Determination of provisions for loss-making and onerous contracts|
|Transition||Effective date for nonpublic companies|
|Transition||Definition of ‘completed contract’|
|Disclosures||Remaining performance obligations|
These differences may be challenging for companies that report under both US GAAP and IFRS – e.g. a US subsidiary of a foreign multinational company that uses IFRS for group reporting with local reporting under US GAAP, or vice versa. Foreign Private Issuers that file IFRS financial statements will face a more subtle issue. The IASB has made it clear that IFRS preparers are not required to consider the decisions of the FASB and the US Transition Resource Group for Revenue Recognition for guidance in applying IFRS 15.
Here are the differences explained in more detail.
|IFRS 15||ASC 606||Consideration for preparers|
|Step 2: Distinct goods and services: Shipping and handling activities – FASB policy election|
|No policy election. The company determines if shipping and handling activities are distinct from the shipped goods (i.e. a performance obligation). If so, some revenue is allocated to the shipping activity and deferred until shipping and handling occurs.||Policy election to treat shipping and handling activities undertaken by the company after the customer has obtained control of the related goods as a fulfillment activity (i.e. not a performance obligation). All revenue and costs are then recognized upon transferring control of the goods to the customer.||
When the customer obtains control
of the goods before shipping, the shipping and handling activities may be a separate performance obligation. The US GAAP policy election simplifies the accounting and accelerates recognition of the revenue and costs relating to the shipping and handling activities in comparison to IFRS.
|Step 3: Transaction price: Measurement date for noncash consideration|
|IFRS 15 (as with current IFRS) does not specify a measurement date for noncash consideration to be received in a revenue contract.||Noncash consideration is measured at contract inception.||Noncash consideration, such as shares or advertising, is measured at fair value for inclusion in the transaction price. Fair value can be measured at contract inception under both IFRS and US GAAP. Other dates (e.g. when the consideration is received) are acceptable under IFRS 15, but are not permitted under US GAAP.|
|Step 3: Transaction price: Sales taxes – FASB policy election|
|No policy election. The company evaluates whether sales and similar taxes are collected on behalf of a third party (e.g. government) on a jurisdiction-by-jurisdiction basis (i.e. a principal vs. agent evaluation).||Policy election to present all sales and similar taxes on a net basis.||The US GAAP practical expedient simplifies the presentation of sales taxes, in line with current US GAAP. Current IFRS (IAS 18) already requires a principal vs. agent evaluation for sales tax presentation. This may result in some taxes being presented on a net basis and others on a gross basis under IFRS, with a different presentation under US GAAP when the policy is elected.|
|Contract costs: Reversal of previously impaired contract acquisition and contract fulfillment costs|
Under IFRS, an entity recognizes a reversal of an impairment loss that has previously been recognized when the impairment conditions cease to exist. Any reversal of the impairment loss
is limited to the carrying amount, net of amortization, that would have been determined if no impairment loss had been recognized.
|Sales outside ordinary activities: Sales of in-substance nonfinancial assets|
Sales of nonfinancial assets, such as property, plant and equipment (IAS 16), intangible assets (IAS 38) and investment property (IAS 40), are accounted for using the measurement and derecognition guidance of IFRS 15.
Sales of a subsidiary or equity method investee continue to be accounted for under the deconsolidation guidance (IFRS 10 and IAS 28, respectively).
Sales of nonfinancial assets and in-substance nonfinancial assets scoped in ASC 610-20 are accounted for using the contract existence, separation, measurement and derecognition guidance in ASC 606.
Sales of a subsidiary that only has nonfinancial assets and / or in-substance nonfinancial assets and is not a business are scoped into ASC 610–20. This includes partial sale transactions.
Sales of a subsidiary or group of assets that constitutes a business or not-for-profit activity continue to be accounted for under the deconsolidation guidance (ASC 810).
For example, if a subsidiary that has only a building and does not represent a business is sold for a fixed price plus a contingent fee:
|Onerous contracts: Determination of provisions for loss-making and onerous contracts|
|Onerous revenue contracts are accounted for under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. A provision is recognized when the unavoidable costs of meeting the obligations under a contract exceed the economic benefits to be received.||
US GAAP has no general guidance for recognizing a provision for onerous contracts, but instead focuses either on types of contracts or on industry-specific arrangements.
Current guidance is unchanged except for losses on long-term construction- and production-type contracts, where an entity is allowed to determine the provision for losses at either the contract level or the performance obligation level.
|IFRS and US GAAP are likely to remain unaligned for the foreseeable future.|
|Transition: Effective date for nonpublic companies|
|Annual periods beginning on or after January 1, 2018.||Annual periods beginning after December 15, 2017 (public business entities and certain not-for-profits) or after December 15, 2018 (other entities).||Nonpublic business entities that have an IFRS parent may need to adopt the revenue standard one year earlier compared to what would be required for US stand-alone financial statements.|
|Transition: Definition of ‘completed contract’|
Completed contract for the purposes of transition is a contract for which the company has transferred all of the goods or services identified under legacy IFRS, regardless of whether all of the revenue has been recognized.
Legacy IFRS revenue guidance continues to apply to revenue or adjustments to revenue arising from completed contracts after the transition date.
|Completed contract for the purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP.||
In an effort to simplify the transition, both GAAPs permit not applying the new requirements to completed contracts. Because the definition of a completed contract differs and US GAAP permits entities to apply the new standard either just to open contracts or to both open and completed contracts, the population of contracts to analyze may differ.
Overall, transition options are slightly different between the two GAAPs, so that opening numbers may not be similar under IFRS and US GAAP.
|Disclosures: Remaining performance obligations|
Disclosure relief in two situations. An entity needs to disclose the aggregate amount of the transaction price allocated to unsatisfied or partially satisfied performance obligations and when it expects to recognize this amount as revenue, unless:
|Disclosure relief in four situations. Additional to the two exceptions under IFRS 15, ASC 606 permits not including variable consideration in the disclosure of remaining performance obligations when variable consideration:
||Under IFRS 15, the entity needs to estimate certain variable consideration for disclosure purposes only, even when those estimates are not needed for the recognition of revenue.|
|Disclosures: Interim disclosures|
|Disclosure of disaggregated revenue.||Similar to annual disclosures – e.g. disaggregated revenue, contract balances and remaining performance obligations.||IFRS 15 has fewer disclosure requirements for interim financial reporting than ASC 606.|