In 2002, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) undertook a project to converge their revenue standards. While the resulting standards published in 2014 are largely converged, Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers and International Financial Reporting Standards (IFRS) 15 Revenue from Contracts with Customers still contain a number of significant differences. This article explains those differences and their significance. For easy reference, each difference is listed and explained below according to the 5-Step approach used in both standards:
- Effective Date
- Application Date of Contract Modifications Practical Expedient
- Completed Contracts at Transition
Step 1: Identify the Contract
For a contract to exist, collectibility of the consideration from the customer must be “probable” under both paragraph 9(e) of IFRS 15 and ASC 606-10-25-1(e). However, the threshold of “probable” is higher under ASC 606, being about 75-80%, whereas under IFRS it is only 50% (or more likely than not). The boards decided that this would rarely be an issue because an entity is not likely to enter a contract without assurance of collecting the consideration.
In ASC 606-10-55-3A through 55-3C, the FASB includes additional guidance on the assessment of the probability of collecting the consideration. IFRS 15 does not include this additional guidance. These paragraphs guide entities to review their customary business practices and their contractual terms to provide evidence that they will collect substantially all of the consideration they are entitled to. Entities may consider the payment terms, the ability to stop transferring promised goods and services, and other factors in their analysis. Although IFRS 15 does not include these additional paragraphs, the guidance is frequently incorporated by professionals as a common-sense way of determining the probability of collecting consideration.
Out of Scope Contracts
If a contract does not meet the scope criteria in Step 1 of the 5-Step approach (e.g., because the payment terms cannot be identified), the entity will not follow the remaining steps of the 5-step approach to recognize revenue for that contract. In such situations, ASC 606-10-25-7 and paragraph 15 of IFRS 15 include guidance allowing these entities to recognize revenue once the entity has no remaining obligations and all of the consideration is non-refundable, or when the contract is terminated and the consideration is non-refundable. However, ASC 606 includes a third point that allows entities to recognize revenue under ASC 606-10-25-7(c) if they have transferred control of some goods and services, have stopped transferring any remaining goods and services, and the consideration is non-refundable.
This change is not likely to cause many differences between IFRS 15 and ASC 606. The FASB added this criterion because a contract might not be terminated if a vendor is still trying to recover amounts owed under the contract. Essentially, the IASB acknowledges a different interpretation of “terminated.” The IASB concluded that existing guidance was sufficient for an entity to conclude that the contract is terminated when it stops providing goods or services.
Step 2: Identify Performance Obligations
Shipping and Handling
Under both ASC 606 and IFRS 15, the shipping and handling activities are not a performance obligation when they are performed before the customer obtains control of the goods (e.g., FOB destination). However, if the shipping and handling activities are performed after the customer obtains control of the goods (e.g., FOB shipping point), ASC and IFRS differ. An entity following the FASB’s standards will apply ASC 606-10-25-18B, which allows the entity to make an election for whether or not it will account for shipping and handling as a performance obligation. An entity who applies this election, shall apply it to all similar types of transactions. There is no similar election under IFRS 15, and therefore entities following the IASB’s standards must use judgment to determine whether or not shipping and handling is a distinct good or service.
KONINKLIJKE PHILIPS N.V. (2018 6-K) vs Cimpress N.V. (2019 10-K): Differences between treatment of shipping and handling for IFRS and GAAP
KONINKLIJKE PHILIPS N.V. is a foreign issuer that follows IFRS 15. In its July 2018 6-K, it explained the following about its treatment of the costs of shipping and handling:
When shipping and handling are part of a project and billed to the customer, then the related expenses are recorded as cost of sales. Shipping and handling billed to customers are distinct and separate performance obligations and recognized as revenues. (2018 6-K)
On the other hand, Cimpress N.V. follows ASC 606 and elected to account for shipping and handling as a fulfillment activity. As Cimpress explained in its 10-K for the period ended June 30, 2019:
We have elected to recognize shipping and handling activities that occur after transfer of control of the products as fulfillment activities and not as a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation upon the transfer of control of the fulfilled orders, which generally occurs upon delivery to the shipping carrier. If revenue is recognized prior to completion of the shipping and handling activities, we accrue the costs of those activities. (2019 10-K)
Immaterial Goods and Services
ASC 606-10-25-16A explains that when evaluating which goods or services are distinct as performance obligations, an entity does not need to consider those that are immaterial to the contract. IFRS 15 does not include this provision. Instead, entities applying IFRS 15 should assess the materiality of those goods and services in the context of the financial statements, as stated in paragraph BC90 of IFRS 15. It is unclear whether more performance obligations would be recognized under ASC 606 or IFRS 15 because of this difference in assessing materiality. However, the process and controls necessary to make this judgment would clearly be different.
Step 3: Determine the Transaction Price
ASC 606-10-32-21 explains that noncash consideration should be measured at fair value at the time of contract inception. The inception of the contract is the date when the criteria in ASC 606-10-25-1 are met. Only changes in fair value for reasons other than the form or nature of the noncash consideration would be included in the transaction price after the initial measurement (see Noncash Consideration for more information). Like ASC 606, paragraph 66 of IFRS 15 says that noncash consideration should also be measured at fair value, however it does not include any wording about when the consideration should be initially measured. Nor does the IASB state what should happen with changes in the fair value of the consideration after measurement.
Alibaba Group Holding Ltd (2020 SEC Correspondence) vs SPI Energy Co., Ltd (2020 20-F): Noncash Consideration Differences
Alibaba Group Holding Ltd and SPI Energy Co., Ltd have both received noncash consideration for a contract. Following ASC 606, Alibaba Group Holding Ltd explained:
[T]he Company considered the Ant Financial Interest as noncash consideration for the Relevant IP Rights and measured such noncash consideration based on its fair value (as required under ASC 323-10-30-2(b)) at contract inception. To determine the contract inception date, the Company assessed the criteria for identifying a contract as prescribed by ASC 606-10-25-1 and concluded that the contract inception date for the purpose of measuring the Ant Financial Interest was in late 2014 (the management judgment involved in determining the contract inception date is further explained below). The fair value of the Ant Financial Interest at contract inception in late 2014 was approximately RMB12.2 billion, as determined by reference to the results of valuation performed by an independent valuer at the time. Since the Relevant IP Rights had zero carrying value, the exchange of the Relevant IP Rights for the Ant Financial Interest resulted in a gain of RMB12.2 billion. This amount is also the initial accounting cost of the Company’s investment in Ant Financial. (2020 SEC Correspondence)
In contrast to Alibaba, SPI Energy Co., Ltd, which follows IFRS 15, measures fair value of noncash consideration at a different point in time. SPI explained:
[SPI] has entered into a digital asset mining pool to provide computing power to the mining pool. Providing computing power in crypto asset transaction verification services is an output of the Company’s ordinary activities. The provision of computing power is the only performance obligation in the Company’s contracts with the mining pool. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date of receipt, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the mining pool. (2020 20-F)
Sales and Other Similar Taxes
Under ASC 606, an entity can elect to exclude sales and other related taxes from its measurement of the transaction price. Specifically, ASC 606-10-32-2A includes an election allowing an entity to exclude from the transaction price all taxes that are assessed by a governmental authority and collected from a customer. These can include sales, use, value-added, and some excise taxes. This election does not exist under IFRS 15, so an entity must first determine if sales or similar taxes are collected on behalf of a third party according to paragraph 47 of IFRS 15 and if so, exclude those taxes from the transaction price. This can result in a higher transaction price under IFRS 15, particularly when the entity concludes that the tax is imposed on the vendor.
Transaction Price for Principal and Agent Relationships Where the End Price is Not Known
For situations in which a principal does not know (and expects not to know) the end price the agent is charging, the FASB and IASB have come to different conclusions. The IASB has clarified, in paragraph BC38 of ASC 2016-08 that when a principal does not expect to know the end price, the only amount included in the transaction price should be the amount to which the principal is entitled. The IASB discusses this topic in BC385X to BC385Z of IFRS 15 and does not come to a similar conclusion. Instead, the IASB concluded that a principal should apply judgement and come to a conclusion using all relevant facts and circumstances.
Step 5: Recognize Revenue
Intellectual Property Licenses
ASC 606-10-55-59 and paragraph B56 of IFRS 15 require entities to determine whether a license granted to the customer is a right to use or a right to access. Revenue for a right-to-use license would be recognized over time, while revenue for a right-to-access license would be recognized at a point in time. While this idea is constant across both standards, the method to determine whether the license is a right to use or a right to access is different under each standard.
Under ASC 606, the entity will first determine if the license is for symbolic IP or functional IP (see Licenses for Intellectual Property for more information). In contrast, entities following IFRS 15 must “consider whether a customer can direct the use of, and obtain substantially all of the remaining benefits from, a licen[s]e at the point in time at which the licen[s]e is granted.” (Paragraph B57 of IFRS 15). ASU 2016-12 explains that this difference in guidance across the two standards can result in different revenue recognition patterns, as follows:
Although most licenses to symbolic intellectual property would be recognized over time under IFRS 15, revenue may be recognized at a point in time in those cases in which the entity will undertake no activities that significantly affect the ability of the customer to obtain benefit from the intellectual property during the license period.
This means that under IFRS 15, there will be instances in which revenue for symbolic IP will be recognized up front instead of over time, as required under ASC 606 for symbolic IP.
Both ASC 606 and IFRS 15 contain guidance stating that revenue for a license cannot be recognized until the customer can use and benefit from the license. ASC 606 also states that revenue cannot be recognized for the renewal of a license before that renewal period begins. Specifically, ASC 606-10-55-58C states: “[A]n entity would recognize revenue from a license renewal no earlier than the beginning of the renewal period.” In contrast, IFRS 15 does not contain any such limitation for renewals. The lack of a specific limitation in IFRS 15 could result in revenue being recognized earlier under IFRS 15.
For example, a customer has a subscription that will end on June 1 but on January 1 decides to renew (or extend) that subscription. Under ASC 606, the entity providing the good or service cannot begin to recognize revenue until June 1 because that is when the renewal period begins. Entities following IFRS 15 may determine that the customer can use and benefit from the license (since she is already subscribed) and may recognize revenue as early as January 1, when the customer renews. For more information on licenses, see our article Licenses for Intellectual Property.
Disclosures & Presentation
Remaining Performance Obligations
Both standards require entities to disclose information about the remaining performance obligations in their contracts. IFRS 15, paragraphs 120 through 122, and ASC 606-10-50-13 through 50-14 explain that an entity must disclose the sum of the amount of future revenue for all unsatisfied performance obligations unless the contract is less than a year or the entity elects the practical expedient (ASC 606-10-55-18 or IFRS 15 para. B16). ASC 606-10-50-14A includes two additional exemptions for variable consideration. The entity does not need to disclose the amount of future revenue for variable consideration when the variable consideration is based on sales or usage-based royalties from a license of intellectual property (see our article Sales- and Usage-Based Royalties) or when the variable consideration is entirely allocated to an unsatisfied performance obligation (or a promise to deliver goods or services). Under IFRS 15, these amounts would require disclosure.
Interim disclosure standards apply to revenue recognition under both standards. However, the FASB relies on ASC 270 Interim Reporting while the IASB relies on IAS 34 Interim Financial Reporting for related guidance. IAS 34 contains fewer disclosure requirements than ASC 270, which means that less revenue information is disclosed under IFRS than US GAAP for interim reporting.
ASC 340-40-35-3 through 5 (which contains guidance on impairments for contract cost assets with customers) is consistent with paragraphs 101 through 103 of IFRS 15. Impairments are to be recognized when the book value of the asset exceeds the remaining amount of consideration the entity expects to receive less the costs that have not been recognized. However, paragraph 104 of IFRS 15 explains that an entity must recognize a reversal of some or all of the amount of the impairment when conditions improve or no longer exist. ASC 340-40-35-6 states that an entity shall not reverse an impairment loss. This means that economic improvements related to a contract will be recognized earlier under IFRS (as impairment reversals) than they will under US GAAP, which won’t recognize the improvement until the good or service is transferred to the customer.
Nonpublic Entity Requirements
ASC 606 applies to both public and nonpublic entities, with some specific relief relating to disclosures and other requirements for nonpublic entities. Nonpublic IFRS candidates may apply IFRS for Small and Medium-sized Entities. This means that under IFRS, the accounting for small companies and public companies will not be as similar as it would be under ASC.
Outside of Ordinary Activities
Sales of nonfinancial assets are accounted for using guidance in ASC 606 or IFRS 15. The measurement and derecognition guidance in IFRS 15 applies to nonfinancial assets like property, plant, and equipment, or like intangible assets. The contract existence, separation, measurement, and derecognition guidance in ASC 606 applies to nonfinancial assets and in-substance nonfinancial assets that are scoped into ASC 610-20. The key difference here is that more of ASC 606 will apply to nonfinancial assets than does IFRS 15. Accounting for nonfinancial assets under ASC 606 will follow contract existence and separation guidance that the nonfinancial assets would not follow under IFRS 15.
In response to the many comments from respondents, the IASB and FASB both decided not to include explicit guidance in ASC 606 or IFRS 15 about onerous contracts. Entities following IFRS 15 will instead apply IAS 37—Provisions, Contingent Liabilities, and Contingent Assets—which states that if an entity has a contract in which the unavoidable costs exceed the expected economic benefits, then a loss shall be recognized (see paragraphs 66 through 69 of IAS 37).
To provide guidance related to onerous contracts, the FASB has kept portions of ASC 605. Specifically, ASC 605-10-5-4 directs entities to guidance for certain types of transactions when considering how to account for an onerous contract:
- 605-20, Revenue Recognition—Provision for Losses on Separately Priced Extended Warranty and Product Maintenance Contracts
- 605-35, Revenue Recognition—Provision for Losses on Construction-Type and Production-Type Contracts
- 985-605, Software—Revenue Recognition, specifically paragraph 985-605-25-7
- 944-605, Financial Services—Insurance—Revenue Recognition, specifically paragraph 944-605-35-7
- 912-20, Contractors—Federal Government—Contract Costs, specifically paragraph 912-20-45-5
- 954-440, Health Care Entities—Commitments, specifically on continuing care retirement communities in paragraphs 954-440-35-1 through 35-3
- 954-450, Health Care Entities—Contingencies, specifically on prepaid health care services in paragraphs 954-450-30-3 through 30-4
- 980-350, Regulated Operations—Intangibles—Goodwill and Other, specifically on long-term power sales contracts in paragraph 980-350-35-3.
Each standard included different effective dates. For public business entities and nonprofit entities meeting certain conditions, ASC 606 was effective for annual reporting periods beginning after December 15, 2017. For all other entities, ASC 606 was effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods beginning after December 15, 2020. For both public and nonpublic entities, IFRS 15 was effective for annual reporting periods beginning on or after January 1, 2018. Early application was permitted for both IFRS 15 and ASC 606, but early adoption of ASC 606 was permitted only for annual reporting period beginning after December 15, 2016 (public entities) and December 15, 2017 (nonpublic entities).
Application Date of Contract Modifications Practical Expedient
Entities applying ASC 606 may apply the contract modifications practical expedient at the date of initial application of ASC 606. This practical expedient allows companies to use the benefit of hindsight in their contract modifications. For entities applying IFRS 15 and electing the modified retrospective transition method, entities can choose to apply the practical expedient at the beginning of the earliest period presented or at the date of initial application of IFRS 15. This option provides more relief for those applying IFRS 15 as it gives additional options. For more information on this practical expedient, see our article Contract Modifications Part III – The Hindsight Experiment.
Completed Contracts at Transition
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. See our article Completed Contracts at Transition for more on why this definition matters. The IASB included a practical expedient, not included by the FASB, to allow an entity applying the full retrospective method not to restate contracts that are completed at the beginning of the earliest period presented.
Although the boards converged the majority of the two revenue standards, some differences still exist. When comparing entities’ revenue, it is important to consider these differences.
- ASU 2016-12 “Revenue from Contracts with Customers” A1-A2
- EY, Financial Reporting Developments: “Revenue from contracts with customers.” January 2020
- IFRS 15 Revenue from Contracts with Customers
- ASC 606-10 Revenue from Contracts with Customers
- KPMG, Revenue: Top 10 Differences Between IFRS 15 and ASC 606, February 2017