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2 May 2018

Two first year accounting associates are discussing the timingof revenue recognition for long-term construction contracts, andmore specifically, discussing which method best reflects thepoint-of-sale/delivery. One associate, Taylor, believes recognizingrevenue at the time of completion is the preferred method and mostlike point-of-sale/delivery revenue recognition.

The other associate, Alex, believes recognizing the revenue overtime is the preferred method because revenue is recognized as timeprogresses (as portions of the contract are completed), and therevenue can be reported sooner.

Do you agree with Taylor or with Alex? Explain why you agreewith that associate.

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Sixta Kovacek
Sixta KovacekLv2
3 May 2018

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There are several differences between IFRS and GAAP in regardsto revenue recognition. First, there are differences in theconditions that must exist to recognize revenue from the sale ofgoods. For example, under IFRS, one of the conditions is that “Theentity has transferred to the buyer the significant risks andrewards of the goods.” Where as one of the GAAP conditions issimply that “Delivery has occurred.” Second, there are differencesin recognizing revenue from construction contracts. For example, inGAAP, “If certain criteria are met, the percentage-of-completionmethod is used. If those criteria are not met, the completedcontract method is used.” In IFRS, “The completed contract methodis prohibited. If the percentage-of-completion method is not usedbecause the final outcome cannot be reliably estimated, revenue islimited to the amount of recoverable costs incurred.” Third, thereare differences in recognizing revenue involving contingentconsideration. For example, under IFRS, if there is “theprobability that economic benefits associated with the transactionwill flow to the entity…revenue might be recognized prior toresolution of the contingency.” However, with GAAP, “Revenuerelated to contingent consideration should not be recognized untilthe contingency is resolved.” Lastly, in regards to customerloyalty programs, “there is not specific guidance related toaccounting for customer loyalty programs. However, IFRS states that“Credits awarded to program participants must be treated as aseparately identifiable component of a sales transaction.” PLEASECOMMENT ON THIS POST

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