Yawning revenue GAAP

Would the revenue recognised by an entity for a transaction during a particular period differ between different accounting frameworks? In other words, would the revenue earned differ based on the generally accepted accounting principles (GAAPs) used to present the financial statements? This answer, interestingly, is ‘possibly yes’…

Revenue under Indian GAAP is the gross inflow of cash, receivables or other consideration arising from sale of goods, services, and the interest, royalties and dividends resulting from the use of the enterprise’s resources by others, except for commission in the case of an agency relationship. Under Indian accounting standards, revenue should be recognised at the nominal consideration receivable.

Revenue recognition guidance is extensive under US GAAP and includes several standards issued by the Financial Accounting Standards Board (FASB), the Emerging Issues Task Force (EITF), the American Institute of Certified Public Accountants (AICPA), and the US Securities and Exchange Commission (SEC). The guidance tends to be detailed, and is often industry-specific.

International Financial Reporting Standards (IFRS) has two primary revenue standards and four revenue-focused interpretations. Generally, the broad principles laid out in IFRS are applied without further guidance or exceptions for specific industries.

Some examples of conflicting results between different accounting frameworks for economically similar transactions are discussed here.

Under US GAAP, software revenue recognition requires the use of vendor-specific objective evidence (VSOE) of fair value when determining an estimate of the selling price. Indian GAAP and IFRS have no equivalent requirement.

Activation services from telecom companies are often economically similar to the connection services provided by cable TV companies. Under US GAAP, however, the accounting guidance for these transactions differs. As a result, the timing of revenue recognition also varies.

Contingent pricing and how it factors into the revenue recognition models vary. Under Indian and US GAAPs, revenue recognition is based on fixed or determinable pricing criterion, so the contingent amounts are generally not recorded as revenue until the contingency is resolved. IFRS looks at the probability of associated economic benefits for the entity and the ability to reliably measure the revenue, including contingent. This could lead to differences in the timing of revenue recognition, which may potentially be earlier under IFRS.

The accounting for customer loyalty programmes may drive fundamentally different results. While Indian GAAP has no specific guidance, the IFRS requirement to treat the programmes as multiple-element arrangements in which consideration is allocated to the goods or services and the award credits are based on fair value through the customer’s eyes, would be acceptable under US GAAP. Companies reporting under US GAAP may, however, use the incremental cost model. In this instance, IFRS generally results in the deferral of more revenue.

US GAAP prohibits the use of the cost-to-cost percentage-of-completion method for service transactions (unless the transaction explicitly qualifies as a particular type of construction or production contract). Most service transactions that do not qualify as these type of contracts are accounted under a proportional-performance model. IFRS requires using the percentage of-completion method in recognising revenue in service arrangements unless progress toward completion cannot be estimated reliably (in which case, a zero-profit approach is used), or a specific act is much more significant than any other (in which case, revenue recognition is postponed until the significant act is executed).

Indian GAAP allows revenue for services to be recognised either based on the completed service contract method or proportionate completion method. Prohibition of the completed contract method under IFRS and diversity in the application of the percentage-of-completion method might also result in differences.

While the standard setters continue to make isolated changes to their individual accounting frameworks, they are focused on developing a single converged revenue recognition standard. To that end, the FASB and IASB released, in June 2010, a joint exposure draft on revenue recognition — Revenue from Contracts with Customers. A final standard is expected with an effective date not earlier than January 1, 2015. The new model is expected to impact revenue recognition under both US GAAP and IFRS.

Every industry having contracts within the scope of project might be affected, and some will see pervasive changes.

Until the common standard is formulated, the answer to the question “What is your revenue?” would, on a lighter note, be a cross-question: “Under which GAAP, please?”

Hemant Joshi is Partner and Yogikumar Patel is Senior Manager, Deloitte Haskins & Sells

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