Revenue Recognition Paper

Task:

The primary goal of this assignment is to examine and analyze the selected case, Revenue Recognition: Understanding the Impact of IFRS 15 - Revenue from Contracts with Customers. The secondary goal is to compare US GAAP recognizing revenue on long-term contracts.

Required Readings:

Differences and Similarities Between IFRS and GAAP - Revenue Recognition.pdf Download Revenue Recognition.pdf The real effects of a new accounting standard: the case of IFRS 15 Revenue from Contracts with Customers - The Case of IFRS 15 Revenue from Contracts with Customers.pdf Download The Case of IFRS 15 Revenue from Contracts with Customers.pdf

Attention: Be sure to review pages 480 - 488; section 3. The new revenue accounting standard

Attention: Be sure to review pages 494-501; sections 4.3 (information effects) through 5 (conclusions).

Submission Instructions:

The paper is to be clear and concise, and students will lose points for improper grammar, punctuation, and spelling.

The text is to be 10-20 pages in length (typed, double-spaced), excluding the title page and reference pages. The student will automatically lose points if these guidelines are not followed.

All journal articles, media, and books should be referenced according to current APA style (the STU library provides a copy of the online APA Manual).

Partie I

Differences and Similarities Between IFRS and GAAP on Inventory, Revenue Recognition and Consolidated Financial Statements

S. Sam Sedki St. Mary's University

Abby Smith St. Mary's University

Aissa Strickland St. Mary's University

As globalization progresses and international economic dependency increases, the need for a global accounting system becomes more apparent. American companies will inevitably have to adopt international accounting standards if they wish to enter or remain in their respective international markets. The idea of obtaining an international convergence of accounting standard first arose in the late 1950s in response to economic integration and increases in international trade. As of today, over one hundred (100) countries either require or permit the use of International Financial Reporting Standards (IFRSs)

INTRODUCTION

The International Accounting Standards Committee was formed in 1973 and was the first international standards-setting entity. It became International Accounting Standards Board (IASB) in 2001. This paper will highlight the similarities and difference in IFRS and Generally Accepted Accounting Principles (GAAP) as they pertain to accounting for inventory, revenue recognition, and consolidated financial statements and to provide an accurate depiction of what issues future convergence will need to address. The three accounting areas may well be considered to be core accounting areas and may affect most U.S. companies' financial position. Therefore, anticipated adoption of IFRS will be most problematic in these areas.

INVENTORY

Accounting for inventory is intended to accurately reflect the cost expensed by an entity. Accounting for inventory should also provide investors a basis with what to determine expected profit. IFRS aimed to provide guidance on "the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized." International Accounting Standards (IAS 2-1). "Similarly, GAAP requires companies to record inventories at cost when first recognized. Accounting Standards Codification" (ASC 330). The integration of IFRS by companies currently using GAAP will not be seamless as IFRS and GAAP significantly differ in some areas. "Switching to IFRS wouldn't only require coordinating money regulatory authorities, such as the Public Company Accounting Oversight Board, the Internal Revenue Service, and the Securities and Exchange Commission (SEC) but it would also put pressure on changes to company information systems, internal controls, and tax planning, (Krishnan, 2012).

IFRS prohibits the use of the Last-in-First-out (LIFO) method to account for inventory, while LIFO has been long accepted under GAAP IAS 2 & ASC 330. This will have the biggest impact on American companies financial statements particularly on their reported tax obligations. The IRS requires companies using LIFO for tax purposes to have to use LIFO for income measurement in financial accounting as well IRC Sec. 472(c). Usually companies using LIFO have lower tax expenses and lower financial income. Operating results and cash flows might be significantly different for American companies currently using LIFO and wish to incorporate IFRS. Requiring American companies to switch from LIFO to First-in- First-out (FIFO) in a short and abrupt amount of time can have detrimental effects life of these companies and volatility of the economy. Because removing LIFO as an available inventory method to be used will have such a dramatic impact on companies and the economy, therefore, the adoption of IFRS should: 1) be an stated as a requirement as early as possible to allow companies to adjust their financial plans, 2) the adoption should be conducted in increments and, for example, include set requirements for year 1, year 3, and year 5 so that the economic impact of the adoption does not fully impact the year of adoption, and 3) prohibit companies from reversing previously written down inventory as required by IFRS.

Currently, subsequent measurement of inventory under GAAP is recorded at the lower of cost or market and market is defined as current replacement cost, which is limited to net realizable value. Subsequent measurement of inventory under IFRS is measured at the lower of cost or net realizable value. Under GAAP companies are prohibited from reversing the write-down and increasing the new cost basis. However, under IFRS, reversals up to the amount of that was previously written down is not only allowed but is required when surrounding economic circumstances clearly indicate the net realizable value of the inventory has increased. This mandatory recovery of previously written down inventory is based on subjective criteria and will inevitably subject companies to earnings volatility and also has the potential for abuse. Companies' profit and gross profit percentages will be subject to the changes in economic circumstance. This requirement is contrary to accounting's qualitative characteristic, predictive value. An abrupt adoption of IFRS may result in economic volatility, GAAP should gradually eliminate the use of LIFO from being used while IFRS should remove its requirement for reversing previously written down inventory upon change of circumstance.