IFRS Conversion Considerations: Revenue Recognition

Organizations considering a conversion to the International Financial Reporting Standards (IFRS) from U.S. Generally Accepted Accounting Principles (U.S. GAAP) should be aware of key revenue recognition differences between both accounting standards.   This article is part of a series covering considerations for organizations contemplating a conversion from U.S. GAAP to IFRS. 

The revenue recognition guidelines contained in International Accounting Standards Board’s (IASB) IFRS 15 and Financial Accounting Standards Board’s (FASB) ASC Topic 606 have mostly converged, but there are a few key differences between both standards, one of which is the accounting treatment for shipping and handling activities. While both standard-setting bodies reached the same conceptual interpretation of the performance obligations inherent within shipping and handling activities, the IASB did not provide the same shipping and handling performance obligation practical expedient as did the FASB.  Entities with dual reporting requirements or first-time adopters of IFRS should be cognizant of this difference in accounting for shipping and handling activities, because it affects the timing of revenue recognition.

Promises and goods identified in a contract are separate performance obligations if they are distinct or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.  In order to be distinct, a good or service must be capable of being distinct and distinct within the context of the contract.  The issue is whether or not shipping and handling activities constitute a separate performance obligation.  In situations where control of the goods passes to the customer at a point in time after shipment has occurred, as in FOB destination arrangements, there would likely not be a separate performance obligation for shipping and handling.  In contrast, when shipping and handling activities occur at a point in time after control of the goods passes to the customer, as in FOB shipping point arrangements, there is a separate performance obligation.

The FASB’s revenue recognition model provides sellers with an optional practical expedient to treat shipping and handling activities that occur after the customer has obtained control of the goods as a fulfilment activity and not as a separate performance obligation.  The IASB’s IFRS 15 does not provide the same practical expedient and requires sellers to analyze whether or not shipping and handling activities create a separate performance obligation.  If a seller determines that the activity of shipping and handling is a separate performance obligation, a portion of the transaction price is allocated to that performance obligation and deferred until the goods ship to the customer.

Schneider Downs provides assurance and advisory services for international entities and organizations following IFRS. For more information concerning international business matters and their impact to your organization, please visit the Schneider Downs Our Thoughts On blog or email us at [email protected].

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2024 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Pillar Two is Here; Is Your Company Ready?
Audit BY Erin Puko-Wilking
2024 Audit Plan Hot Spots
Cap Table Basics for Startup Companies
Potential Accounting Changes for Environmental Credits
PCAOB’s New Standard Enhances Auditors’ Use of Confirmations
Single Audit Reporting Reminders
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us
Pittsburgh

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×