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What Are the Best Tips for IFRS Revenue Recognition?

Mastering IFRS revenue recognition requires understanding the five-step model: identify the contract, separate performance obligations, determine the transaction price, allocate the price to obligations, and recognize revenue as obligations are fulfilled. Staying updated with amendments and seeking real-world examples can solidify your grasp. How might these steps impact your business's financial reporting? Join us to uncover the nuances.
Osmand Vitez
Osmand Vitez

International financial reporting standards (IFRS) represent the accounting principles commonly used by international companies. These principles can vary widely from generally accepted accounting principles (GAAP), the dominant accounting standards for companies doing business in the United States. Therefore, IFRS revenue recognition is a bit different than GAAP revenue recognition, allowing companies to report financial information in a different format. The best tips for IFRS revenue recognition include non-amortization of certain income types, the recognition of partial-contract income, and the use of percentage of completion for certain long-term contracts. Disclosures or statements made on these activities may be necessary to inform stakeholders on financial reporting.

IFRS revenue recognition generally allows a company to recognize income as they perform services, for example, if a company has a contract to perform work that will take several different periods over a long time. Under IFRS accounting principles, the company performing the service can recognize income each time they complete work for the bigger project. This allows the company to release financial statements that may be slightly more accurate in terms of income earned from business activities during a given period. Certain rules may apply, however, that limit this opportunity based on situations covered in IFRS financial reporting principles.

Man with hands on his hips
Man with hands on his hips

Multi-element contracts are another financial reporting tip for IFRS revenue recognition. Here, a company may generally be allowed to recognize income on this contract type when the revenue occurs. One rule for this contract type is that delivery on the contract must be probable for certain events within the agreement. Refunds or cancellations for noncompletion of certain activities within the contract may not cancel the revenue recognition. Companies must be very careful when reporting these contract types as certain rules may apply in specific situations that can affect this revenue recognition.

Construction-type projects usually fall under specific accounting rules when reporting income, and IFRS revenue recognition is no different. Here, companies must use the percentage of completion method for recognizing revenue rather than another method for this process. For example, companies can only recognize revenue on a given project so much as they have completed it. If a project is 35 percent complete, then the company can only recognize 35 percent of the related revenue for IFRS financial reporting. Any attempt to recognize more income can result in misstatements on an income statement, making a company look like it generated more revenue than it actually has during a given time period.

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