IFRS 15 and ASC 606

Last Updated: Wed Apr 03 2024

ASC 606 Standard

ASC 606 is a set of revenue recognition standards developed by the FASB to ensure consistency and clarity in the revenue reporting process for all private and public companies. Implemented in 2018, it introduces a five-step model aimed at standardizing revenue recognition practices across industries, thereby simplifying financial statement preparation.

Five-Step Model for Recognizing Revenue - ASC 606

  1. Identify the Contract with the Customer: Confirm the agreement and mutual understanding of obligations and payment terms.

  2. Identify the Performance Obligation(s): Define each distinct promise to transfer goods or services to the customer.

  3. Determine the Transaction Price: Establish the amount of consideration expected for the transfer of goods or services.

  4. Allocate the Transaction Price to the Performance Obligation(s): Distribute the transaction price among each performance obligation based on its standalone selling price.

  5. Recognize Revenue as Performance Obligation(s) are Satisfied: Revenue is recognized when control of goods or services transfers to the customer, fulfilling the performance obligation.

IFRS Standard

IFRS (International Financial Reporting Standards) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that guide the preparation of financial statements globally. Like ASC 606, IFRS standards aim to make financial statements more comparable, transparent, and consistent across different countries and sectors.

Comparing ASC 606 and IFRS 15

While ASC 606 and IFRS 15 share a common foundation in the five-step model, there are crucial differences to be aware of:

  • Collectibility Threshold varies between the standards, affecting when contracts are recognized.

  • Impairment Loss Reversal is treated differently, with IFRS 15 allowing reversals under certain conditions.

  • License of Intellectual Property and renewal of licenses have distinct recognition criteria.

  • Shipping and Handling Costs and Sales Taxes have unique treatments under each standard.

Companies must adhere to the standard applicable in their jurisdiction, with no choice between ASC 606 and IFRS 15. These differences underscore the importance of specialized knowledge in financial reporting under each framework.

Why Understanding ASC 606 and IFRS 15 Matters

Recognizing revenue accurately under ASC 606 and IFRS 15 is crucial for compliance and reliable financial reporting. Entities must navigate the nuances of each standard to ensure their financial statements reflect their financial performance faithfully, accommodating the critical aspects of modern business transactions.