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Analyzing Revenue Recognition Methods

Analyzing Revenue Recognition Methods

Managers must determine which revenue recognition method is best for a company while complying with revenue recognition rules.

1. Describe different revenue recognition methods under GAAP and IFRS.
2. Define ADR firms.

Suppose the selected ADR firm is considering whether to report revenues under U.S. GAAP or IFRS, and their choice will determine which stock exchange ADR trades.

3. Describe the U.S. stock exchanges versus international ones in terms of requirements for listing company stocks for trading.
4. What does management need to know, estimate, and assume to determine which revenue recognition method is best for the firm?

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1. Describe different revenue recognition methods under GAAP and IFRS.

There are some areas where there are different revenue recognition methods under GAAP and IFRS. When there is deferred receipt of receivables, US GAAP discounts it to present value only in some situations, the IFRS treats it as a financing agreement. In case of IFRS there is discounting of future receipts. Where there is sale of goods, public companies under the US GAAP SAB 104, revenue is recognized if the risks and rewards have been transferred, fee is fixed, and collectivity is assured. In case of IFRS, revenue is recognized only if risks and rewards related to ownership have been transferred, the buyer controls goods, revenues can be measured, and economic benefits will flow to the company. In case of service revenue, the US GAAP addresses services sold with software separately, normal service revenue needs to follow SAB 13, application of long-term contract accounting. In case of IFRS, long-term contract accounting is the rule and the stage of completion is considered when revenues and costs can be measured reliably and economic benefits are likely to flow to the company. In case of construction contracts the percentage of completion method is used in the US GAAP if certain criteria are met otherwise completed contract method is used. In case of IFRS, the percentage of completion method is used ...

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