Convergence of Revenue Recognition

Oct 23, 2010

One accounting principle that is omnipresent in the accounting of all companies, be it public or private, domestic or private, billion dollar company or a startup, is the “Revenue recognition principle”.  Presently, US Generally Accepted Accounting Principles (GAAP) offers more than 100 pronouncements regarding when and how to book revenue, including industry specific rules for 25 different sectors.  The variations of the rules definitely leads to comparability issues among different companies, but due to the type of work different organizations do it is almost required to have variations in the rule. A construction company that uses the percentage of completion method to recognize revenue, will show a warped picture if it were to recognize the revenue only when the final sale of the property was done. If it takes 5 years to construct and sell, the company would be a loss making company for the five years as there will be costs associated with the construction but no revenue to show!

With the GAAP and IFRS convergence on full swing, the goal is to have a converged revenue recognition principle by the second quarter of next year. But consider this, under IFRS there are just two broad revenue rules augmented by four interpretations. A hundred pronouncements vs two broad rules; how do you come to a middle ground. This will be a major challenge for the standard setters and more so for all the companies that have to comply with the converged standards. Would it be more effective and show a clearer picture is something only time will tell.

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Mexican airport operator – an early adopter of IFRS

Oct 23, 2010

In January of 2009,the National Banking and Securities Commission made mandatory the presentation of financial statements prepared in accordance with IFRS starting  with the year ending December 31, 2012, but allowing for early adoption for the years 2008-2011, subject to prior notification to the CNBV and Mexican Stock Exchange (BMV). One of the early adopters of the requirement is the Mexican airport operator Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., known as OMA. The  operator announced that it will make early adoption of International Financial Reporting Standards (IFRS) (beginning a year ahead of the mandate with their first IFRS financial statements being year ending December 31, 2011, they will be considering the year 2010 as a transition year) and provided information on the estimated effects of the change.

It seems like the accounting standards world is coming closer to convergence and becoming totally global.


												
				

				
				

					

	
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IFRS a bane for Real Estate Companies in India

				
Oct 21, 2010

				
						
										
											
								
				
The Indian government is all set to drop the new rule from International Financial Reporting Standards (or as the accountants call it IFRS) that allows property developers to book sales only when the project is complete. In the present real estate market where the developers are already struggling to make ends meet, this new rule will push their income statement even further down.  The government has decided to allow the developers to follow the percent completion method, whereby the developers record revenue as they build the property, thereby showing a much healthier income statement.


 


Though the Indian government like many other country governments is trying to merge their rules to the IFRS, this departure from the international standards will definitely come as a relief for the local real estate organizations, especially in trying times like these. 


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Convergence vs Adoption

				
Nov 13, 2009

				
						
										
											
								
				
There is a lot of talk of the convergence project undertaken by Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).


But why is the convergence project and not the adoption project. Adoption would mean that the Securities and Exchange Commission (SEC) sets a specific timetable when publicly  listed companies would be required to use International Financial Reporting Standards (IFRS) as issued by the IASB to prepare their Financial Statements. Convergence on the other hand means that the FASB and the IASB would continue working together to develop high  quality, compatible accounting standards over time. More convergence  will make adoption easier and less costly and may even make adoption of  IFRS unnecessary. On the other hand, if IFRS is not adopted completely, the differences between the two standards will not all be eliminated completely and there will still be need to reconcile the two.


To completely eliminate the differences between the two standards is easier said than done. There is a long history behind US Generally Accepted Accounting Standards (GAAP), the accounting standards governing the US based corporations. To completely   give up the present standards and adopt IFRS is definitely not prudent and also not feasible. It isn’t a switch that can be turned off, there is a lot of history and knowledge that is the basis of GAAP, and it is best to find a solution that would leverage the knowledge base. And so a gradual shift through convergence is a much more viable and effective approach.


But be it convergence or adoption, it is a definitely a big step towards standardizing the accounting field and towards making accounting a global profession.

												
				

				
				

					

	
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