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.
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