Comparison between U.S. GAAP and International ... - Grant Thornton

Comparison between U.S. GAAP and International Financial Reporting Standards 77
IFRS
estimated reliably, contract revenue and costs shall
be recognised by reference to the stage of
completion (IAS 11.22). If the outcome of a contract
cannot be estimated reliably, contract revenue shall
be recognised to the extent of recoverable contract
costs (IAS 11.32).
• Unlike U.S. GAAP, the completed-contract method is
not permitted.
• Probable losses shall be recognised as an expense
immediately (IAS 11.36).
An agreement for the construction of real estate may be
within the scope of IAS 11 or 18. The determination is a
matter of judgement that depends on the terms of the
agreement and the specific facts and circumstances of
the arrangement. IFRIC 15 provides guidance to assess
whether an agreement for the construction of real estate
is within the scope of IAS 11 or 18 and when revenue
from the construction of real estate shall be recognised.
IAS 11 applies to each construction contract separately.
However, in some situations IAS 11 is applied to separate
components of a single contract or to a group of contracts
together (IAS 11.7).
Contracts shall be combined when they are negotiated as
a single package, they are closely interrelated and they
are performed concurrently or in a continuous sequence
(IAS 11.9).
Contracts shall be segmented when separate proposals
have been submitted for each asset, each part was
subject to separate negotiation and the contractor and
customer have been able to accept or reject that part of
the contract relating to each asset, and costs and
revenues of each asset can be separately identified
(IAS 11.8).
U.S. GAAP
in situations in which reasonably dependable
estimates can be made and the conditions in
ASC 605-35-25-57 exist (ASC 605-35-25-56 and
25-57). Revenue is recognized as contract activity
progresses. In a situation in which a precise
estimate is not practical and the contract is not
expected to result in a loss, the percentage-of
completion method based on a zero profit margin is
recommended until results can be estimated more
precisely.
• If reasonable estimates cannot be made, the
completed-contract method is used
(ASC 605-35-25-94).
• Probable losses are recognized as an expense
immediately under either the percentage-ofcompletion
method or the completed-contract
method (ASC 605-35-25-45 and 25-50).
Except for services in connection with construction
contracts, long-term service contracts are excluded
from the scope of ASC 605-35
(ASC 605-35-15-2, 15-3, and 15-6).
ASC 605-35 permits, but does not require, the
combining and segmenting of contracts provided certain
criteria are met (ASC 605-35-25-5 through 25-14). IFRS
requires combining and segmenting contracts when
certain criteria are met.
Recognition guidance
IAS 11.22 provides that when the outcome of a
construction contract can be estimated reliably, contract
revenue and contract costs shall be recognised by
reference to the stage of completion of the contract at the
end of the reporting period. IAS 11.23 and .24 list the
conditions that must be met for the outcome of a fixed
price or cost plus contract, respectively, to be reliably
The ability to produce reasonably reliable estimates is
essential for the use of the percentage-of-completion
method. In a situation in which a precise estimate is not
practical and the contract is not expected to result in a
loss, the percentage-of-completion method based on a
zero profit margin is recommended until results can be
estimated more precisely (ASC 605-35-25-56 and
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