IBF 5030 Module 3 Written Assignment: One Revenue Standard, Two Sets of Details Example

A Spectrometer, an Installation and a Service Plan: Applying the Converged Revenue Standard

Student Name

Master of Science in Accounting, Thomas Edison State University

IBF-5030: U.S. and International Accounting

Mentor Name

Month Day, Year

A Spectrometer, an Installation and a Service Plan: Applying the Converged Revenue Standard

Introduction

In 2014 the FASB and IASB issued a joint revenue standard, ASC 606 under U.S. GAAP and IFRS 15 under IFRS, replacing a large body of industry-specific U.S. guidance and two thin IFRS standards. Hudson and Rhine applies one principle under both ASC 606 and IFRS 15 (Financial Accounting Standards Board, 2014; International Accounting Standards Board, 2014): it records revenue as control of the instrument, the setup and the service moves to the lab, measured at the consideration it expects to receive. This assignment applies that principle to a typical Hudson and Rhine contract and then notes where the details diverge.

The Contract

A university research center buys a mass spectrometer for $480,000, including installation and a three-year service plan with preventive maintenance and repairs. Hudson and Rhine sells each separately: the instrument alone for $420,000, installation for $20,000 and three-year service for $60,000.

The Five Steps

The $20,000 bundle discount is shared among the three promises by their standalone prices.

Revenue of $403,200 is recognized when the customer obtains control of the spectrometer, at delivery, and $19,200 when installation is completed. Service revenue of $57,600 is recognized evenly at $1,600 a month over 36 months, because the customer benefits from the service as it is provided.

Where the Standards Still Differ

Convergence is not complete. Several differences remain. The first is collectibility. Both standards require the lab's payment to be probable, but the threshold is higher under U.S. GAAP but only better than even odds under IFRS, so a doubtful customer may pass the IFRS threshold and fail the U.S. one. Second, practical expedients: U.S. GAAP allows entities to treat shipping and handling after control transfers as a fulfillment cost and to exclude sales taxes from the transaction price by policy election, options IFRS does not provide in the same form. The third is licensing: some licenses of intellectual property fall in different categories under each standard, which can move revenue between a single date and a period. Fourth, interim disclosures differ in detail.

Implications for the Company

For Hudson and Rhine's instrument contracts, the two standards produce the same revenue. Differences would arise only for an unusual customer with doubtful credit or for software licenses bundled with instruments, which the company should review when it reconciles the German subsidiary to U.S. GAAP. Picker et al. (2013) note that even converged standards can diverge in application as each board issues its own interpretations, so comparability depends on monitoring both boards' updates.

Conclusion

The converged revenue standard applies the same five steps under both systems, and for most of Hudson and Rhine's contracts it produces the same result. The remaining differences, in collectibility, practical expedients and licenses, are narrow but worth knowing, because they appear in exactly the contracts that require judgment.

References

Financial Accounting Standards Board. (2014). Revenue from contracts with customers (Topic 606) (Accounting Standards Update No. 2014-09).

International Accounting Standards Board. (2014). IFRS 15 revenue from contracts with customers. IFRS Foundation.

Picker, R., Leo, K., Loftus, J., Wise, V., Clark, K., & Alfredson, K. (2013). Applying international financial reporting standards (3rd ed.). John Wiley & Sons.