CHAPTER 5 Revenue Recognition and Profitability Analysis 311 Expenses incurred by the franchisor in providing these continuing franchise services should be recognized in the same periods as the service revenue. Accounting for franchise revenue under ASU No. 2014-09 is similar to revenue recognition under previous GAAP. To the extent that the services underlying initial franchise fees constitute separate performance obligations, revenue associated with those fees is recognized when those services have been performed. Similarly, to the extent that continuing franchise fees constitute payments for services that are provided over time, revenue recognition over time is likely to be appropriate. However, the justification for the amount and timing of revenue recognition is based on the ASU, rather than on special guidance provided for franchise arrangements. Also, ASU 2014-09 includes new guidance for recognizing licensing revenue. Other unique industry-specific revenue recognition situations exist besides those we have discussed. The FASB and AICPA previously issued detailed revenue recognition guidance for such industries as insurance, record and music, cable television, and motion pictures. All of that guidance was replaced by ASU No. 2014-09. 41 Additional Differences Between U.S. GAAP and IFRS ASU No. 2014-09 is a converged standard, providing virtually identical guidance for U.S. GAAP and IFRS. However, prior to issuance of the ASU, there was incomplete convergence between U.S. GAAP and IFRS. In addition to differences in revenue recognition concepts discussed earlier in this appendix, key differences involved accounting for revenue on longterm contracts and multiple-deliverable arrangements. We provide an IFRS Box for each of these issues below. International Financial Reporting Standards Long-Term Construction Contracts. Prior to issuance of the ASU, IAS No. 11 governed revenue recognition for long-term construction contracts. 42 Like U.S. GAAP, that standard required the use of the percentage-of-completion method when reliable estimates can be made. However, unlike U.S. GAAP, IAS No. 11 required the use of the cost recovery method rather than the completed contract method when reliable estimates couldn’t be made. 43 Under the cost recovery method, contract costs are expensed as incurred, and an offsetting amount of contract revenue is recognized to the extent that it is probable that costs will be recoverable from the customer. No gross profit is recognized until all costs have been recovered, which is why this method is also sometimes called the “zero-profit method.” Note that under both the completed contract and cost recovery methods no gross profit is recognized until the contract is near completion, but revenue and construction costs will be recognized earlier under the cost recovery method than under the completed contract method. Also, under both methods an expected loss is recognized immediately. (continued) 41 FASB ASC 944: Financial Services–Insurance (previously “Accounting and Reporting by Insurance Enterprises,” Statement of Financial Accounting Standards No. 60 (Stamford, Conn.: FASB, 1982)); FASB ASC 928—Entertainment–Music (previously “Financial Reporting in the Record and Music Industry,” Statement of Financial Accounting Standards No. 50 (Stamford, Conn.: FASB, 1981)); FASB ASC 922: Entertainment—Cable Television (previously “Financial Reporting by Cable Television Companies,” Statement of Financial Accounting Standards No. 51 (Stamford, Conn.: FASB, 1981)); FASB ASC 928: Entertainment–Films (previously “Accounting by Producers or Distributors of Films,” Statement of Position 00-2 (New York: AICPA, 2000)). 42“Construction Contracts,” International Accounting Standard No. 11 (IASCF), as amended, effective January 1, 2011. 43Earlier in this appendix we referred to the “cost recovery method” in a different circumstance—when a company had already delivered a product to a customer but had to delay gross profit recognition until a point after delivery because of an inability to make reliable estimates of uncollectible accounts. In that case, gross profit only could be recognized after costs had been recovered (and cash collections exceeded cost of goods sold). IFRS’ use of “cost recovery method” is similar, in that gross profit recognition is delayed until after cost has been recovered, but note that in this case the product is being constructed for the customer and therefore has not yet been delivered.
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