Financial Statement Fraud: Strategies for Detection and Investigation

CHAPTER ONE

Introduction to Revenue-Based Financial Reporting Fraud Schemes

REVENUE RECOGNITION PRINCIPLES

U.S. GAAP describes revenues as inflows or other enhancements of an entity's assets or settlements of its liabilities (or a combination of both) from delivering or providing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Under IFRS, revenue is defined in IAS 18, Revenue, as “The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.”

The primary accounting standard governing revenue recognition under IFRS is IAS 18, a comprehensive standard covering numerous considerations. In addition, rules have been published dealing with certain specific types of revenue (e.g., IAS 11 on construction contracts, SIC 31 on barter transactions, etc.).

Under U.S. GAAP, there is currently not a comprehensive revenue standard that is analogous to IAS 18. Instead, there is very broad guidance found in ASC 605, supplemented by standards dealing with specific types of revenue (e.g., revenue from software at ASC 985-605-25) or specific industries (e.g., the music industry at ASC 928-605-25).

As of the writing of this book, however, FASB and IASB are involved in a joint project that will result in changed revenue recognition principles under both U.S. ...