Q) A firm that reports under IFRS has begun providing a product under a long-term contract for which it cannot reliably estimate the outcome. In the first year of this contract, compared to reporting under U.S. GAAP, reporting under IFRS will cause the firm’s operating profit margin to be:
C. the same
I thought under IFRS, if the outcome of a long term contract cannot be estimated reliably, the firm should expense costs when incurred, recognise revenue to the extent of the costs and recognize profit only when the contract is complete.
U.S. GAAP: completed contract method, only recognise revenue, expenses and profit when the contract is complete.
Therefore, how can a firm reporting under IFRS have lower operating profit margin than a firm reporting under U.S. GAAP?
Their operating profit (in dollars, euro, pounds, yen, whatever) will be the same, but under IFRS their revenue will be higher (recognized to the extent of costs, compared to US GAAP: no revenue recognized). The same profit divided by higher revenue results in a lower profit margin.