Question

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

Short answer

GAAP had numerous standards related to revenue recognition, but they were often inconsistent with one another.

Step-by-step solution

Introduction to Prior Standards  

According to asurvey,in prior standards,financial executives noted that the revenue recognition process is increasingly complex to manage, more prone to error, and more material to financial statements than any other financial reporting area.

The report noted that revenue recognition is a top fraud risk and that regardless of the accounting rules followed (GAAP or IFRS), the risk of errors and inaccuracies in revenue reporting is significant.

The explanation for lack of guidance

The FASB and the IASB have indicated that the state of reporting for revenue was unsatisfactory. IFRS was criticized because it lacked guidance in a number of areas.

IFRS had one general standard on revenue recognition plus some limited guidance related to certain minor topics. In contrast, GAAP had numerous standards related to revenue recognition, but many believed the standards were often inconsistent with one another.

Thus, the accounting for revenue provided a most fitting contrast of the principles-based (IFRS) and rules-based (GAAP) approaches.