Accounting technology / Glossary / Revenue recognition

What is revenue recognition?

Definition

Revenue recognition is the set of accounting rules that decide when a company records revenue and how much. Under IFRS 15 and its US equivalent, ASC 606, revenue is recognised as a company transfers promised goods or services to the customer, at the amount it expects to receive, which can differ from when the invoice is sent or paid.

Also calledrev recrevenue accounting

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Standards: IFRS 15 and ASC 606
Issued: May 2014, jointly
Model: Five steps

How revenue recognition works

IFRS 15 and ASC 606 were issued together by the IASB and FASB in May 2014 and replaced most earlier industry rules; IFRS 15 applies to annual periods beginning on or after 1 January 2018. Both use five steps: identify the contract with the customer; identify the performance obligations, the distinct goods or services promised; determine the transaction price, including discounts and variable amounts; allocate the price to each obligation in proportion to standalone selling prices; and recognise revenue when, or as, each obligation is satisfied, at a point in time or over time. A software deal with a licence, implementation and a year of support may therefore recognise some revenue on day one and the rest monthly. Revenue recognition software reads contracts, builds schedules and posts deferred and recognised revenue to the ledger.

Common questions

What are the five steps of revenue recognition?+

Identify the contract; identify the performance obligations; determine the transaction price; allocate the price to the obligations; recognise revenue when or as each obligation is satisfied.

Is revenue recognised when the invoice is sent?+

Not necessarily. Revenue follows delivery of the goods or services. Billing in advance creates deferred revenue; delivering before billing creates a contract asset.

Are IFRS 15 and ASC 606 the same?+

They share the same core principle and five steps and were issued together. Some details differ, such as certain disclosures and practical expedients, so groups reporting under both still check the differences.