What is revenue recognition?
Revenue recognition answers two questions: when should revenue be recorded, and how much? Getting it right is essential for accurate profit, and getting it wrong is a common cause of restatements and fraud cases.
The five-step model
IFRS 15 and ASC 606 use the same core model:
- Identify the contract with the customer.
- Identify the performance obligations, the distinct goods or services promised.
- Determine the transaction price, including discounts, variable amounts and financing.
- Allocate the price to each performance obligation based on standalone selling prices.
- Recognise revenue when (or as) each obligation is satisfied.
Point in time vs over time
- Point in time: retail sales, product deliveries.
- Over time: subscriptions, construction contracts, ongoing services.
Example
A software company sells a $1,200 package: a one-year subscription (standalone price $1,000) and a setup service (standalone price $300). The price is allocated in proportion: about $923 to the subscription, recognised monthly, and $277 to setup, recognised when complete.
Related balances
- [Deferred revenue](/glossary/deferred-revenue): cash received before recognition.
- [Accrued income](/glossary/accrued-income): revenue recognised before billing.