How revenue is recognized under IFRS 15 and ASC 606

Revenue recognition defines when and how entities record income from contracts with customers. IFRS 15 (Revenue from Contracts with Customers) and ASC 606 (Revenue Recognition) are fully converged standards developed jointly by the IASB and FASB. They introduce a five-step model that replaces previous industry-specific guidance, ensuring consistency across sectors. The framework focuses on the transfer of control rather than the transfer of risks and rewards, aligning reported revenue with the delivery of goods or services and the satisfaction of contractual obligations.

The objective is to depict the economic substance of transactions and provide transparent, comparable information about the timing, amount, and uncertainty of revenue and cash flows.

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The five-step revenue recognition model.

Both IFRS 15 and ASC 606 apply the same sequential process:

Step 1 — Identify the contract with a customer.A contract exists when there is an agreement with enforceable rights and obligations, usually written, verbal, or implied.Criteria: approval by both parties, identifiable payment terms, commercial substance, and probable collection of consideration.

Step 2 — Identify the performance obligations.Performance obligations are distinct goods or services promised in a contract.Distinct if the customer can benefit from it on its own and it is separately identifiable within the contract.Example: a software license and a one-year maintenance service are two obligations.

Step 3 — Determine the transaction price.Transaction price is the amount of consideration expected in exchange for transferring goods or services, including fixed and variable amounts (bonuses, discounts, rebates, or penalties).Variable consideration is included only if highly probable that reversal will not occur.

Step 4 — Allocate the transaction price.Allocate the total price to each performance obligation based on relative stand-alone selling prices.If unavailable, estimate using adjusted market approach, expected cost plus margin, or residual method.

Step 5 — Recognize revenue when (or as) performance obligations are satisfied.Revenue is recognized over time or at a point in time depending on when control transfers to the customer.

Over time if one of the following applies:

• Customer simultaneously receives and consumes benefits.

• Entity creates or enhances an asset controlled by the customer.

• The asset has no alternative use and the entity has enforceable right to payment.

  
  

  Otherwise, recognize at a point in time (e.g., product delivery).

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Measurement and timing differences.

Over-time recognition:Use output methods (milestones, units delivered) or input methods (costs incurred, labor hours).

Example — construction contract:Total contract 5,000,000; total expected cost 4,000,000; cost to date 2,000,000.Progress = 50% → Revenue = 2,500,000.

Entry:

• Debit: Contract Asset (WIP) 2,500,000

• Credit: Revenue 2,500,000

Point-in-time recognition:Recognize revenue when legal title, physical possession, or risk transfers to customer (e.g., shipment).

Entry:

• Debit: Accounts Receivable 500,000

• Credit: Revenue 500,000

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Contract modifications and variable consideration.

Contract modifications:A modification is treated as:

• Separate contract if adds distinct goods/services at stand-alone price.

• Part of existing contract if modifies scope or price of remaining obligations.

Variable consideration:Estimate using expected value (probability-weighted) or most likely amount, constrained by the “highly probable” threshold.

Example:Performance bonus 100,000 payable if project completed before deadline, 70% probability.Expected value = 70,000; include in transaction price if highly probable to be retained.

Entry:

• Debit: Contract Asset 70,000

• Credit: Revenue 70,000

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Presentation and disclosure under IFRS 15 and ASC 606.

Entities present:

• Contract assets: recognized revenue not yet billed.

• Contract liabilities: advances or deferred revenue.

• Receivables: unconditional rights to payment.

Example – balance sheet excerpt:

Current Assets	USD
Contract Assets	1,200,000
Accounts Receivable	800,000
Current Liabilities	USD
Contract Liabilities	950,000

Disclosures required:

• Disaggregation of revenue (type, geography, contract type).

• Opening/closing balances of contract assets/liabilities.

• Information about performance obligations and timing of satisfaction.

• Methods, inputs, and judgments for revenue over time.

• Remaining performance obligations (backlog).

IFRS vs GAAP minor differences:US GAAP provides more implementation guidance for non-refundable upfront fees, shipping and handling, and gross-versus-net presentation.

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Comparative table: IFRS 15 vs ASC 606.

Aspect	IFRS 15	US GAAP (ASC 606)
Core principle	Recognize revenue as control transfers	Same
Collectability threshold	Probable (>50%)	Probable (~75–80%)
Constraint on variable consideration	“Highly probable” not to reverse	Same
Significant financing component	Adjust if >1 year	Same
Non-cash consideration	Measure at fair value	Same
Licensing guidance	Distinguishes right-to-use vs right-to-access	Identical
Disclosures	More flexible format	Prescriptive (SEC Reg S-X)

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Journal entries summary.

1) Contract inception:

• Debit: Contract Asset / Work in Progress xx

• Credit: Contract Liability / Deferred Revenue xx

2) Revenue recognized over time:

• Debit: Contract Asset xx

• Credit: Revenue xx

3) Billing the customer:

• Debit: Accounts Receivable xx

• Credit: Contract Asset xx

4) Cash collection:

• Debit: Cash xx

• Credit: Accounts Receivable xx

5) Adjust for variable consideration:

• Debit: Contract Asset xx

• Credit: Revenue xx

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Example – long-term service contract.

A software company sells a three-year license (600,000) and annual support (300,000).Stand-alone prices: license = 700,000; support = 300,000.Total price = 900,000 → allocate: license = 630,000; support = 270,000.License revenue recognized at delivery, support over time.

Year 1 entries:

• Debit: Accounts Receivable 900,000

• Credit: Revenue (License) 630,000

• Credit: Contract Liability (Support) 270,000

  
  

  Each year, recognize 90,000 revenue from support.

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Impact on financial performance and ratios.

Revenue recognition affects both timing and profile of earnings:

• Over-time recognition smooths revenue and earnings.

• Point-in-time recognition increases volatility.

• Contract assets raise current ratios and working capital, while contract liabilities reduce them.

• Margin analysis must consider deferred revenue positions, especially in SaaS or subscription models.

Analysts adjust for deferred balances to derive underlying run-rate revenue and cash conversion metrics.

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Operational considerations.

Implementing IFRS 15 and ASC 606 requires:

• Integration of contract management systems with accounting.

• Monitoring of performance obligation tracking.

• Consistent policies for variable consideration and discounts.

• Alignment of KPIs (e.g., ARR, backlog) with revenue accounting.

• Periodic contract reviews for modifications and renewals.

Clear, consistent application of the five-step model enhances comparability and aligns revenue reporting with the true economic performance of each contract.

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