How revenue recognition is applied under IFRS 15 and ASC 606

Revenue recognition defines when and how income is recognized from contracts with customers. IFRS 15 and US GAAP (ASC 606) are fully converged standards built around a single five-step model that replaces numerous industry-specific rules. Both frameworks aim to depict the transfer of goods or services in an amount that reflects the consideration the entity expects to receive, emphasizing control transfer, performance obligations, and transaction price allocation.

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How the five-step revenue model works.

Both IFRS 15 and ASC 606 follow a consistent sequence:

Step 1 — Identify the contract with a customer.A contract exists when it creates enforceable rights and obligations, has commercial substance, and it is probable the entity will collect the consideration.

Step 2 — Identify performance obligations.Each distinct good or service (or bundle) within a contract is a separate performance obligation if the customer can benefit from it on its own or with other available resources, and it is separately identifiable.

Step 3 — Determine the transaction price.The transaction price is the consideration the entity expects to receive, including variable consideration, significant financing components, non-cash consideration, and consideration payable to customers.

Step 4 — Allocate the transaction price.When multiple performance obligations exist, allocate the price based on stand-alone selling prices, adjusted for discounts or variable elements.

Step 5 — Recognize revenue when (or as) performance obligations are satisfied.Revenue is recognized when control of the good or service passes to the customer—either over time or at a point in time.

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How revenue recognition differs between point-in-time and over-time contracts.

Point in time recognition applies when the customer obtains control of a completed good or service (e.g., product sale).Over time recognition applies when:

1. The customer simultaneously receives and consumes benefits as performance occurs;

2. The entity’s performance creates an asset controlled by the customer; or

3. The asset created has no alternative use and the entity has an enforceable right to payment.

For over-time contracts, progress is measured using output methods (milestones, units delivered) or input methods (costs incurred, labor hours).

Example — manufacturing contract (over time):Contract price 1,000,000; total estimated cost 800,000; incurred costs 400,000.

Progress = 400,000 ÷ 800,000 = 50%Revenue recognized = 1,000,000 × 50% = 500,000.

Journal entry:

• Debit: Contract Asset 500,000

• Credit: Revenue 500,000

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How transaction price is determined and adjusted.

Variable consideration: includes discounts, rebates, performance bonuses, penalties. Recognize amounts only to the extent it is highly probable (IFRS) or probable (GAAP) that reversal will not occur.

Significant financing component: adjust for time value if timing of payments provides financing to either party.

Non-cash consideration: measure at fair value of goods or services received.

Consideration payable to customer: reduce transaction price unless paid for a distinct good or service.

Example — variable consideration constraint:Sales bonus up to 100,000 based on delivery within 60 days. Historical success rate 80%.Expected value = 100,000 × 80% = 80,000; recognize only if reversal unlikely.

Journal entry:

• Debit: Contract Asset 80,000

• Credit: Revenue 80,000

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Contract assets, contract liabilities, and receivables.

Entities present contract assets when revenue recognized exceeds billings, and contract liabilities (deferred revenue) when billings exceed revenue recognized. Receivables arise when payment is unconditional except for the passage of time.

Example:At year-end, entity has recognized 1,200,000 revenue, billed 1,000,000.

Journal entry:

• Debit: Contract Asset 200,000

• Credit: Revenue 200,000

If customer pays in advance 500,000 before transfer of goods:

• Debit: Cash 500,000

• Credit: Contract Liability (Deferred Revenue) 500,000

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Principal vs agent considerations.

When more than one party is involved in providing goods or services, an entity acts as principal if it controls the specified good or service before transfer to the customer; otherwise, it is an agent.

Principal: recognize gross revenue.Agent: recognize net commission (fee or margin).

Example:Platform sells third-party software subscriptions. Total price 300,000; vendor share 270,000; platform earns 30,000 commission.If agent:

• Debit: Cash 300,000

• Credit: Payable to Vendor 270,000

• Credit: Revenue 30,000

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Contract modifications and combined contracts.

When contract terms change, entities must determine if the modification:

1. Adds distinct goods or services priced at stand-alone selling prices → treat as separate contract.

2. Adds goods/services not distinct → adjust cumulative revenue under existing contract (prospective or retrospective).

Example — modification adds non-distinct goods:Contract value increases 200,000 for additional work not distinct. Adjust cumulative progress and recognize catch-up adjustment in current period.

Journal entry:

• Debit: Contract Asset 200,000

• Credit: Revenue 200,000

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Disclosures required under IFRS 15 and ASC 606.

Entities must disclose sufficient information for users to understand:

• Nature, amount, timing, and uncertainty of revenue and cash flows.

• Disaggregation of revenue by type, geography, customer, or timing (point vs over time).

• Contract balances roll-forward (opening, additions, transfers, revenue recognized).

• Performance obligations and when they are satisfied.

• Significant judgments about timing of recognition, transaction price estimates, and variable consideration constraints.

Example disclosure extract:

Contract Balances	Opening (USD)	Closing (USD)
Contract Assets	250,000	410,000
Contract Liabilities	(520,000)	(480,000)
Receivables	1,050,000	1,180,000

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Comparative table: IFRS 15 vs ASC 606.

Area	IFRS 15	ASC 606
Core principle	Transfer of control	Same
Constraint threshold	“Highly probable” no significant reversal	“Probable” no significant reversal
Onerous contract testing	IAS 37 separate	ASC 605-35 legacy, updated for construction
Licensing	Distinguishes right to use vs right to access	Same; more industry examples (software, media)
Non-cash consideration	Fair value at contract inception	Same
Interim disclosure detail	Less prescriptive	SEC filers must follow detailed quantitative tables
Collectability threshold	Probable (≈ >50%)	Probable (≈ 75–80%)

The two frameworks are substantially aligned, but disclosure intensity and threshold wording create subtle differences.

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Journal entries for common revenue recognition cases.

1) Point-in-time product sale:

• Debit: Accounts Receivable 500,000

• Credit: Revenue 500,000

2) Over-time construction contract (cost-to-cost):

• Debit: Contract Asset 400,000

• Credit: Revenue 400,000

3) Customer advance:

• Debit: Cash 200,000

• Credit: Contract Liability 200,000

4) Upon delivery satisfying obligation:

• Debit: Contract Liability 200,000

• Credit: Revenue 200,000

5) Variable consideration (rebate):

• Debit: Revenue Reduction 25,000

• Credit: Refund Liability 25,000

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Impact on financial performance and ratios.

Revenue recognition affects key indicators such as gross margin, EBITDA, working capital, and cash conversion cycles.

• Over-time recognition accelerates revenue relative to billing, inflating contract assets and unbilled revenue.

• Changes in variable consideration or estimates create earnings volatility.

• The shift from risks and rewards to control may reclassify timing for software, real estate, and long-term manufacturing contracts.

Analysts often adjust revenue trends for backlog, contract asset/liability movements, and non-recurring modifications to understand sustainable performance.

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Operational considerations.

Implementation requires cross-functional collaboration between sales, legal, operations, and finance to track contracts, performance obligations, and price changes. Systems must handle revenue schedules, contract combinations, and reallocations dynamically. Entities must also ensure consistency of data between invoicing and recognition systems, apply controls over variable consideration, and maintain transparent disclosures.

A robust IFRS 15 / ASC 606 framework strengthens comparability across industries and enables clearer insight into the economics of customer relationships.

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