How to recognize Revenue under IFRS and US GAAP: Step-by-step guidance and key differences
- Graziano Stefanelli
- Sep 11
- 4 min read
Revenue recognition is central to the presentation of an entity’s financial performance. With the joint issuance of IFRS 15 and ASC 606, IFRS and US GAAP have largely converged on a five-step model for recognizing revenue from contracts with customers. Despite this convergence, subtle but meaningful differences remain in contract combinations, variable consideration, licensing, and disclosure requirements. Understanding and applying the correct recognition criteria is essential to accurately reflect economic activity and comply with regulatory standards.
Revenue is recognized using a standardized five-step model under both standards.
Both IFRS 15 and ASC 606 outline the same core framework to determine when and how much revenue should be recognized. This model ensures consistency across industries and jurisdictions.
The five-step model:
Identify the contract with a customer.A contract must be approved by both parties, define the rights and payment terms, and have commercial substance.
Identify the performance obligations.These are distinct promises to transfer goods or services. A single contract may contain multiple separate obligations.
Determine the transaction price.This includes the amount the entity expects to receive in exchange for fulfilling its obligations, including variable consideration, discounts, and significant financing components.
Allocate the transaction price to the performance obligations.The price is allocated based on standalone selling prices of each obligation, unless otherwise specified by discount or variable consideration constraints.
Recognize revenue when (or as) performance obligations are satisfied.Revenue is recognized either over time or at a point in time, depending on when control of the goods or services transfers to the customer.
This model applies broadly across all industries and contracts unless specifically scoped out (e.g., insurance contracts, leasing).
Contract modifications, combinations, and performance obligations may be treated differently.
While the five-step model is consistent, IFRS 15 and ASC 606 differ slightly in how contract modifications and combinations are interpreted:
Contract modifications:
IFRS 15 tends to emphasize prospective vs. retrospective treatment based on whether the modification adds distinct goods or services.
ASC 606 provides additional guidance on determining whether to treat a modification as a separate contract or as part of the existing arrangement.
Combining contracts:
Both frameworks require combining contracts entered at or near the same time with the same customer if the contracts are interdependent.
IFRS is slightly more flexible in interpreting interdependence, while US GAAP emphasizes enforceability and contractual formality.
Variable consideration and constraints require careful estimation.
Both standards allow inclusion of variable consideration (bonuses, discounts, incentives), but constrain it based on the likelihood of reversal:
IFRS 15:
Uses a highly probable threshold for including variable consideration.
Offers a probability-weighted or most likely amount estimation method.
ASC 606:
Similar concepts, but the “highly probable” constraint is interpreted with slightly more conservatism in practice.
US GAAP tends to emphasize contractual enforceability more strictly.
Revenue may be recognized over time or at a point in time.
Recognition timing is determined by how and when control transfers:
Over time (e.g., construction, software licenses with updates):
When customer simultaneously receives and consumes benefits.
When entity creates/enhances an asset that the customer controls.
When the asset has no alternative use, and the entity has enforceable right to payment.
Point in time (e.g., most product sales):
Revenue is recognized when the customer obtains control of the good.
Indicators of control transfer:
Legal title
Physical possession
Risks and rewards of ownership
Customer acceptance
Costs to obtain or fulfill contracts are capitalized under both standards.
Both IFRS 15 and ASC 606 require capitalization of:
Incremental costs to obtain a contract (e.g., sales commissions)
Costs to fulfill a contract (e.g., setup costs)
These assets are amortized over the period the related revenue is recognized. However, IFRS provides slightly broader guidance on capitalization, while US GAAP may impose stricter materiality thresholds and disclosures.
Disclosure requirements are extensive and aim to improve transparency.
Both frameworks require detailed disclosures that enhance the understanding of revenue recognition patterns, judgments, and timing.
Required disclosures:
Disaggregation of revenue by type, geography, or market segment
Reconciliation of contract balances (opening vs. closing)
Performance obligations and remaining revenue to be recognized
Significant judgments and changes in estimates
US GAAP typically includes more tabular reconciliation and quantitative detail, while IFRS allows more narrative explanation in some cases.
Key differences between IFRS and US GAAP in revenue recognition.
Despite alignment on the five-step model, the interpretation and application of revenue recognition under IFRS and US GAAP can still lead to material differences in timing, disclosure, and contract asset/liability presentation. These differences are particularly important in industries such as technology, construction, and professional services, where judgment plays a significant role in applying performance obligations and measuring revenue over time.
____________
FOLLOW US FOR MORE.
DATA STUDIOS
