Revenue Recognition in Practice Under IFRS 15 and ASC 606: Rules, Journal Entries, Examples

Revenue recognition standards have transformed the way companies report financial performance, making it critical for professionals and businesses to understand how IFRS 15 and ASC 606 operate in real scenarios.

These frameworks require companies to follow a five-step process for recognizing revenue, shifting the focus from timing of cash flows to satisfaction of performance obligations.

This article explains the practical application of these standards, presents concrete examples and journal entries, and highlights key compliance points for both IFRS and US GAAP environments.

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Understanding the five-step model is fundamental to accurate revenue reporting.

The core of both IFRS 15 and ASC 606 is the five-step revenue recognition model, which ensures a consistent approach across industries and transactions.

The five steps are:

1. Identify the contract with the customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognize revenue when (or as) each performance obligation is satisfied.

This structure replaces earlier rules-based guidance with a more principles-based approach, emphasizing the transfer of control over goods or services.

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Identifying contracts and performance obligations requires careful analysis.

A contract exists when there is an agreement that creates enforceable rights and obligations.

Contracts may be written, verbal, or implied by customary business practices, but all must meet criteria such as approval, commitment, clear payment terms, and commercial substance.

Performance obligations are distinct goods or services promised in the contract.

A good or service is distinct if the customer can benefit from it on its own or together with other resources, and it is separately identifiable in the contract.

For example, a software license and ongoing support may be separate obligations.

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Determining and allocating the transaction price involves estimates and judgment.

The transaction price is the amount of consideration a company expects in exchange for goods or services, including variable amounts, discounts, rebates, non-cash consideration, and the effect of the time value of money if significant.

Estimating variable consideration requires assessment of expected value or the most likely amount, with constraints to avoid significant revenue reversal.

Allocation of the transaction price is done based on the stand-alone selling prices of each performance obligation.

If not directly observable, companies estimate using adjusted market assessment, expected cost plus margin, or residual approaches.

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Recognizing revenue depends on when performance obligations are satisfied.

Revenue is recognized when the customer obtains control of a good or service.

This can occur at a point in time (e.g., delivery of goods) or over time (e.g., construction contracts).

Over time recognition is appropriate if the customer simultaneously receives and consumes benefits, controls the asset as it is created, or if the entity has no alternative use and an enforceable right to payment.

Companies must apply judgment and document their conclusions, especially in complex arrangements with multiple deliverables.

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Journal entries under IFRS 15 and ASC 606 reflect the transfer of control.

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Examples of Journal Entries for Revenue Recognition

Transaction	Debit	Credit	Description
Customer invoice for goods delivered	Accounts Receivable	Revenue	Recognize revenue and receivable
Advance payment received (before delivery)	Cash	Contract Liability	Record advance as liability until performance
Revenue recognized for satisfied obligation	Contract Liability	Revenue	Recognize revenue as obligation is satisfied
Adjustment for variable consideration	Revenue	Contract Asset/Liability	Adjust for variable consideration

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Each entry reflects a specific phase in the revenue process, ensuring compliance with the transfer of control principle.

Revenue cannot be recognized before the performance obligation is satisfied, even if cash is received.

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Disclosure requirements have increased under the new standards.

Companies must now provide detailed disclosures about contracts with customers, including qualitative and quantitative information about performance obligations, significant judgments, contract balances, and changes in estimates.

These requirements aim to improve transparency and comparability across entities and industries.

Disclosures include descriptions of performance obligations, transaction price allocation, significant payment terms, and information about contract assets and liabilities.

Failure to comply with disclosure requirements can lead to restatements or audit findings, making robust documentation and systems essential.

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IFRS and US GAAP differences are narrowing but not eliminated.

While IFRS 15 and ASC 606 are substantially converged, some differences persist in application and guidance.

US GAAP may have more specific guidance in certain areas, such as licenses of intellectual property or collectibility assessments, whereas IFRS tends to allow more judgment and fewer industry-specific exceptions.

Multinational groups must pay attention to these subtleties, especially when preparing consolidated financial statements under both frameworks.

Clear policy elections, detailed documentation, and ongoing training are critical for maintaining compliance.

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