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Get a clear, practical explanation of IFRS 15 at a point in time, including key criteria, common pitfalls, and tips for accurate revenue recognition.
When is a sale officially a sale? It seems like a simple question, but in accounting, the answer can be surprisingly complex. You might think it’s when you ship the product or send the invoice, but IFRS 15 has a much more specific set of rules. The standard requires you to recognize revenue only when your customer gains control of the promised good or service. For many businesses, this happens at a single moment, a concept known as recognizing revenue under IFRS 15 at a point in time. Getting this timing right is critical for accurate financial reporting. This guide will walk you through the key indicators that signal when control has transferred, helping you avoid common mistakes and ensure your books are always audit-ready.
If your business deals with customer contracts, you need to be familiar with IFRS 15. It’s the global accounting standard that sets the rules for how and when you report revenue. Before this standard was introduced, revenue recognition practices could vary wildly between industries and even between similar companies, making it difficult to compare financial statements accurately. IFRS 15 was created to clear up that confusion by providing a single, comprehensive framework for businesses to follow, ensuring consistency and transparency.
At its heart, the core principle of IFRS 15 is straightforward: you recognize revenue when you transfer a promised good or service to a customer. The amount you recognize should reflect what you expect to receive in exchange for those goods or services. Think of it as a rule to ensure your financial statements accurately tell the story of how your business earns its money. It standardizes the what, when, and how much of revenue reporting, making your financials more reliable for investors, lenders, and your own leadership team.
To apply this principle consistently, IFRS 15 provides a practical roadmap known as the five-step model. This framework walks you through the process of analyzing a customer contract and recognizing the revenue correctly. Here’s how it breaks down:
This final step is where the critical distinction between recognizing revenue "at a point in time" versus "over time" comes into play. Mastering this five-step model is the key to ensuring your revenue recognition is accurate and compliant.
Once you’ve identified your performance obligations, the next big question is when to recognize the revenue. Under IFRS 15, this happens either "over time" or "at a point in time." While some revenue, like a monthly subscription, is clearly recognized over time, many transactions fall into the "point in time" category. Let's break down what that means for your business.
Think of "point in time" recognition as the exact moment a customer gains control of a product or service. This is the default method for revenue recognition if the criteria for "over time" aren't met. Control means your customer can direct the use of the asset and receive substantially all of its remaining benefits. In simpler terms, they own it now—they can use it, sell it, or prevent others from using it. Getting this timing right is a critical part of the five-step model for revenue recognition, ensuring your financial statements accurately reflect when a sale is truly complete.
So, how do you know when control has officially been transferred? IFRS 15 provides several indicators to help you pinpoint the exact moment. While no single factor is definitive, they provide a strong framework for your assessment. Consider if your company has a present right to payment for the asset and if the customer has legal title. Other key signs include the customer having physical possession, bearing the significant risks and rewards of ownership (like responsibility for loss or damage), and formally accepting the asset. You can find a more detailed breakdown of these indicators in Deloitte's accounting research tool.
One of the most common mistakes is recognizing revenue prematurely. This often happens when a business confuses sending an invoice or shipping a product with the actual transfer of control. For example, if a customer has the right to return a product, control may not have fully transferred until that return period expires. Another pitfall is misidentifying performance obligations within a single contract, which can throw off the timing for each distinct good or service. These errors can lead to inaccurate financial reporting and compliance headaches down the road. Staying informed with the latest accounting insights can help you steer clear of these common issues.
Figuring out the exact moment a customer gains control of a good or service is the most important part of recognizing revenue at a point in time. It’s not always as simple as when an item ships or an invoice is sent. The IFRS 15 framework provides several indicators to help you pinpoint when this transfer happens.
Think of these indicators less as a rigid checklist and more as clues that help you build a case. Sometimes one indicator is enough, but often you’ll need to consider several together to get the full picture of the transaction. The goal is to determine when your customer has the ability to direct the use of the asset and receive substantially all of its remaining benefits. Getting this right is fundamental to ASC 606 & 944 compliance and ensures your financial statements are accurate. Let's walk through what you should be looking for.
One of the most straightforward indicators is your right to payment. If you have a present and legally enforceable right to be paid for the good or service, it’s a strong sign that the customer now has control. This means the obligation for the customer to pay is no longer conditional on anything else you need to do. Essentially, if you've fulfilled your end of the deal and can now demand payment, the control has likely shifted. This moves beyond a simple invoice; it’s about when the payment becomes a real obligation for your customer according to your contract terms.
Who legally owns the asset? When the legal title passes to the customer, it's a classic sign of a control transfer. This is often specified in the contract terms, such as the shipping terms (e.g., FOB shipping point). Similarly, physical possession is a powerful indicator. If the customer has the product in their hands, at their warehouse, or on their premises, they can typically use it as they see fit. While not definitive on its own—a customer could have physical possession of a consigned item without having control—it’s a significant piece of the puzzle to consider alongside other factors.
Think about who would bear the loss if the asset were suddenly damaged or destroyed. When the customer assumes the significant risks and rewards of ownership, control has likely been transferred. Risks include things like loss, theft, or obsolescence, while rewards include the ability to use, sell, lease, or otherwise benefit from the asset. For example, if a customer is responsible for insuring a piece of equipment upon delivery, they have likely taken on the risks of ownership, indicating that control has passed to them.
Many contracts include customer acceptance clauses, which can complicate the timing of revenue recognition. You need to determine if the acceptance is a substantive step or just a formality. If the product is delivered based on clear, objective specifications (like size or performance metrics) that you can prove have been met, customer acceptance may be a formality. In this case, control may have transferred before formal sign-off. However, if acceptance is based on subjective criteria, control likely doesn’t transfer until the customer formally accepts the product.
No single indicator is a magic bullet. You need to weigh them all in the context of your contract and business practices. One transaction might hinge on the transfer of legal title, while another might be determined by the customer assuming the risks of ownership. The key is to apply professional judgment and look at the complete picture these indicators paint. Consistently applying this judgment across thousands of transactions is challenging, which is why many businesses turn to automated revenue recognition solutions to ensure accuracy and efficiency.
Under IFRS 15, revenue recognition hinges on when you fulfill your promise to the customer. The standard offers two timing options: at a point in time or over a period. The deciding factor is when your customer gains control of the goods or services. Getting this right is fundamental to accurate financial reporting, as it directly shapes how your company’s performance is reflected on your income statement. Let's walk through the key differences, how they affect your financials, and how to choose the right approach for your business.
The main distinction comes down to your performance obligation. Revenue is recognized at a point in time when control transfers to the customer at a specific moment. Think of it as the default method—if you can't justify recognizing revenue over time, you use this approach, which is common for retail sales. In contrast, revenue is recognized over time when the customer receives and consumes benefits as you perform the service, like with a monthly software subscription. The value is delivered continuously, not all at once. Understanding your specific performance obligations is the first step to making the right call.
Your choice of recognition method can significantly change your financial statements. Recognizing revenue over time generally results in a smoother, more predictable revenue stream, giving investors a clearer picture of ongoing performance. Point in time recognition, however, can lead to more volatile revenue figures. A few large projects completed at the end of a quarter can cause a sudden spike, making performance appear inconsistent. Neither method is better; the goal is to select the one that faithfully represents how you deliver value. You can find more insights on managing financial data on our blog.
The decision isn't a strategic choice—it's determined by your customer contracts. To find the correct method, you must follow the five-step model in IFRS 15: identify the contract, pinpoint performance obligations, set the transaction price, allocate it, and recognize revenue as you satisfy each obligation. This requires a careful review of each contract. For businesses with high transaction volumes, this can be a complex task. This is where automated revenue recognition tools become essential, helping you apply the rules consistently and accurately across all your contracts without manual effort.
Making the switch to IFRS 15 can feel like a huge undertaking, but breaking it down into a clear, step-by-step plan makes it much more manageable. Think of it less as a rigid set of rules and more as a roadmap to more transparent and accurate financial reporting. A successful implementation isn't just about ticking boxes for compliance; it's about fundamentally improving how your business understands and communicates its revenue streams. This process requires a close look at your contracts, systems, and internal processes to ensure everything is aligned.
Getting it right from the start prevents headaches down the line, like restating financials or facing tough questions during an audit. This checklist is designed to guide you through the key stages of implementation. By following these steps, you can build a solid foundation for IFRS 15 compliance that supports your company’s growth and financial health. For businesses with high transaction volumes, automating this process is key. You can explore HubiFi's integrations to see how technology can streamline these steps and ensure accuracy across your financial operations.
First things first, you need to get familiar with your customer contracts. This is the foundation of the five-step model. You’ll need to carefully assess each contract to pinpoint the specific promises you’ve made to your customers—these are your performance obligations. From there, you can determine the transaction price and figure out how to allocate it to each of those promises. This step is crucial because it dictates exactly when and how you recognize revenue. It requires a detailed review, so don't rush it. A thorough analysis here will prevent major issues later on.
Your current accounting software might not be ready for the demands of IFRS 15. The standard requires extensive disclosures about your customer contracts, including details on performance obligations and significant judgments made during the revenue recognition process. You need a system that can handle this level of detail and disaggregate revenue information effectively. This is the time to evaluate whether your existing tools can be updated or if you need to invest in a new solution. Your goal is to have a system that not only ensures compliance but also provides valuable insights into your revenue.
Consistent and thorough documentation is your best friend during an audit. It’s not enough to just follow the rules; you have to prove you’re following them. This means documenting how you’ve identified performance obligations, determined transaction prices, and handled any contract modifications. Pay special attention to variable considerations like discounts, rebates, or bonuses, as these are often embedded in contracts and can be easily missed. Creating clear, standardized documentation practices across your team ensures everyone is on the same page and that your records are always audit-ready.
With new processes comes the need for new internal controls. Your control framework is the system of checks and balances that ensures revenue is recognized accurately and consistently. The goal is to confirm that revenue is recognized precisely when a performance obligation is satisfied—not before and not after. This might involve implementing new review and approval processes for contracts or setting up automated alerts for key milestones. A strong internal control framework gives you and your stakeholders confidence that your financial statements are reliable and fully compliant with IFRS 15.
A new standard is only as effective as the people implementing it. Your entire team, from sales and legal to finance and accounting, needs to understand how IFRS 15 impacts their roles. Training should cover the core principles of the standard and your company’s specific policies for applying it. Misidentifying performance obligations or overlooking variable consideration are common pitfalls that can undermine all your hard work. By investing in training, you empower your team to make compliant decisions, maintain data integrity, and contribute to a smooth and successful implementation. For more helpful guides, check out the latest insights on the HubiFi blog.
Staying compliant with IFRS 15 isn’t a one-and-done task; it’s an ongoing commitment. The good news is that with the right practices in place, you can handle the complexities with confidence. Think of it as building a strong foundation that supports your financial reporting and keeps your business on solid ground. These practices aren't just about avoiding penalties—they're about creating clarity, efficiency, and trust in your financial data. By focusing on clear policies, smart technology, solid data management, and consistent reviews, you can turn compliance from a headache into a strategic advantage. Let's walk through the key steps to make that happen.
First things first: you need a clear, written rulebook for how your company handles revenue. This isn't just for your auditors; it's for your team. Your policies should outline exactly how you apply the five-step model to your specific contracts. IFRS 15 requires extensive disclosures about customer contracts, including how you break down revenue, manage contract balances, and define performance obligations. Documenting the significant judgments your team makes is also critical. When everyone is on the same page and following a consistent process, you reduce the risk of errors and ensure your financial statements are reliable and transparent.
Manually tracking revenue for high-volume businesses is a recipe for delays and mistakes. In fact, one survey found that over half of finance leaders say revenue recognition challenges lead to manual work and missed deadlines. This is where technology becomes your best friend. Using an automated revenue recognition solution removes the burden of manual data entry and complex calculations. The right software can integrate with your existing systems, apply the correct rules automatically, and generate the reports you need in a fraction of the time. This frees up your team to focus on strategic analysis instead of getting bogged down in spreadsheets.
Accurate revenue recognition depends entirely on the quality of your data. Under IFRS 15, you have to carefully assess each contract to identify performance obligations and determine transaction prices, which often involves significant judgment. A solid data management strategy ensures that all relevant contract information is captured accurately and is easily accessible. This means having a central place for your contracts and a clear process for updating them. When your data is organized and reliable, you can make better judgments and have confidence that your revenue is being recognized correctly, every single time.
Compliance isn't static. Your business evolves, contracts change, and your team grows. That's why you need to build regular check-ins to make sure your IFRS 15 processes are still working as they should. Common pitfalls like misidentifying performance obligations or overlooking variable consideration can easily undermine your compliance efforts. By setting up a schedule for periodic reviews of contracts and accounting policies, you can catch these issues early. This creates a feedback loop that helps you refine your approach, train your team on any changes, and maintain a clear audit trail for every transaction.
Staying compliant with IFRS 15 isn’t a one-time task; it’s an ongoing process that requires a solid strategy. Simply understanding the five-step model is the start, but effectively managing revenue recognition means building a system that is accurate, transparent, and scalable. Relying on manual spreadsheets and disconnected processes can quickly lead to errors, compliance risks, and a lot of stress when audit season rolls around. The key is to be proactive.
By putting the right systems and controls in place, you can turn a complex accounting standard into a streamlined part of your financial operations. This approach not only ensures you meet your reporting obligations but also provides you with clearer, more reliable data to make smart business decisions. It’s about creating a framework that supports your team, reduces manual work, and gives you confidence in your numbers. The following practices will help you build that framework and manage IFRS 15 compliance with much less friction.
If you’re still tracking revenue in spreadsheets, you’re creating unnecessary risk for your business. Manual data entry is prone to human error, and it simply can’t keep up as your company grows, especially if you have a subscription-based model. Accurate bookkeeping is the foundation of compliance, and modern software is built to handle these complexities automatically.
The right tools can connect directly to your other business systems, pulling data from your CRM and payment processor to perform revenue calculations accurately. This automation saves your team countless hours and provides a reliable, single source of truth for your financials. Exploring platforms with seamless integrations is the first step toward building a more efficient and error-free process.
IFRS 15 requires detailed disclosures about your customer contracts. You need to be able to show disaggregated revenue information, contract balances, and details about your performance obligations. This level of reporting is nearly impossible to produce quickly and accurately with manual methods. Modern financial software, however, comes with powerful analytics and reporting features designed for this.
Instead of seeing reporting as a chore, you can use these tools to your advantage. They not only generate the disclosure reports you need for compliance but also offer deeper insights into your business performance. You can analyze revenue trends, identify your most profitable contracts, and understand how different business segments are performing. This turns a compliance requirement into a strategic asset.
Under IFRS 15, every decision starts with the customer contract. It dictates the performance obligations, transaction price, and how and when you can recognize revenue. Because contracts are so central to the standard, you need a reliable way to manage them. A dedicated contract management system—or a revenue recognition platform with this capability—is essential.
This system acts as a central library for all your customer agreements, tracking key terms, amendments, and renewal dates. It ensures that your finance team has easy access to the information they need to assess each contract correctly. By centralizing contract data, you eliminate the risk of overlooking important details buried in a file folder or email chain and ensure consistent application of your revenue policies.
When an auditor asks why you recognized a certain amount of revenue in a specific period, "I think this is right" isn't a good enough answer. You need to be able to prove it. A clear audit trail provides a detailed, chronological record of every transaction, calculation, and journal entry related to your revenue. It shows exactly how you arrived at your final numbers, creating a transparent path from the original contract to your financial statements.
This isn't just about satisfying external auditors; it's a critical internal control. An audit trail helps you pinpoint errors, understand historical data, and ensure your team is following procedures correctly. Automated systems create this trail for you, giving you the documentation you need to feel confident and prepared. If you want to see how automation can make you audit-ready, you can always schedule a demo to see it in action.
Applying the IFRS 15 framework, especially the point-in-time model, has a direct and significant effect on your company’s financial statements. It’s not just a box-ticking exercise for the accounting department; it changes how your company’s performance and financial health are presented to investors, lenders, and other stakeholders. Getting it right is crucial for maintaining trust and ensuring compliance. Understanding these changes will help you explain your company’s financial story accurately and confidently. Let’s look at how this plays out on your key financial reports.
Your balance sheet provides a snapshot of your company's financial health, and IFRS 15 can alter that picture. When a customer pays you before you’ve delivered a product or service, that cash shows up as an asset, but you can't recognize it as revenue yet. Instead, you record a corresponding liability, often called "deferred revenue" or "contract liabilities." This liability represents your promise to deliver. Once you satisfy that performance obligation at a specific point in time—like when the customer receives their product—you can finally recognize the revenue and clear the liability from your balance sheet. This timing is critical because it directly affects your reported assets and liabilities at the end of any given period.
The income statement is where the impact of point-in-time recognition really shines through. Because revenue is recognized all at once when control is transferred, it can make your revenue stream appear more variable than it would under an over-time model. For example, if you complete a large project and transfer control on the last day of a quarter, all of that revenue hits your income statement for that period. If the project had finished a day later, the revenue would fall into the next quarter. This can create significant fluctuations in your reported profits, which is why it's so important to have a clear and consistent policy for determining when control of a good or service is transferred.
IFRS 15 isn't just about changing the numbers; it's also about providing more transparency. The standard requires you to include detailed notes in your financial statements that explain how you're recognizing revenue. You’ll need to break down your revenue into meaningful categories, like by product line, geographical region, or customer type. You also have to disclose information about your contract balances, performance obligations, and any significant judgments you made in the process. The goal is to give anyone reading your financials a clear understanding of the nature, amount, timing, and uncertainty of your revenue. These extensive disclosures are a core part of compliance.
When auditors review your financials, they will focus heavily on your revenue recognition practices. To prepare, you need impeccable documentation. For every contract, you should be able to show how you identified the performance obligations and why you determined revenue should be recognized at a point in time. Common missteps include misidentifying these obligations or failing to properly account for things like returns or discounts. Having a robust system in place helps you maintain a clear audit trail and prove your compliance. Automating your revenue recognition process can help you avoid these pitfalls and ensure your records are always accurate and ready for scrutiny.
Why can't I just recognize revenue when I send an invoice or ship a product? This is a common point of confusion, and it gets to the heart of the IFRS 15 standard. In the past, shipping a product or sending an invoice were often used as the trigger for recognizing revenue. Now, the focus has shifted to when your customer actually gains control of the good or service. An invoice is simply a request for payment, and shipping is just one step in the delivery process. Control is about the customer’s ability to use, benefit from, and direct the asset. Sometimes that moment aligns with shipping, but in many cases, especially with complex contract terms, it happens later.
What happens if a single contract includes multiple products or services delivered at different times? This is where identifying your distinct performance obligations becomes so important. You have to break the contract down into each separate promise you've made to the customer. For example, if you sell a piece of equipment (delivered at a point in time) and a one-year maintenance service (delivered over time), you must treat them separately. You would allocate a portion of the total transaction price to the equipment and recognize that revenue when the customer gains control. The rest of the price would be allocated to the service and recognized evenly over the 12-month period.
How do customer rights, like returns or refunds, affect point in time recognition? Customer acceptance clauses and return rights can complicate things because they suggest control may not have fully transferred. If a customer has a right to return a product, you have to consider that uncertainty. You can't recognize revenue for sales you expect to be returned. Instead, you need to estimate the value of expected returns based on historical data and recognize revenue only for the net amount you expect to keep. The amount for potential returns is typically recorded as a liability until the return period expires.
My business has thousands of transactions. How can I apply these rules consistently without slowing everything down? This is the primary challenge for high-volume businesses. Applying the five-step model and assessing control transfer for every single transaction manually is not just slow; it’s also highly susceptible to human error. This is precisely why automation is so critical. A dedicated revenue recognition system can apply your established policies consistently across every contract, handle complex allocations, and maintain a clear audit trail without manual intervention. It ensures accuracy and frees your team to focus on analysis rather than data entry.
Is one method—point in time vs. over time—better than the other? Neither method is inherently better; they simply reflect different ways of delivering value to a customer. The choice isn't a strategic one you make to manage how your financials look. It's determined entirely by the nature of your performance obligations within your customer contracts. If control of a good or service transfers at a single moment, you must use point in time recognition. If the customer receives and consumes the benefits of your work as you perform it, you must use over time recognition. The goal is to choose the method that most faithfully represents the transaction.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.