Oops! Something went wrong while submitting the form.
Get a Demo
See your data in HubiFi < 2 days
Get a clear, practical explanation of IFRS 15 over time, including key principles, steps, and tips for accurate revenue recognition in your business.
Trying to manage IFRS 15 compliance with spreadsheets is a risky game, especially as your business scales. The standard’s requirements for tracking performance obligations, handling contract modifications, and estimating variable consideration demand a level of precision that manual processes can’t provide. This is particularly true for complex scenarios like calculating revenue for contracts that meet the criteria for ifrs 15 over time. This article will not only explain the core principles of the standard but also show you why automated systems are essential for maintaining accuracy, ensuring compliance, and turning your revenue data into a strategic asset for your business.
IFRS 15, or International Financial Reporting Standard 15, is the global rulebook for reporting revenue from customer contracts. Its main purpose is to make revenue reporting consistent and transparent across all industries. This gives anyone looking at your financial statements—from investors to internal teams—a clear and reliable picture of your company's performance. Understanding IFRS 15 is fundamental to your financial health and making smart business decisions.
At its heart, IFRS 15 is built on one core principle: you should recognize revenue when you transfer promised goods or services to a customer, and the amount you recognize should reflect what you expect to receive in return. It’s a shift from industry-specific rules to a single, principle-based approach. This standardizes how companies interpret and report their earnings, which helps everyone compare performance on a level playing field. By following this principle, you ensure your revenue figures accurately represent the value you’ve delivered to your customers at any given time.
To apply its core principle, IFRS 15 lays out a clear five-step model. This framework is a practical roadmap that guides you through recognizing revenue correctly for any customer contract.
The five steps are:
Following these steps helps you manage even the most complex customer agreements.
Before IFRS 15 was introduced in 2014, revenue recognition rules were a bit of a patchwork. Companies followed various standards, like IAS 18 and IAS 11, which were often less detailed and led to different interpretations. IFRS 15 replaced these older rules with a single, comprehensive framework that applies to nearly all customer contracts. For many businesses, this changed the timing of when they could recognize revenue—sometimes bringing it forward, other times pushing it back. This shift requires careful financial planning and robust systems to ensure you remain compliant and your reporting stays accurate.
Deciding whether to recognize revenue all at once or spread it out over time is a critical part of IFRS 15. The standard moves away from rigid rules and instead gives us a set of principles to follow. The main idea is to recognize revenue as you transfer control of goods or services to your customer. Sometimes that transfer happens in a single moment, like when a customer buys a coffee. Other times, it happens continuously over a period.
To recognize revenue over time, your contract needs to meet at least one of three specific criteria. Think of these as gateways. If you can pass through any one of them, you can recognize revenue as you perform the work. This approach gives a more accurate picture of your company's performance, especially for businesses involved in long-term projects, subscriptions, or ongoing services. Getting this right is essential for accurate financial statements and can offer deeper insights into your business's health. Let's walk through each of these three criteria so you can see which one applies to your contracts.
This is often the most straightforward criterion. If your customer is simultaneously receiving and consuming the benefits of your service as you provide it, you can recognize revenue over time. The classic example is a cleaning service. As the cleaners work, the office becomes clean—the customer gets the benefit right away. The same logic applies to many subscription-based services, like a software-as-a-service (SaaS) platform or a monthly gym membership. The customer has access and benefits from the service throughout the entire subscription period, not just at the end. This method aligns your revenue with the value you’re consistently delivering.
This criterion applies when your work creates or enhances an asset that your customer already controls. Imagine you're a contractor hired to build an extension on a client's existing house. The house belongs to the client, and as you build, the value of their asset increases with every wall you put up. They control the asset (the house and the partially built extension) throughout the project. Another example is a developer customizing a software platform that the client owns. Because you are improving an asset the customer controls, you can recognize the revenue as the work progresses, reflecting the value you're adding at each stage.
This final criterion is a two-part test, and you must meet both conditions. First, the asset you're creating must have no alternative use to you. This usually means it's highly customized for a specific customer and you couldn't easily sell it to someone else. Think of building a unique piece of manufacturing equipment for a factory or designing a bespoke IT system. Second, you must have an enforceable right to payment for the work you've completed so far if the customer were to cancel the contract. If both of these conditions are true, it shows you're essentially financing the creation of a customer-specific asset, which justifies recognizing revenue over time.
Once you’ve determined that a performance obligation is satisfied over time, you need a reliable way to measure your progress. This isn’t just a box-ticking exercise; it’s how you accurately recognize revenue in each accounting period. Think of it as creating a map that shows how much of the journey you’ve completed with your customer. IFRS 15 gives you two main ways to do this: output methods and input methods. Each approach looks at progress from a different angle. One focuses on what the customer has received, while the other looks at the effort you've put in. The goal is to choose the method that best reflects how you’re transferring value to your customer. Let's break down what these methods involve and how to pick the right one for your contracts.
This approach measures progress based on the value you've delivered to the customer. It’s all about the tangible results. Think of it in terms of what the customer can see and use. Common examples include milestones reached on a project, units delivered, or appraisals of results achieved. For instance, if you're building a house, you might recognize revenue as you complete the foundation, framing, and roofing. The output method is often preferred because it directly links revenue to the value the customer receives, which is the core idea behind IFRS 15. It provides a clear and objective measure of performance.
Input methods, on the other hand, measure progress based on the efforts or resources you've expended. Instead of looking at the final product, this method focuses on the work you've put in. You might measure progress using costs incurred, labor hours worked, or machine time used. For example, a consulting firm might recognize revenue based on the number of hours its consultants have spent on a client project. This approach is particularly useful when the output is difficult to measure directly or when the effort expended correlates closely with the value transferred to the customer. It’s a practical way to track progress on long-term service contracts where results aren't delivered in neat, measurable chunks.
You can't switch between methods on a whim. The standard requires you to select one method for measuring progress and apply it consistently across similar types of contracts. This consistency is key to producing reliable and comparable financial statements. So, how do you choose? The decision should be based on which method most faithfully depicts the transfer of control of goods or services to the customer. If your work delivers clear, distinct value at different stages, an output method might be best. If your value is delivered through continuous effort, an input method could be more appropriate. The important thing is to make a thoughtful choice and document your reasoning.
Putting these methods into practice isn't always straightforward. One of the biggest challenges is pinpointing the exact moment a customer gains control of a good or service, especially in complex service agreements. This ambiguity can make measurement tricky. To manage this, you'll likely need to establish new processes and internal controls to gather the right data accurately and consistently. For many businesses, this means moving beyond spreadsheets to systems that can handle complex calculations and maintain a clear audit trail. Having robust systems helps ensure you're applying your chosen method correctly every single time, which is crucial for compliance and accurate reporting. You can find more insights on building these financial systems on our blog.
Contracts are rarely simple, fixed-price agreements. They often include elements like performance bonuses, discounts, or rebates that can change the final amount you receive. This is what IFRS 15 calls "variable consideration." The standard also provides a clear framework for what to do when a contract's scope or price changes mid-stream. Getting this right is crucial for accurate financial reporting. Let's walk through the steps to manage these moving parts without getting overwhelmed.
First things first, you need to pinpoint any part of the contract price that isn't fixed. This variability can show up in many forms, including discounts, refunds, credits, performance bonuses, or price concessions. Think of it as a scavenger hunt within your contract terms. Your goal is to find any clause that could make the final payment go up or down. For example, a contract might include a bonus for early completion or a rebate if the customer buys a certain volume. At this stage, you’re not doing any math—you’re simply identifying all the potential variables you'll need to account for later. This is a foundational step in the revenue recognition process.
Once you've identified the variables, you need to estimate their effect on the total transaction price. IFRS 15 gives you two methods to do this: the "expected value" method, which is a probability-weighted average of possible outcomes, or the "most likely amount." The method you choose depends on your situation. The expected value approach works well when you have a large number of similar contracts, while the most likely amount is better for contracts with only two possible outcomes (like receiving a bonus or not). A crucial part of this step is applying the "constraint," which means you only include variable consideration in the transaction price if it's highly probable that a significant reversal of revenue won't occur later.
Business is dynamic, and so are contracts. When a contract is modified, you need to determine if the change creates a new contract or simply alters the existing one. According to IFRS 15, a modification is treated as a separate contract if it adds distinct goods or services that are priced at their standalone selling prices. If not, you’ll adjust the revenue recognition for the original contract. This could mean re-allocating the transaction price or adjusting revenue on a cumulative catch-up basis. Keeping track of these changes manually can be a headache, which is why having systems that integrate seamlessly is so important for maintaining data accuracy.
After you've determined the total transaction price, the final step is to allocate it to each separate performance obligation in the contract. This allocation should be based on the relative standalone selling price of each promised good or service—basically, what you would charge for each item if you sold it separately. If a standalone price isn't readily available, you'll need to estimate it. You can do this by looking at market prices for similar goods or by calculating your expected cost plus a reasonable margin. This ensures that you recognize revenue in a way that truly reflects the value being delivered to the customer at each stage of the contract.
Applying IFRS 15 isn't just a task for your accounting department; it's a company-wide initiative that touches your systems, processes, and people. Getting it right means looking beyond the balance sheet and thinking about the operational nuts and bolts of how you track and report revenue. Many businesses underestimate the shift, viewing it as a simple accounting update. In reality, it requires a fundamental change in how sales, legal, and finance teams collaborate. Without a clear plan, you risk inaccurate financial statements, difficult audits, and missed opportunities for strategic insight.
The good news is that breaking it down into manageable steps makes the entire process much clearer. A successful implementation rests on four key pillars: updating your technology, refining your internal processes, establishing strong controls, and getting all your teams on the same page. By focusing on these areas, you can build a solid foundation for compliance that not only satisfies auditors but also supports your business as it grows. This isn't just about avoiding penalties; it's about creating a more transparent and efficient revenue management system. A well-executed IFRS 15 strategy provides clearer visibility into your performance, helping you make smarter decisions about pricing, sales compensation, and resource allocation. Let's walk through the key areas you'll need to address to put these principles into action effectively.
To apply IFRS 15 correctly, you need a complete view of your customer contracts, which often means pulling information from several different places. Your IFRS 15 disclosures rely on data from your ERP, CRM, billing, and contract management systems. If these platforms don’t talk to each other, your team is left manually piecing together data, which is slow and opens the door to errors. The first step is to ensure your systems can share information seamlessly. This allows you to track a contract from the initial sale to the final payment, capturing all the details needed for accurate revenue recognition along the way. Look for solutions that offer robust integrations to create a single source of truth for your revenue data.
With your systems connected, it's time to look at your workflows. How do you currently manage contracts and recognize revenue? Documenting every step is crucial for consistency and makes it easier to train new team members and prepare for audits. Centralizing your revenue management helps you streamline operations, automate calculations, and get a much clearer understanding of your financial performance. Define who is responsible for each part of the process, from reviewing contract terms to approving final revenue figures. This clarity ensures everyone follows the same rules, leading to more reliable financial reporting and fewer headaches when it's time to close the books.
Internal controls are the checks and balances that ensure your data is accurate and your processes are followed correctly. For IFRS 15, this could mean requiring a second approval on contracts with non-standard terms or setting up automated alerts for key performance obligation milestones. The goal is to embed these controls directly into your reporting workflow so they become a natural part of your operations, not an afterthought. Using automated revenue recognition tools can simplify this process significantly. Automation helps enforce your rules consistently, reducing the risk of human error and giving you confidence that your financial statements are compliant and accurate.
Revenue recognition is a team sport. Your sales team structures the deals, your legal team drafts the contracts, and your operations team delivers the products or services. Each of these actions has a direct impact on when and how you recognize revenue. That’s why it’s so important to get everyone on the same page. Host training sessions to help non-finance teams understand the basics of IFRS 15 and how their work affects the company’s financials. When your sales team understands how contract modifications impact revenue, they can structure better deals. When everyone is speaking the same language, you can avoid compliance issues and make more strategic decisions.
Managing IFRS 15 compliance with spreadsheets is a recipe for headaches and costly errors, especially as your business grows. The standard’s complexity requires a level of precision that manual processes just can’t guarantee. This is where the right technology comes in. A dedicated revenue recognition tool handles the heavy lifting, from complex calculations to detailed reporting, so your team can focus on financial strategy instead of getting lost in the weeds. Choosing the right software is about more than just compliance; it’s about building a scalable financial foundation for your business.
Let’s be honest: tracking performance obligations and allocating transaction prices across thousands of contracts is nearly impossible to do by hand without mistakes. Manual data entry is tedious and error-prone, and a single misplaced decimal can have a major impact on your financial statements. Automated revenue recognition software takes human error out of the equation. It streamlines your accounting by automatically applying the five-step model to each contract, ensuring calculations are consistent and compliant with IFRS 15. This not only saves your team countless hours but also creates a reliable, auditable trail for every transaction, giving you confidence in your numbers.
Great software does more than just crunch numbers—it turns your revenue data into a clear story about your business's health. Instead of just seeing what you’ve earned, you can understand how and why. The right platform provides the foundation to simplify your financial processes while offering greater transparency for stakeholders. With real-time analytics and dynamic reporting, you can easily track key metrics like recurring revenue, customer lifetime value, and deferred revenue balances. This level of insight is crucial for making smart, data-driven decisions and communicating your company’s performance to investors, board members, and leadership.
Your revenue recognition tool shouldn't live on an island. To be truly effective, it needs to communicate with the other systems you rely on every day. Connecting your rev rec software with your existing business systems is key for accurate financial reporting and efficient workflows. Look for a solution with pre-built integrations for your CRM, ERP, and payment gateways. This creates a smooth flow of data, eliminating the need for manual uploads and reconciliations that can introduce errors. When your systems are in sync, your revenue data is always up-to-date and accurate, from the initial sale to the final journal entry.
When your contract, billing, and customer information are scattered across different platforms, you can’t get a complete picture of your revenue. Centralizing this data in a single system is the key to accurate and efficient revenue management. By bringing everything together, you create a single source of truth for all revenue-related activities. This not only helps you achieve compliance but also streamlines your operations by automating calculations and providing a much clearer view of your company’s financial health. It simplifies everything from daily tasks to audit preparation, making your entire financial process more manageable and reliable.
Adopting IFRS 15 isn't just a box-ticking exercise; it changes how your company's financial health is presented to the world. The standard directly impacts your key financial statements, from the balance sheet to the income statement. It also introduces stricter disclosure rules that demand greater transparency. Understanding these changes is the first step to ensuring your reporting is accurate, compliant, and ready for scrutiny from investors, stakeholders, and auditors. Getting this right means your financial story is told clearly and correctly, reflecting the true nature of your customer contracts and revenue streams. Let's walk through exactly what you can expect to see change.
Your balance sheet will likely look a little different after applying IFRS 15. The standard introduces two key accounts: contract assets and contract liabilities. Think of a contract asset as revenue you've earned by fulfilling part of a contract, but you don't have the unconditional right to invoice for it yet. For example, you’ve completed a project milestone but can't bill until the entire project is done. On the flip side, a contract liability is created when a customer pays you upfront for goods or services you haven't delivered yet. This is essentially deferred revenue. These new accounts provide a clearer picture of your obligations to customers and the future revenue you're set to receive, giving more depth to your financial reporting.
The biggest shift you'll see on your income statement is the timing of when you recognize revenue. Under IFRS 15, revenue is recorded when your customer gains control of the goods or services, not necessarily when you send an invoice or receive cash. This could mean recognizing revenue earlier, later, or spread out over time differently than you did before. For a software company, this might mean recognizing subscription revenue monthly as the service is delivered, rather than all at once. This change can directly affect your reported profit margins and overall performance period over period, so it’s crucial to get the timing right with systems that provide seamless integrations and real-time data.
IFRS 15 asks for much more transparency. You'll need to provide detailed notes in your financial statements that explain how and when you recognize revenue. This includes describing the nature of your goods and services, your performance obligations, and any significant judgments you made when applying the standard. The goal is to give investors and other stakeholders a clear, comprehensive view of your revenue streams so they can understand their nature, amount, timing, and uncertainty. This means your documentation has to be meticulous, breaking down revenue from contracts with customers in a way that’s easy for outsiders to follow.
With these new rules comes increased auditor focus. When your next audit rolls around, be prepared for a deep look into your revenue recognition policies and practices. Auditors will want to see that your processes are well-documented and that you can justify the judgments you've made, especially around things like transaction price allocation and measuring progress. Having a robust, automated system in place is your best defense. It ensures consistency, reduces the risk of human error, and provides a clear audit trail. If you want to walk into your next audit with confidence, it helps to have an expert review your data and processes beforehand.
Getting compliant with IFRS 15 is a huge accomplishment, but the work doesn’t stop there. Think of it as an ongoing practice rather than a one-time project. The rules can change, your contracts evolve, and your team members come and go. To stay on the right side of the standards and keep your financial reporting accurate, you need to build a sustainable compliance framework. This means creating repeatable processes that keep everyone informed and your data in check. By focusing on regular reviews, continuous training, clear communication, and staying aware of updates, you can turn compliance from a chore into a core strength of your financial operations. It’s about creating a system that works for you in the long run, not just for the next audit.
Your first step is to make compliance reviews a routine part of your financial calendar. Don’t wait for an audit to find potential issues. Schedule quarterly or semi-annual check-ins to review a sample of new contracts and assess how your team is applying the five-step model. This isn’t just about catching errors; it’s an opportunity to refine your processes. Treating IFRS 15 compliance as more than just a box-ticking exercise turns it into a strategic advantage. A regular review process strengthens your financial governance and gives you confidence that your revenue figures are always accurate and defensible.
Even the best processes fall apart if your team isn't up to speed. Since accounting standards evolve and memories fade, ongoing education is essential. Your finance and accounting teams need regular refreshers, but don't forget about your sales and legal departments. They’re on the front lines creating contracts, so they need to understand how different terms can impact revenue recognition. You can find accessible IFRS training modules online or host internal workshops. Keeping everyone educated ensures consistency and reduces the risk of non-compliant contracts slipping through the cracks.
Your investors, board members, and leadership team rely on your financial statements to make critical decisions. Clear communication about how you recognize revenue builds trust and prevents confusion. Be prepared to explain your application of the five-step revenue recognition model and how it affects the company’s financial performance. This is especially important if you have complex contracts or variable consideration. When everyone understands the methodology behind the numbers, you create alignment across the organization and can have more productive, data-driven conversations about business strategy and growth.
Accounting standards are not set in stone. The International Accounting Standards Board (IASB) can issue amendments or clarifications to IFRS 15, and you’re expected to adapt. Staying informed is key to avoiding compliance gaps. Assign someone on your team to monitor updates from the IASB and other professional accounting bodies. Subscribing to newsletters from reputable firms or setting up news alerts can help you catch significant changes in revenue recognition early. Being proactive allows you to assess the impact on your business and adjust your processes smoothly, long before your next audit cycle begins.
What’s the main difference between IFRS 15 and ASC 606? Think of them as nearly identical twins who grew up in different countries. Both IFRS 15 and the US-based ASC 606 follow the same core five-step model for recognizing revenue. They were developed together to create a more unified global standard. While they are about 95% the same, there are some subtle differences in areas like contract costs and licensing. For most businesses, the day-to-day application is incredibly similar, but if you operate in both the US and internationally, it's wise to be aware of the minor distinctions.
Does my small business really need to worry about IFRS 15? Yes, if your company reports under International Financial Reporting Standards, then IFRS 15 applies to you, regardless of your size. The standard is designed to cover all contracts with customers. However, the complexity of applying it will depend entirely on your business model. A coffee shop with simple, single-point-in-time sales will have a much easier time than a software company with complex, multi-year subscription contracts. The key is to understand your contracts and apply the five-step model correctly, even if the process is straightforward.
How does IFRS 15 change how my sales team should structure deals? This is a fantastic question because it gets to the heart of why IFRS 15 is a company-wide issue, not just an accounting one. The way your sales team structures a contract has a direct impact on when you can recognize revenue. For example, bundling multiple services into a single price or including vague acceptance clauses can delay revenue recognition. Training your sales team on the basics helps them craft deals that are not only good for the customer but also healthy for the company's financial reporting, ensuring revenue is recognized as smoothly as possible.
Can I use both input and output methods to measure progress? You can, but not on the same performance obligation. The standard requires you to choose the single best method—either input or output—that reflects how you transfer value to the customer for a specific promise in a contract. You must then apply that same method consistently to all similar performance obligations across your contracts. So, you might use an output method (like milestones completed) for your installation services and an input method (like hours worked) for your ongoing support services, but you can't mix and match methods for a single service.
What's the most common pitfall when adopting IFRS 15? The biggest mistake is treating it as a simple accounting update that only the finance team needs to handle. Many businesses underestimate the operational shift required. They try to manage complex new requirements using old systems and spreadsheets, which quickly leads to errors and audit headaches. A successful transition depends on getting your systems, processes, and people aligned. This means ensuring your CRM and ERP can communicate and that your sales, legal, and finance teams all understand how their work impacts the numbers.
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.