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Revenue accounting

Revenue recognition

Determining when revenue is earned rather than when it was invoiced or paid.

Revenue recognition decides when money counts as revenue. For subscription software the answer is usually rateably over the service period, not at invoice and not at payment.

The complications are the interesting part: setup fees that may or may not be a separate performance obligation, discounts that must be allocated across a bundle, usage that is recognised as consumed, and contract changes mid-term that require the remaining consideration to be reallocated.

Getting it wrong is an audit problem and, for anyone raising or selling, a diligence problem. The framework is ASC 606 / IFRS 15.

Related terms

  • Deferred revenue Money received for service not yet delivered. A liability, not revenue, until it is earned.
  • ASC 606 and IFRS 15 The converged accounting standards for revenue from contracts with customers, built on a five-step model.
  • Bookings, billings and revenue Three different numbers that are routinely confused: what was contracted, what was invoiced, and what has been earned.