# IFRS Revenue Recognition — IFRS 15 Explained

> Understand IFRS 15 revenue recognition: the five-step model, performance obligations, and when to recognize revenue. Clear examples for accounting students.

- Canonical page: https://accountery.app/learn/ifrs-revenue-recognition
- Language: English (en)
- Category: financial-statements
- Estimated reading time: 14 minutes
- Published: 2026-04-09
- Updated: 2026-04-09

## Why Revenue Recognition Matters

Revenue recognition determines **when** a company records revenue in its financial statements. Get it wrong, and profit figures are misleading.

Before IFRS 15, different industries had different rules. A construction company recognized revenue differently than a software company. IFRS 15 replaced all of that with a single, unified framework.

## The Five-Step Model

IFRS 15 uses five steps to determine when and how much revenue to recognize:

**Step 1: Identify the contract** — Is there an agreement between the company and a customer? Does it have commercial substance? Are payment terms identifiable?

**Step 2: Identify performance obligations** — What distinct goods or services has the company promised to deliver?

**Step 3: Determine the transaction price** — How much will the company receive? Consider variable consideration, discounts, and time value of money.

**Step 4: Allocate the price** — If there are multiple performance obligations, allocate the transaction price to each one based on standalone selling prices.

**Step 5: Recognize revenue** — Record revenue when (or as) each performance obligation is satisfied — either at a point in time or over time.

## Point in Time vs Over Time

Revenue is recognized **over time** when:
- The customer receives and consumes benefits as the company performs
- The company's work creates or enhances an asset the customer controls
- The asset has no alternative use and the company has a right to payment for work completed

**Example (over time):** A 12-month consulting retainer. The client benefits each month, so revenue is recognized monthly.

Revenue is recognized **at a point in time** when control transfers to the customer:

**Example (point in time):** Selling equipment. Revenue is recognized when the buyer takes delivery and has the risks and rewards of ownership.

## Worked Example: SaaS Subscription

**Scenario:** CloudTech sells a 12-month software license for SAR 120,000. Payment is received upfront on January 1.

**Step 1:** Contract exists — signed agreement, payment received.
**Step 2:** One performance obligation — provide access to software for 12 months.
**Step 3:** Transaction price = SAR 120,000.
**Step 4:** One obligation, so full price allocated to it.
**Step 5:** Recognized over time — the customer benefits from the software continuously.

**January 1 — Cash receipt:**

| Account | Debit | Credit |
|---|---|---|
| Cash | 120,000 | |
| Unearned Revenue | | 120,000 |

**Each month — Revenue recognition:**

| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | 10,000 | |
| Subscription Revenue | | 10,000 |

After 12 months, Unearned Revenue reaches zero and SAR 120,000 of revenue has been recognized.

## Worked Example: Bundled Sale

**Scenario:** A company sells a phone (SAR 3,000) with a 24-month service plan (SAR 1,200) for a bundled price of SAR 3,600.

**Standalone selling prices:**
- Phone alone: SAR 3,000
- Service plan alone: SAR 1,200
- Total standalone: SAR 4,200

**Allocation of SAR 3,600 bundled price:**
- Phone: (3,000 / 4,200) x 3,600 = SAR 2,571
- Service: (1,200 / 4,200) x 3,600 = SAR 1,029

**Revenue recognition:**
- Phone revenue (SAR 2,571): recognized at delivery (point in time)
- Service revenue (SAR 1,029): recognized over 24 months (SAR 42.88/month)

## Common Exam Questions

**Q: A company receives SAR 50,000 for a project. Work is 60% complete at year-end. How much revenue is recognized?**
A: If the performance obligation is satisfied over time, recognize SAR 30,000 (60% of 50,000).

**Q: A customer pays upfront for 6 months of services. At the end of month 2, how much is Unearned Revenue?**
A: 4/6 of the original payment. Revenue recognized = 2/6. Remaining liability = 4/6.

**Q: Why can't a company record all revenue when cash is received?**
A: Because IFRS 15 requires revenue to be recognized when performance obligations are satisfied, not when cash is collected. Upfront payment creates a liability (Unearned Revenue), not revenue.

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