Glossary · Accounting
Revenue recognition
Revenue recognition is the accounting rule for when revenue counts as earned. Under IFRS 15 and ASC 606, it is when the promised work is delivered.
IFRS 15 internationally, and ASC 606 in the US, set out a five-step model: identify the contract, identify the performance obligations (the distinct things promised), determine the price, allocate the price to the obligations, and recognise revenue when (or as) each obligation is satisfied.
For services, revenue is often recognised over time as the work is performed, rather than when it is invoiced. That is why revenue, invoicing and cash can be three different numbers in the same month.
Revenue recognised but not yet invoiced is unbilled revenue; cash or invoices received before the work is done are deferred revenue.
Example
A firm signs a €120,000 contract for 12 months of support and invoices it annually up front. It recognises €10,000 of revenue each month as it delivers, holding the rest as deferred revenue.