Revenue Recognition
Revenue Recognition
Core idea
Revenue depicts the transfer of promised goods or services for the consideration the entity expects to receive. Cash, invoice and revenue dates may differ.
The five-step model
| Step | Question |
|---|---|
| 1 | Is there an enforceable contract with a customer? |
| 2 | Which promised goods or services are distinct performance obligations? |
| 3 | What is the transaction price, including constrained variable consideration? |
| 4 | How is that price allocated using relative stand-alone selling prices? |
| 5 | When does control transfer: at a point in time or over time? |
Northstar bundle
On 1 October, a customer pays £2,640 for:
- an e-bike delivered immediately; stand-alone price £2,400;
- 24 months of maintenance; stand-alone price £600.
Total stand-alone price is £3,000. Allocation follows relative stand-alone prices:
| Obligation | Allocation | Revenue timing |
|---|---|---|
| Bike | £2,640 × £2,400 / £3,000 = £2,112 | At delivery, if control has transferred |
| Maintenance | £2,640 × £600 / £3,000 = £528 | Over 24 months: £22 per month in this simple pattern |
Entries:
1 October — cash received
Dr Cash £2,640
Cr Contract liability £2,640
1 October — bike delivered
Dr Contract liability £2,112
Cr Bike revenue £2,112
31 December — three months maintained
Dr Contract liability £66
Cr Service revenue £66
At 31 December the contract liability is £462. Total recognised revenue is £2,178, even though all £2,640 cash arrived in October.
Three balances that are not interchangeable
| Balance | Meaning |
|---|---|
| Receivable | Right to consideration is unconditional except for the passage of time |
| Contract asset | Right is still conditional on something other than time, such as further performance |
| Contract liability | Customer has paid, or payment is due, before the related performance |
Where judgement enters
Distinct promises
A promise is not separated merely because it appears on a contract line. Test whether the customer can benefit from it and whether it is distinct in the contract context.
Variable consideration
Estimate discounts, returns, rebates or bonuses, then constrain the amount so a significant reversal is not highly probable when uncertainty resolves under IFRS 15. Do not book the most optimistic outcome.
Point in time or over time
Look for control indicators, not invoice labels. For over-time obligations, choose a measure of progress that faithfully depicts performance.
Licences
Do not assume every software licence is recognised at delivery. The nature of the promise, updates, hosting and continuing activities can change whether revenue is recognised at a point in time or over time; IFRS and US GAAP also retain application differences.
Real-report check
Microsoft’s 2025 Annual Report reported both unearned revenue and revenue allocated to remaining performance obligations. The analytical question is not “How large is the backlog?” but:
- what is included;
- when management expects recognition;
- which estimates or renegotiations affect the amount;
- how much is billed versus not yet billed.
Quick check
Suppose Northstar completes six months of maintenance by 31 March. What are cumulative service revenue and the remaining contract liability?