RevenueRecognition

Revenue recognition is the process of recording revenue in financial statements when goods or services are transferred to customers in an amount the entity expects to receive. Global standards, including IFRS 15 and US GAAP's ASC 606, provide a common framework for recognizing revenue from contracts with customers.

At the center of these standards is a five-step model: identify the contract; identify performance obligations; determine the transaction price; allocate the price to each obligation; and recognize revenue as the entity satisfies each obligation. Revenue is recognized when control of the promised goods or services transfers to the customer, which can occur at a point in time or over time.

Recognizing revenue over time uses methods such as output or input measures that reflect progress toward satisfaction of the performance obligation. For goods or services delivered at a single point in time, revenue is recognized when the customer obtains control.

Key concepts include variable consideration, constrained by the likelihood of reversal. A significant financing component is recognized if payment terms provide a meaningful financing benefit. The standards also address noncash consideration, consideration payable to customers, and presentation of licenses or service arrangements.

Costs to obtain a contract that are incremental and expected to be recovered are capitalized as an asset; costs to fulfill a contract may be capitalized if they relate directly to satisfying the contract. Contract modifications, warranties, returns, and agency versus principal considerations also affect revenue recognition. The standards require disclosures of judgments and remaining performance obligations to enhance transparency.