Revenue recognition standards

💰 Revenue Recognition Standards – Complete Guide

Revenue recognition is a key principle in accounting that determines when and how revenue should be recorded in the books. It ensures consistency, accuracy, and comparability of financial statements.

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🌍 Global Standards for Revenue Recognition

Standard	Full Name	Used In
IFRS 15	Revenue from Contracts with Customers	140+ countries
ASC 606 (US GAAP)	Revenue from Contracts with Customers	United States
Ind AS 115	Indian equivalent of IFRS 15	India

All three are converged standards based on the 5-Step Model.

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📘 5-Step Revenue Recognition Model

Step 1️⃣: Identify the Contract

• An agreement between two or more parties

• Must have commercial substance and enforceable rights

Step 2️⃣: Identify the Performance Obligations

• Distinct goods/services promised in the contract

• Each is treated separately if distinct

Step 3️⃣: Determine the Transaction Price

• Total amount expected to be received

• Adjust for discounts, variable consideration, financing terms

Step 4️⃣: Allocate the Transaction Price

• Allocate revenue to each performance obligation

• Based on standalone selling price

Step 5️⃣: Recognize Revenue

• As performance obligations are satisfied:

  • Over time (e.g., subscriptions, long-term contracts)

  • At a point in time (e.g., retail sales)

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📊 Examples of Revenue Recognition

Industry	Example	Recognition Method
Retail	Sell product at checkout	At a point in time
SaaS	Monthly subscription	Over time
Construction	2-year project	Over time (percentage of completion)
Airlines	Ticket sold in Jan, flight in March	Recognize in March (when service provided)

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🧾 Journal Entry Example

Let’s say a company sells software for ₹1,20,000 for 12 months.

Monthly Revenue Recognition:

Every month:
Unearned Revenue A/c ......... Dr ₹10,000  
     To Revenue A/c ..................... ₹10,000

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🔎 Key Concepts Under IFRS 15 / ASC 606

Concept	Description
Contract Asset	Revenue earned but not billed
Contract Liability	Payment received before performance
Variable Consideration	Includes bonuses, penalties, rebates
Standalone Selling Price	Price for individual components in a bundle

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❌ Common Mistakes

• Recognizing revenue before delivery/service

• Ignoring refunds, discounts, or contingencies

• Failing to separate performance obligations in bundled offerings

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🧠 Summary Table

Principle	Explanation
Revenue = Earned + Realizable	Must be both earned (service delivered) and realizable (payment likely)
Matching Principle	Recognize revenue in the same period as related expenses
Accrual Basis	Revenue may be recognized before or after cash is received