IFRS 15 revenue recognition: five steps and a Swiss example
An invoice does not always determine the revenue for the period. IFRS 15 starts with the promises made to the customer and the transfer of goods or services. Understand the five-step model through a complete example and practical checks.
By Sarah Prieur · Swiss certified accountant
IFRS 15: the essentials
IFRS 15 sets the rules for recognising revenue from contracts with customers. Revenue reflects the transfer of promised goods or services, measured at the consideration the business expects to receive in exchange.
- Invoicing and payment alone do not determine when revenue is recognised.
- A contract may contain several performance obligations.
- The price is generally allocated using the relative stand-alone selling prices of distinct goods or services.
- Revenue is recognised either at a point in time or over time, depending on the applicable criteria.
This article addresses businesses preparing IFRS financial reporting. For the underlying business concept, see our explanation of revenue and sales.
The IFRS 15 five-step model
Start with the contract, before drafting the accounting entry. You may need the commercial offer, terms and conditions, and amendments to understand the full promise made to the customer.
| Step | Practical question |
|---|---|
| 1. Identify the contract | Which enforceable rights and obligations have been agreed? |
| 2. Identify performance obligations | Which distinct goods or services have we promised? |
| 3. Determine the transaction price | What consideration are we entitled to, and what is uncertain? |
| 4. Allocate the price | How much relates to each performance obligation? |
| 5. Recognise revenue | When does the customer obtain control of the promised good or service? |
The contract must satisfy the standard's criteria, including approval and commitment, identifiable rights and payment terms, commercial substance and probable collection. An unaccepted quotation does not automatically qualify.
Some contracts fall within other standards, including leases and financial instruments. Check the scope before applying the five-step model across the group.
Identify distinct performance obligations
A good or service is distinct when the customer can benefit from it alone or with other readily available resources, and the promise to transfer it is separately identifiable within the contract. Both parts of the assessment matter.
A machine sold with maintenance that can be used separately may create two performance obligations. Complex installation that is essential to delivering an integrated output may lead to a different conclusion.
Activities needed to fulfil a contract are not necessarily services transferred to the customer. An administrative setup task does not automatically become a distinct performance obligation simply because it is billed separately.
Practical approach: ask the sales team to describe the result promised to the customer. Compare that description with the deliverables, acceptance criteria and the customer's ability to benefit from each component separately. The quotation's line items provide evidence, but cannot replace the assessment.
Allocate the price: a bundled contract example
A Swiss business sells equipment and twelve months of maintenance for CHF 12,000 excluding VAT. The equipment transfers to the customer on 1 January; maintenance covers the calendar year evenly. The assessment identifies two distinct performance obligations.
The stand-alone selling prices are CHF 10,000 for the equipment and CHF 5,000 for maintenance, totalling CHF 15,000. Assume the overall discount is allocated proportionately and no exception applies.
| Performance obligation | Stand-alone price | Relative share | Allocated price |
|---|---|---|---|
| Equipment | CHF 10,000 | 2/3 | CHF 8,000 |
| Annual maintenance | CHF 5,000 | 1/3 | CHF 4,000 |
| Total | CHF 15,000 | 100% | CHF 12,000 |
By 30 June, cumulative revenue is CHF 10,000: CHF 8,000 for the equipment plus CHF 2,000 for six months of maintenance. If the customer paid everything in January, the CHF 2,000 relating to the remaining service is still a contract liability in this example.
This revenue calculation does not determine the VAT treatment. Assess the tax reporting date separately. Our article on Swiss VAT explains the local framework.
Recognise revenue over time or at a point in time
Recognition over time is not limited to subscriptions. However, at least one of IFRS 15's criteria must be met. These address the customer's simultaneous receipt and consumption of benefits; control of an asset as it is created or enhanced; or performance that creates no asset with an alternative use to the supplier, together with an enforceable right to payment for work completed to date.
If none of the criteria is met, recognise revenue at a point in time when control transfers. Delivery, customer acceptance, rights to payment and contractual terms help establish that date.
For an obligation satisfied over time, select a measure of progress that represents the actual transfer to the customer. Time elapsed may work for an evenly provided maintenance service, but may be unsuitable for a project with uneven deliverables.
Do not confuse billed progress with completed performance. An invoice for a 40% advance does not prove that 40% of the revenue has been earned. Your income statement and sales reporting should make the difference understandable.
Contract clauses that need closer attention
Bonuses, penalties, volume discounts and return rights can make the price variable. Estimate the consideration and apply the variable consideration constraint so that recognised revenue is not exposed to a significant reversal beyond the standard's permitted threshold.
A warranty may only assure that a product meets its specifications, or it may include an additional service. An amendment may modify the existing contract or form a separate contract. For licences, analyse the nature of the rights granted.
A business acting as an intermediary must also assess whether it is a principal or an agent. Reporting the gross amount collected or only the net commission can materially change reported revenue without changing the transaction's economic margin.
Our comparison of IFRS and US GAAP explains why the revenue models are broadly converged, while differences between the frameworks still need checking.
Build revenue controls into each closing
Maintain a register of significant contracts showing performance obligations, prices, amendments, acceptance terms and recognition dates. Reconcile it with invoices and customer receipts.
For unfinished projects, obtain operational confirmation of progress. Update estimates for variable consideration. For contract liabilities, verify which goods or services remain to be provided after the reporting date.
The file should allow someone to reconstruct the figures without relying on the salesperson's memory. Establish these controls as part of your closing process and keep a record of the conclusions. An IFRS conversion is a useful opportunity to formalise the approach.
Frequently asked questions
Does a paid invoice immediately count as revenue?
Not always. If the business still owes goods or services, the payment may represent a contract liability. Revenue recognition depends on transferring the promised good or service.
Can the price be allocated using the quotation's line items?
Not automatically. IFRS 15 generally uses the relative stand-alone selling prices of distinct performance obligations, subject to specified exceptions. The quotation does not replace that analysis.
Is subscription revenue always recognised evenly?
An even allocation is appropriate if it represents the service transferred. A different pattern of performance may require another measure of progress.
What is the difference between a receivable and a contract asset?
A receivable is an unconditional right to consideration, with only the passage of time required before payment is due. A contract asset depends on another condition, such as completing additional performance.
Is IFRS 15 mandatory for every Swiss company?
It applies to the relevant IFRS reporting. A Swiss SME preparing only local statutory accounts must assess its own accounting framework and obligations.
