IFRS 15 replaced almost everything that came before it on revenue — IAS 11, IAS 18 and four interpretations — with a single five-step model built on one idea: revenue follows the transfer of control, not the transfer of risks and rewards. It has been effective for periods beginning on or after 1 January 2018, and it still catches people out.
The core principle
The standard requires an entity to recognise revenue "to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services."
Two phrases in that sentence do the work. Transfer of promised goods or services — so the unit of account is the promise, not the contract and not the invoice. And expects to be entitled — so the amount is what you expect to get, not what the price list says.
The five steps
The model is sequential, and skipping a step is the usual source of error.
- Step 1 — identify the contract with a customer. Contracts may need combining where they are negotiated as a package, and a contract only exists where collection is probable;
- Step 2 — identify the performance obligations, being the promises to transfer distinct goods or services. This is the step that most often changes the answer;
- Step 3 — determine the transaction price, including estimates of variable consideration such as discounts, rebates, bonuses and penalties;
- Step 4 — allocate the transaction price to each performance obligation by reference to relative stand-alone selling prices;
- Step 5 — recognise revenue when a performance obligation is satisfied by transferring control, either at a point in time or over time.
Step 2 is where the money is
Identifying performance obligations is where a contract stops being one number and becomes several. A software licence sold with implementation, training and three years of support is not one promise. A machine sold with installation may be one promise or two, depending on whether the installation is distinct.
The practical consequence is timing. Split a contract into four obligations and the revenue profile changes even though the cash does not — and with it EBITDA, covenant headroom, bonus calculations and the multiple a buyer will pay. Nothing about the business has changed; only the accounting has become more accurate.
The question to ask on each promise is whether the customer can benefit from it on its own or with resources readily available, and whether it is separately identifiable from the other promises in the contract. A service that significantly modifies or integrates with another deliverable is usually not distinct.
Variable consideration and the trap in step 3
Step 3 requires an estimate, which means revenue is recognised before the amount is known. Volume rebates, performance bonuses, penalties, refunds and price concessions all belong in the transaction price as estimates, constrained so that a significant reversal is not expected.
This is uncomfortable for businesses used to invoicing certainty, and it produces the most common audit disagreement under the standard: management estimates at the optimistic end of a range and treats the constraint as a formality. The estimate needs evidence and it needs revisiting each period.
Point in time or over time
Step 5 turns on control, and the over-time criteria are narrower than most service businesses assume. A contract is not recognised over time merely because it lasts a long time or because the customer pays monthly. It qualifies where the customer simultaneously receives and consumes the benefit, where the entity's performance creates or enhances an asset the customer controls, or where the asset has no alternative use to the entity and there is an enforceable right to payment for performance to date.
That last limb is why the enforceable-right-to-payment clause in a construction or bespoke development contract is an accounting question as much as a legal one. The same work, on two differently drafted contracts, can produce two different revenue profiles.
Who this applies to in the UK
IFRS 15 applies to entities reporting under UK-adopted international accounting standards — listed groups and those that choose IFRS. Most UK private companies report under FRS 102 instead, and have a different revenue section.
Those companies should nonetheless have this in their diary. The FRC completed its second periodic review of UK and Ireland accounting standards, the Periodic Review 2024, in March 2024, with amendments to FRS 102 published on 27 March 2024 carrying a principal effective date of 1 January 2026 and early application permitted. If you report under FRS 102, the amendment document rather than this guide is the authority on what changes for you and when — but the effective date has arrived, so the question is live now rather than later. Our comparison of FRS 101 and FRS 102 sets out the framework choice.
Getting it right in practice
Start from the contracts rather than the ledger. The revenue policy is a conclusion drawn from what you actually promise customers, and if nobody has read a representative sample of live contracts recently, the policy is describing a business that may no longer exist.
Write down the stand-alone selling prices and keep them current, because step 4 is unauditable without them. Document the variable consideration estimates and the constraint applied. And treat contract modifications deliberately — a change order is a fresh question under the model, not an adjustment to an existing schedule.
Acumon supports revenue recognition and reporting through IFRS accounts, FRS 102 accounts and financial reporting work, with statutory audit and group audits where assurance is needed. If your revenue policy predates a change in how you sell, it is the contracts that need reading first.