Key Takeaways
- Revenue is recognised at the point control transfers to the customer, not when cash is collected or an invoice is issued.
- IFRS 15 uses a five-step model that applies to every contract with a customer, across all industries.
- Misstating the timing of revenue recognition is the single most common cause of financial statement restatements in mid-market audits.
- Auditors must evaluate each performance obligation separately because a single contract can produce revenue at different points in time.
What is the revenue recognition principle?
IFRS 15.31 establishes that an entity recognises revenue when it satisfies a performance obligation. The standard draws a sharp line between POs satisfied at a point in time and those satisfied over time. IFRS 15.35 sets out the criteria for over-time recognition: the customer simultaneously receives and consumes the benefits (paragraph 35(a)), the entity's performance creates or does not create an asset with alternative use while the entity retains an enforceable right to payment for work completed (paragraph 35(b) and 35(c)). POs that meet none of these criteria are recognised at a point in time.
On an actual engagement, the auditor's first job is to confirm that the entity applied the five-step model correctly. Steps one and two ( IFRS 15.9 and 15.22) ask whether a contract exists and identify distinct POs. Steps three through five allocate the transaction price and determine when each PO is satisfied. Where the entity bundles goods with installation or support services, the auditor tests whether the allocation to each PO reflects standalone selling prices under IFRS 15.76 –80. ISA 315 .A232 treats revenue recognition as a presumed fraud risk, so the audit programme must address it even on engagements where assessed risk is low.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY2025, revenue €67M, IFRS reporter. Rossi sells premium olive oil and specialty sauces to supermarket chains across southern Europe. Contracts typically include product supply and promotional display services, with volume-based rebates adjusting the TP.
Step 1 — Identify the contract and its POs
The auditor selects a contract with a Spanish supermarket chain worth €2.4M annually. The contract includes two distinct POs: product supply (delivered in weekly shipments) and in-store promotional display services (provided quarterly). IFRS 15.27 requires the entity to treat each distinct good or service as a separate PO.
Step 2 — Determine the TP
The contract states a base price of €2.4M plus a volume rebate of 3% if the customer orders more than 850,000 units. At year-end, 790,000 units have been shipped. Management estimates total volume will reach 870,000 units by contract expiry in March 2026 and has included the rebate as variable consideration under IFRS 15.50 . The adjusted TP is €2,328,000.
Step 3 — Allocate the TP to each PO
Rossi determines the standalone selling price for promotional services at €180,000 (based on what the company charges other customers for equivalent services). The remaining €2,148,000 allocates to the product supply PO. The auditor tests the standalone selling price by examining four comparable promotional service contracts with other customers.
Step 4 — Recognise revenue based on satisfaction of each PO
Product supply revenue of €2,148,000 is recognised at a point in time as each shipment transfers control (delivery terms are DAP, so control passes on delivery to the customer's warehouse). By 31 December 2025, 42 weekly shipments have been made, and the auditor agrees delivery records to the entity's revenue journal. Promotional service revenue of €180,000 is recognised over time ( IFRS 15.35 (a)), with €135,000 recognised for the three quarters completed by year-end.
Revenue recognised for this contract (€2,013,000 product supply plus €135,000 promotional services) holds up because each PO is identified separately and the TP is allocated using observable standalone selling prices. The timing of recognition aligns with control transfer evidenced by delivery records.
Why it matters in practice
The FRC's 2022/23 inspection results identified that auditors on mid-market engagements frequently accepted the entity's contract-level revenue figure without testing whether multiple POs existed within a single contract. IFRS 15.22 requires identification of distinct goods or services, and failure to disaggregate bundled contracts means the TP allocation goes untested. We've seen this on about half the engagements where the entity bundles product with support or installation: the file just rolls up revenue at contract level as if a single PO existed.
Teams often test revenue recognition timing by agreeing invoices to cash receipts, which proves collection but not the point at which control transferred. That is ticking and bashing at its worst. IFRS 15.38 lists five indicators of control transfer (physical possession, legal title, risks and rewards, acceptance, and present right to payment). The auditor needs to test at least one of these indicators, not just match cash to invoices. When the file should tell a story about how control moved from seller to buyer, and instead it tells a story about when the money landed, you have a cut-off problem waiting to happen. It is genuinely frustrating to see this on inspection, because the fix is not difficult; it just requires the team to stop and think about what they are actually testing.
Revenue recognition vs. cash-basis accounting
| Dimension | Revenue recognition (accrual basis) | Cash-basis accounting |
|---|---|---|
| Timing trigger | Control of goods or services transfers to the customer | Cash is received from the customer |
| Governing standard | IFRS 15 (five-step model) | No IFRS equivalent; used in some public sector frameworks |
| Matching principle | Revenue matched to the period in which performance occurs | Revenue matched to the period in which cash arrives |
| Audit relevance | Auditor tests assertions over existence, completeness, accuracy, and cut-off of revenue | Not applicable for IFRS-reporting entities |
The distinction matters most at year-end. An entity reporting under IFRS that records revenue only when cash arrives misstates both revenue and receivables. Cut-off testing catches this by comparing delivery evidence to revenue journal entries around the reporting date.
Related terms
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Jurisdiction notes
Revenue recognition under IFRS 15 and the associated audit considerations under ISA 240.26 (presumed fraud risk) apply globally. In the United Kingdom, the FRC’s thematic reviews have consistently identified revenue recognition as the area most frequently subject to audit deficiencies, particularly around the assessment of whether the presumption of fraud risk in revenue can be rebutted. In the Netherlands, the AFM expects auditors to apply NV COS 240.26 with heightened scepticism to revenue cut-off and to document the specific fraud risks identified for revenue streams.
In Australia, ASIC has highlighted revenue recognition as a focus area in audit inspections, particularly for entities applying AASB 15 with complex contract terms or variable consideration. In the United States, revenue recognition follows ASC 606 (the US GAAP equivalent of IFRS 15 , jointly developed by the FASB and IASB). Auditors of non-public entities apply AU-C 240 fraud risk procedures, while SEC registrant auditors apply PCAOB AS 2401, which treats revenue recognition as a presumed fraud risk. The PCAOB has consistently identified revenue recognition as one of the most common areas of audit deficiency in inspection reports, citing insufficient testing of revenue cut-off and failure to challenge management’s identification of POs. For SEC registrants, auditors must also consider SEC Staff Accounting Bulletins and comment letter trends on revenue recognition topics, as these inform the regulatory expectations for FS presentation.
Frequently asked questions
How do I document revenue recognition under the five-step model?
Walk through each step explicitly in the working papers. Record the contract identified (IFRS 15.9), the POs isolated (IFRS 15.22), the TP determined (IFRS 15.47), the allocation to each PO (IFRS 15.73), and the point or period of recognition (IFRS 15.31). ISA 230.8 requires documentation sufficient for an experienced auditor to understand the nature and results of procedures performed.
Does the revenue recognition principle apply to long-term construction contracts?
Yes. IFRS 15 replaced IAS 11 (construction contracts) and IAS 18 (revenue). Long-term construction contracts typically satisfy POs over time under IFRS 15.35(c) because the asset has no alternative use and the entity has an enforceable right to payment for work completed. The entity measures progress using an input or output method under IFRS 15.41.
When do I need to reassess POs during the audit?
Reassess whenever the contract is modified. IFRS 15.18–21 requires the entity to evaluate whether a modification creates new POs or changes the TP allocated to existing ones. The auditor should test all material contract modifications identified during the period, not only the original contract terms.