Quick Answer
Revenue recognition determines when and how revenue is recorded in the financial statements. Under IFRS 15 and FRS 102 Section 23, revenue is recognised when performance obligations are satisfied — typically when goods are delivered or services are performed, not when cash is received. For FP&A teams, understanding revenue recognition rules is essential for building accurate revenue forecasts and ensuring budgets align with accounting policy.
Both IFRS 15 and FRS 102 share a fundamental principle: recognise revenue when the entity has fulfilled its obligation to the customer. This means revenue reflects economic substance, not simply the timing of invoicing or cash collection.
IFRS 15 applies to UK companies reporting under IFRS (typically listed companies and those choosing to adopt IFRS). It uses a five-step model:
1. Identify the contract with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to each performance obligation 5. Recognise revenue when (or as) each performance obligation is satisfied
FRS 102 Section 23 is simpler but follows similar principles. Revenue is recognised when: - The amount can be measured reliably - It is probable that economic benefits will flow to the entity - The stage of completion can be measured (for services) - Costs incurred and costs to complete can be measured reliably
Product sales. Revenue recognised on delivery when risk transfers to the customer.
Subscription / SaaS. Revenue recognised ratably over the subscription period. A £12,000 annual contract generates £1,000 per month, regardless of when payment is received.
Project-based services. Revenue recognised based on percentage of completion or on completion of milestones, depending on the contract structure and accounting policy.
Licences. Revenue recognition depends on whether the licence grants a right to use (recognised at a point in time) or a right to access (recognised over time).
Revenue forecasting. Your revenue model must match the accounting policy. If you forecast bookings (contract signings), you need a revenue recognition waterfall to translate bookings into recognised revenue.
Deferred revenue. Cash received before revenue is recognised creates a deferred revenue balance on the balance sheet. FP&A teams must model this for accurate balance sheet and cash flow forecasting.
Seasonality. Revenue recognition timing can create apparent seasonality in the P&L even when bookings are level. For SaaS companies with annual contracts, renewal timing affects monthly recognised revenue.
Budget alignment. Ensure budget holders understand the difference between bookings, billings, and recognised revenue. A £100k deal signed in December may generate zero P&L revenue in December if it is a subscription starting in January.
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FAQ
Bookings are contract value signed (a commercial metric). Billings are invoices issued to customers (a cash flow indicator). Revenue is the amount recognised in the P&L per accounting standards. For a £12,000 annual SaaS contract signed and invoiced in January: bookings are £12k in January, billings are £12k in January, but revenue is £1k per month over twelve months.
You do not need to be an accounting expert, but you must understand the principles well enough to build accurate revenue models. Work closely with your accounting team or auditors to ensure your forecasting approach aligns with the recognition policy. Get the policy documented and apply it consistently.
Revenue recognition and cash collection are separate. You can recognise revenue months before or after receiving cash. Your cash flow model should be driven by billing terms and collection patterns, not revenue recognition. The two reconcile through movements in debtors and deferred revenue.
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