What Is Revenue Recognition?
Revenue recognition rules determine when you can record a sale in your accounts. Critical for SaaS and long-term contracts.
Key Takeaways
- Revenue is recognised when performance obligations are satisfied, not when cash is received
- Annual subscriptions paid upfront are recognised monthly as service is delivered
- Deferred revenue is a liability — it represents cash received for services not yet delivered
- IFRS 15 is the international standard governing revenue recognition
The core principle
Revenue recognition is the accounting rule determining when a sale appears in your P&L. The principle, codified in IFRS 15, is: recognise revenue when — and only when — you have satisfied your performance obligation to the customer. In other words, when you have delivered the goods or services they paid for.
Cash received is not always revenue
If a customer pays £1,200 upfront for an annual subscription, you have received £1,200 in cash. But you have not yet earned it — you have 12 months of service obligations ahead. Accounting rules require you to recognise £100 per month as the service is delivered. The unearned remainder sits as deferred revenue, a liability.
Deferred revenue
Deferred revenue is a current liability representing cash received for goods or services not yet delivered. For a SaaS business with strong annual plan uptake, deferred revenue can be significant and healthy — customers have pre-paid, providing predictable future cash. Do not confuse it with a debt problem.
Project-based recognition
For long-term contracts, revenue can be recognised using the completed contract method (all at project end) or the percentage of completion method (proportional to work completed). Most modern accounting standards prefer percentage of completion as it better reflects economic reality across reporting periods.
Why it matters
Getting revenue recognition right matters for three reasons: accurate financial statements, tax position (recognising revenue too early creates a tax liability before you have cash to pay it), and investor due diligence — sophisticated investors scrutinise revenue recognition policies closely, especially for subscription businesses.