Revenue recognition glossary

40 terms from ASC 606, IFRS 15 and Ind AS 115. Each entry gives a direct definition, the paragraphs it comes from, an illustrative worked example with real arithmetic, and the mistakes auditors most often raise. For allocation questions, try the SSP allocation calculator.

Adjusted market assessment approachThe adjusted market assessment approach estimates standalone selling price by evaluating the market in which the entity sells and estimating the price customers in that market would pay. It can start from competitors' prices for similar goods or services, adjusted for the entity's own costs, margins and market position.
Bill-and-holdA bill-and-hold arrangement is one in which an entity bills a customer for a product but keeps physical possession until a later date. Revenue is recognised before shipment only if control has passed: there is a substantive reason, the product is identified as the customer's, ready for transfer, and cannot be used or redirected by the entity.
BreakageBreakage is the portion of a customer's non-refundable prepayment for rights it is not expected to exercise, such as unused gift cards, prepaid credits or vouchers. If the entity expects to be entitled to breakage, it recognises it in proportion to the pattern of rights the customer exercises; otherwise when exercise becomes remote.
Consignment arrangementIn a consignment arrangement an entity delivers product to a dealer or distributor that does not obtain control of it, so no revenue is recognised on delivery. Indicators include the entity keeping control until a specified event such as sale to an end customer, and its ability to require the product's return.
Constraint on variable considerationThe constraint limits how much variable consideration enters the transaction price: include an estimate only to the extent it is probable (IFRS 15: highly probable) that a significant reversal of cumulative revenue recognised will not occur when the uncertainty resolves. Factors include external influences, limited experience and a broad range of outcomes.
Contract assetA contract asset is an entity's right to consideration in exchange for goods or services already transferred to the customer, when that right is conditioned on something other than the passage of time, typically the entity's future performance. When the right becomes unconditional, the amount is reclassified to a receivable.
Contract costs (ASC 340-40)ASC 340-40 and IFRS 15 require capitalising the incremental costs of obtaining a contract, typically sales commissions, if they are expected to be recovered, and certain costs to fulfil a contract. Capitalised costs are amortised on a systematic basis consistent with the transfer of the related goods or services, including anticipated renewals.
Contract liabilityA contract liability is an entity's obligation to transfer goods or services to a customer for which it has received consideration, or for which consideration is unconditionally due. In SaaS it is usually presented as deferred revenue, and it unwinds into revenue as the related performance obligation is satisfied.
Contract modificationA contract modification is an approved change in the scope or price, or both, of a contract. It is accounted for as a separate contract, prospectively as a termination of the old contract and creation of a new one, or by cumulative catch-up, depending on whether the added goods or services are distinct and priced at standalone selling price.
Cumulative catch-upA cumulative catch-up adjustment recognises, in the current period, the effect of a change on revenue recognised to date, as if the revised terms or estimates had applied from inception. It applies to modifications of a single, partially satisfied performance obligation and to changes in estimated progress or transaction price.
Customer options for additional goods or servicesCustomer options are rights to acquire additional goods or services, free or at a discount, such as renewal options, add-on pricing, loyalty points or volume tiers. An option is a separate performance obligation only if it provides a material right; otherwise it is a marketing offer and nothing is allocated to it until exercised.
Deferred revenueDeferred revenue is consideration received or billed in advance for goods or services not yet transferred. ASC 606 and IFRS 15 call it a contract liability but permit other descriptions. It decreases as revenue is recognised, and for a ratable subscription the balance should reach exactly zero at the end of the term.
Disaggregation of revenueDisaggregation of revenue is the required disclosure splitting revenue into categories that show how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors, for example by product line, geography, customer type, contract duration or timing of transfer.
Distinct good or serviceA good or service is distinct if the customer can benefit from it on its own or with readily available resources (capable of being distinct) and the promise to transfer it is separately identifiable from the other promises in the contract (distinct within the context of the contract). Both criteria must be met.
Expected cost plus margin approachThe expected cost plus a margin approach estimates standalone selling price by forecasting the costs of satisfying a performance obligation and adding an appropriate margin. It suits services with measurable costs, such as implementation, training or custom development, and fits poorly where costs are not driven by the specific obligation.
Five-step modelThe five-step model is the core of ASC 606, IFRS 15 and Ind AS 115: identify the contract; identify the performance obligations; determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when, or as, each obligation is satisfied.
Ind AS 115 GST treatmentUnder Ind AS 115 the transaction price excludes amounts collected on behalf of third parties, so Goods and Services Tax (GST) charged on an invoice is not revenue. GST is recorded as a liability to the government; only the net consideration is allocated to performance obligations and recognised as revenue.
Input methodAn input method measures progress toward satisfying an over-time performance obligation by the entity's efforts or inputs, such as costs incurred, labour hours or time elapsed, relative to total expected inputs. Inputs that do not depict transfer to the customer, such as wasted materials or rework, are excluded.
Licence of IP (right to access vs right to use)A licence of intellectual property grants either a right to access the IP as it exists throughout the licence period, recognised over time, or a right to use the IP as it exists when granted, recognised at a point in time. IFRS 15 uses this access-or-use distinction; ASC 606 classifies the IP as functional or symbolic.
Material rightA material right is an option for additional goods or services that the customer would not receive without entering the contract, such as a renewal or add-on discount beyond what that class of customer normally gets. It is a separate performance obligation: part of the price is allocated to it and recognised when the option is exercised or expires.
Observable priceAn observable price is the price at which an entity actually sells a good or service separately to similar customers in similar circumstances. It is the best evidence of standalone selling price. A contractually stated or list price may be the standalone selling price, but is not presumed to be.
Output methodAn output method measures progress by the value transferred to the customer to date relative to the remaining goods or services, using measures such as milestones reached, units delivered or time elapsed. A practical expedient lets an entity recognise the amount it has a right to invoice when that amount corresponds directly to value transferred.
Performance obligationA performance obligation is a promise in a contract to transfer to the customer either a distinct good or service (or bundle), or a series of distinct goods or services that are substantially the same and transfer in the same pattern. It is the unit of account to which the transaction price is allocated and revenue recognised.
Point-in-time recognitionPoint-in-time recognition applies when a performance obligation meets none of the three criteria for recognition over time. Revenue is recognised when control transfers, judged by indicators such as a present right to payment, legal title, physical possession, transfer of significant risks and rewards, and customer acceptance.
Practical expedientsPractical expedients are optional simplifications in ASC 606 and IFRS 15 that reduce cost without materially changing results. Examples include ignoring a significant financing component of one year or less, expensing contract costs amortised within a year, right-to-invoice measurement, and omitting certain remaining performance obligation disclosures.
Principal vs agentPrincipal versus agent analysis decides whether an entity reports revenue gross, as principal controlling the specified good or service before transfer, or net, as agent arranging for another party to provide it. Indicators of control include primary responsibility for fulfilment, inventory risk and discretion in setting the price.
Prospective method (modifications)Under the prospective method, a contract modification is treated as if the existing contract were terminated and a new one created. Revenue already recognised is left unchanged; the unrecognised consideration from the original contract plus any new consideration is allocated to the remaining distinct goods or services.
Ratable recognitionRatable recognition spreads revenue evenly over the period a performance obligation is satisfied. It is typical of stand-ready SaaS access, where time elapsed faithfully depicts transfer. It is a measure-of-progress conclusion for an obligation satisfied over time, not a default for every contract.
Relative SSP methodThe relative standalone selling price method allocates a contract's transaction price to each performance obligation in proportion to its standalone selling price. Each obligation receives its SSP divided by the sum of all SSPs, multiplied by the transaction price, so a bundle discount is spread proportionately across every obligation.
Remaining performance obligations (RPO)Remaining performance obligations (RPO) is the disclosure of the transaction price allocated to performance obligations that are unsatisfied, or partly unsatisfied, at the reporting date, with an explanation of when the entity expects to recognise it. It combines deferred revenue and contracted amounts not yet invoiced.
Residual approachThe residual approach estimates a good or service's standalone selling price as the total transaction price less the observable standalone selling prices of the other promised goods or services. It is permitted only if that item's selling price is highly variable or uncertain, not as a general shortcut for absorbing a bundle discount.
SaaS implementation feeA SaaS implementation fee is a charge for set-up, configuration, data migration or training at the start of a subscription. If the activity transfers a distinct service, it is a separate performance obligation. If it is a set-up activity or not distinct, the fee is added to the subscription consideration and recognised over the service period.
Series guidanceThe series guidance treats a series of distinct goods or services that are substantially the same and transfer with the same pattern as a single performance obligation. It applies when each distinct period would be satisfied over time and progress is measured the same way, which is typical for daily or monthly SaaS access.
Significant financing componentA significant financing component exists when the payment timing agreed by the parties gives the customer or the entity a significant benefit of financing. The transaction price is then adjusted for the time value of money. A practical expedient skips the adjustment when the gap between payment and transfer is one year or less.
SSP rangeAn SSP range is a band of prices, commonly set around the median of observable standalone sales, within which a contract's stated price is accepted as its standalone selling price. ASC 606 does not prescribe ranges, but they are common practice; prices outside the band are adjusted to a point, such as the nearer boundary, under a written policy.
Standalone selling price (SSP)Standalone selling price (SSP) is the price at which an entity would sell a promised good or service separately to a customer. The best evidence is an observable price from standalone sales to similar customers in similar circumstances. When none exists, the entity estimates SSP using a method that maximises observable inputs.
Terminal-period remainder absorptionTerminal-period remainder absorption is a rounding policy for revenue schedules: compute each period's amount from the allocated price, round to the cent, and let the final period absorb the difference between the allocated amount and the sum of earlier periods. The schedule then sums exactly to the allocation, and deferred revenue ends at zero.
Transaction priceThe transaction price is the consideration an entity expects to be entitled to in exchange for transferring promised goods or services, excluding amounts collected on behalf of third parties such as some sales taxes. It reflects variable consideration, significant financing components, non-cash consideration and consideration payable to the customer.
Unbilled receivableAn unbilled receivable is revenue recognised for which the entity's right to consideration is already unconditional, with only the passage of time required before payment, but no invoice has been issued yet. Unlike a contract asset, it is a receivable and is presented with accounts receivable.
Variable considerationVariable consideration is any part of the promised consideration that can change: discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or usage-based fees. An entity estimates it using the expected value or the most likely amount, whichever better predicts the outcome, and then applies the constraint.