ASC 606 vs IFRS 15: Key Revenue Principles Every Organization Should Know

Revenue recognition is one of the most critical aspects of financial reporting. Over the years, accounting standards have evolved to better reflect the economic reality of how businesses earn revenue.

The move from IAS 18 (old standard) to ASC 606 / IFRS 15 (new global revenue recognition standard) represents a significant shift — from a rules-based to a principle-based approach.

In this post, we’ll explore some of the core principles of ASC 606, including expected consideration, the seven tests for transfer to customers, performance obligations, deal valuation, and how revenue can be recognized over time or at a point in time.

Expected Consideration

At the heart of ASC 606 is the concept of expected consideration.

Your organization may provide services or deliver physical products to customers. Expected consideration is what you reasonably expect to receive in exchange for those goods or services. It could be:

  • A fixed monetary amount (e.g., $10,000 for 100 laptops).
  • A variable amount, subject to discounts, rebates, penalties, or performance bonuses.

Unlike IAS 18, which relied heavily on billing, ASC 606 focuses on the amount the entity expects to be entitled to — not just the invoiced value.

Seven Tests for the Transfer to Customer

Revenue is recognized only when control of goods or services passes to the customer. To determine whether control has been transferred, ASC 606 outlines seven indicators:

  1. Present right to payment
    • If the entity has a right to payment, it suggests control has transferred.
    • Example: A construction firm completes part of a project; the client must pay for completed work.
  2. Legal title has passed
    • When ownership transfers, control usually passes as well.
    • Example: Car dealership transfers the title of a vehicle.
  3. Physical possession has transferred
    • If the customer has the goods in hand, it indicates control.
    • Example: Delivery of furniture to a customer’s home.
  4. Significant risks and rewards of ownership transferred
    • While the focus is now on control, risks/rewards remain a useful guide.
    • Example: Once an aircraft is delivered, the buyer assumes insurance and risk.
  5. Customer acceptance obtained
    • If acceptance is required by contract, control isn’t transferred until approval.
    • Example: Software implementation accepted after testing.
  6. Customer can direct use of the asset
    • If the customer decides how and when to use it, they likely control it.
    • Example: Buyer receives a machine and starts using it in operations.
  7. Customer can restrict others from use
    • If no one else can benefit from the asset, control has transferred.
    • Example: Exclusive software license granted to a client.

Not all indicators need to be satisfied — judgment depends on the nature of the contract.

Performance Obligations

A performance obligation is simply a promise in a contract to deliver goods or services.

  • Each distinct good or service is treated as a separate obligation.
  • The obligation is satisfied when control transfers, either over time or at a point in time.
  • In the new standard, instead of “deferred revenue,” companies now track performance obligation balances on the balance sheet.
  • These appear as liabilities until obligations are satisfied.

Deal Valued at Inception

Under ASC 606, deals are valued at inception — meaning at the start of the contract, you estimate the transaction price.

  • You may need to estimate prices if no fixed pricing exists.
  • Estimates must consider variable amounts (discounts, rebates, bonuses).
  • Billing does not need to happen at inception.

This ensures contracts are valued consistently, regardless of billing schedules.

Point in Time vs Over Time Recognition

Revenue can be recognized in two ways:

  • Point in Time – When control transfers at once.
    • Example: Delivery of a car to a customer.
  • Over Time – When revenue is recognized gradually as the customer receives benefit.
    • Example: A SaaS subscription where access is provided monthly.

This distinction is critical for businesses in construction, SaaS, and services.

No Dependency on Billing

One of the most important changes is that billing does not drive revenue recognition.

  • Revenue may be recognized before invoicing if the performance obligation has been satisfied.
  • Likewise, even if billing occurs, revenue cannot be recognized until control passes.

Example: A software company provides access to a platform in January but bills quarterly. Revenue recognition begins in January, even if invoices go out in March.

Contract Revision Tracking

Contracts often evolve — with amendments, scope changes, or price adjustments.

Under ASC 606, companies must:

  • Track contract revisions and revalue obligations.
  • Adjust revenue recognition for modifications.
  • Maintain audit trails for transparency and compliance.

This ensures financial statements remain accurate even when deals change midstream.

📌 Final Thoughts

The shift from IAS 18 to ASC 606/IFRS 15 is about aligning accounting with business reality. Instead of rigid billing-driven rules, companies must now focus on:

  • Expected consideration
  • Control transfer (seven tests)
  • Performance obligations
  • Contract valuation at inception
  • Recognition over time or at a point in time
  • Independence from billing
  • Careful tracking of contract revisions

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