How to Measure Satisfaction of Performance Obligations under ASC 606 and IFRS 15

When it comes to revenue recognition, the biggest challenge companies face is knowing when and how much revenue to recognize. Under ASC 606 and IFRS 15, businesses must recognize revenue only when performance obligations in a customer contract are satisfied. But how do you measure “satisfaction”?

The accounting standards provide several satisfaction measurement models, each tailored to different types of goods, services, and contracts. Choosing the right one ensures accurate financial reporting, compliance, and transparency.

Two Main Approaches to Satisfaction

1. Satisfaction Over Time

Revenue is recognized gradually as obligations are fulfilled. This is used when:

  • The customer consumes the benefit as the service is delivered (e.g., cleaning services).
  • The customer controls the asset being built/enhanced (e.g., construction project).
  • The asset has no alternative use, and the company has a right to payment.

Methods to measure progress “over time”:

  • Output-based: Focus on what has been delivered to the customer.
  • Input-based: Focus on the resources consumed or effort expended.

2. Satisfaction at a Point in Time

Revenue is recognized once, when control of the goods or services passes to the customer.

  • Example: Delivery of equipment, transfer of software license, or a one-time consulting project.

Common Satisfaction Models (with Examples)

Here are the most widely used models to measure satisfaction:

1. Percentage-of-Completion (Cost-to-Cost or Labor Hours)

  • Revenue is tied to the proportion of work completed.
  • Example: A construction firm recognizes 60% of revenue when 60% of costs are incurred.

2. Time-Based (Straight-Line or Service Period)

  • Revenue is spread evenly across the service duration.
  • Example: A 12-month software subscription recognized monthly.

3. Quantity or Units-of-Delivery

  • Revenue is recognized as goods or units are delivered.
  • Example: A contract for 100 laptops — revenue recognized per laptop shipped.

4. Milestone or Event-Based

  • Revenue is recognized when contractual milestones are reached.
  • Example: A biotech firm records revenue when a new drug passes a regulatory phase.

5. Customer Usage or Consumption

  • Revenue depends on how much the customer actually uses.
  • Example: Cloud services recognized based on gigabytes consumed or API calls made.

Why Choosing the Right Model Matters

The satisfaction model impacts:

  • Revenue timing: Whether you recognize now, later, or gradually.
  • COGS alignment: Matching expenses with income for accurate profit reporting.
  • Gross margin visibility: Clear insight into true profitability.
  • Compliance: Prevents misstatements and ensures you stay aligned with ASC 606 and IFRS 15.

Final Thoughts

There’s no “one-size-fits-all” satisfaction model. The right choice depends on the nature of the contract, the goods or services promised, and the customer’s benefit pattern.

  • Subscription businesses often use time-based or usage-based models.
  • Manufacturers lean toward point-in-time or units-of-delivery models.
  • Project-driven industries prefer percentage-of-completion or milestone-based models.

By applying the right satisfaction measurement model, companies can ensure revenue recognition is accurate, compliant, and insightful — paving the way for smarter financial decisions and greater investor confidence.

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