IFRS 15 revenue from contracts with customers

IFRS 15 requires revenue to be recognised when control of promised goods or services passes to the customer, at the amount the business expects to be entitled to. It does this through five steps: identify the contract, identify the performance obligations, set the transaction price, allocate it, and recognise revenue as each obligation is satisfied. The mechanics are simple; the difficulty for most UK groups lies in a handful of judgements about bundles, variable pricing, timing and whether the business is principal or agent.

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What does IFRS 15 require and who uses it in the UK?

The IASB issued IFRS 15 in May 2014, alongside the equivalent US standard, Topic 606. It replaced IAS 11, IAS 18 and four interpretations, and it applies to annual periods beginning on or after 1 January 2018. Its core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to be entitled to.

In the UK it applies to groups and companies preparing accounts under UK adopted international accounting standards, and to subsidiaries using FRS 101, which apply IFRS 15 measurement in full but are exempt from several of its disclosures. HMRC’s Business Income Manual at BIM31115 summarises the same five steps. FRS 102 reporters now meet the model too: the revised Section 23, which applies to periods beginning on or after 1 January 2026, is a five step model based on IFRS 15.

How do the five steps work?

Identify the contract. A contract is an agreement that creates enforceable rights and obligations. IFRS 15 applies only where the criteria in paragraph 9 are met, including commercial substance and that it is probable the entity will collect the consideration. Contracts are sometimes combined, and modifications have their own rules.
Identify the performance obligations. Each promise to transfer a distinct good or service is a performance obligation. A good or service is distinct if the customer can benefit from it on its own or with readily available resources, and the promise is separately identifiable from other promises in the contract. The IASB’s example is a brick wall: bricks and labour could be bought separately, but if the promise is to build the wall, they are inputs to one performance obligation.
Determine the transaction price. This is the consideration the entity expects to be entitled to. Variable consideration is estimated using either the expected value or the most likely amount, whichever better predicts the outcome, and is included only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur. The price is also adjusted for a significant financing component and for consideration payable to the customer.
Allocate the price. Normally on the basis of relative stand alone selling prices, estimated where they are not observable.
Recognise revenue. When or as each obligation is satisfied by transferring control, either at a point in time or over time.

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When is revenue recognised over time?

Paragraph 35 sets three alternative criteria, and if any one is met revenue is recognised over time; otherwise paragraph 32 places it at a point in time. As the IFRS Interpretations Committee summarised in March 2018:

35(a) the customer simultaneously receives and consumes the benefits as the entity performs, typical of routine services;
35(b) the customer controls the asset as it is created or enhanced; or
35(c) the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

Under paragraph 37, the right to payment must exist throughout the contract and at least compensate for work done if the customer terminates for reasons other than the entity’s failure to perform. Paragraph B12 brings in legislation and legal precedent as well as the contract wording. The Committee also observed that the likelihood of the right being exercised is irrelevant: the test is whether it exists and is enforceable. For the UK GAAP version of these tests, see our guide to revenue recognised over time.

Which judgements cause UK groups the most difficulty?

The IASB’s post implementation review, completed in September 2024, concluded that IFRS 15 is working as intended, with no fundamental flaws and costs not significantly greater than expected. It nonetheless identified the areas where practice varies:

Bundles and performance obligations. Particularly arrangements combining software licences with installation, customisation or support.
Variable consideration. Some entities constrain estimates to zero at the outset or update them only when an invoice is raised, rather than when the highly probable threshold is met. The IASB decided to take no action, saying estimating variable consideration inherently requires judgement.
Principal or agent. Assessing whether the entity controls a service or intangible asset before it passes to the customer determines whether revenue is reported gross or net. Our guide to principal or agent revenue works through the indicators.
Licences. A distinct licence giving a right to access intellectual property as it exists throughout the licence period is recognised over time; a right to use it as it exists when granted is recognised at a point in time. Renewals and telling a licence from a sale of IP remain difficult.
Consideration payable to a customer. The transaction price is reduced for amounts payable to the customer, and the IASB will revisit incentives paid by an agent to end customers that are not in exchange for a distinct good or service, and payments that exceed the revenue from that customer.
Over time criteria. Reported as applied inconsistently, especially for property and customised assets.

What does a worked example look like?

Illustration only. An engineering company agrees to supply a machine, install it and maintain it for two years for a total price of 90,000 pounds. It sells each element separately: the machine for 60,000, installation for 15,000 and two years’ maintenance for 25,000, a total of 100,000.

Performance obligation	Stand alone price	Allocated price	When recognised
Machine	60,000	54,000	On delivery, when control passes
Installation	15,000	13,500	As installation is performed
Maintenance	25,000	22,500	Over two years, 11,250 a year
Total	100,000	90,000

The 10 per cent discount is spread across all three obligations because nothing suggests it relates to one of them. If the installation significantly modified the machine so that the customer was really buying an integrated working system, the machine and installation would form a single performance obligation, and revenue timing would change.

What about the costs of winning and fulfilling contracts?

IFRS 15 also deals with some contract costs. Incremental costs of obtaining a contract are recognised as an asset if they are expected to be recovered. Costs to fulfil a contract that are not covered by another standard are capitalised only if they relate directly to a contract, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. On financing, IFRS 15 includes a practical expedient so that no adjustment is needed when the period between payment and transfer is expected to be one year or less.

What mistakes come up most often?

Treating every line on an invoice as a separate performance obligation, or bundling everything into one, without testing whether each promise is distinct.
Leaving variable consideration out entirely rather than estimating the amount that is highly probable not to reverse, and failing to update the estimate at each reporting date.
Recognising revenue over time on the basis of stage payments without checking that a genuine enforceable right to payment for work done exists.
Reporting agency sales gross.
Expensing incremental costs of obtaining a contract that should be capitalised, or capitalising costs that fail the fulfilment cost criteria.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.