Revenue recognition is the most critical area of transformation, as it forms the foundation for the entire balance sheet. For IT companies, revenue is rarely straightforward. A single contract may simultaneously include a license, implementation, support, and subscription, and each of these elements requires a separate approach to recognition.

In Ukrainian practice under P(S)BO, revenue is often tied to acts of services rendered or invoices. IFRS 15 requires a more precise model: revenue is recognized as control over the service is transferred to the customer. This is a fundamentally different recognition logic.

In practice, this means that advances become liabilities, unbilled amounts become assets, and fixed-price contracts require assessment of the degree of completion at each reporting date.

1. Does the revenue recognition date match the transfer of services to the customer?

First, it is necessary to determine whether the revenue recognition date corresponds to the transfer of services to the customer.

If the service has already been provided and revenue is recognized correctly, then a corresponding asset must be recognized simultaneously with revenue: accounts receivable if the right to payment is already unconditional; cash if payment has already been received; or a contract asset if the service has already been provided or partially provided but the invoice cannot yet be issued.

If revenue is recognized before the service is provided, then it is necessary to reduce revenue and recognize a contract liability.

It is important to understand that a contract asset arises when the service has already been provided or partially provided, revenue has already been earned, but the right to payment still depends on the fulfillment of additional conditions.

2. Are there customer advances?

If the customer has paid in advance but the service has not yet been provided, revenue cannot be recognized. First, cash and a contract liability must be recognized. When the service is provided, the contract liability is debited and revenue is credited for the amount of services actually provided.

3. Are there SaaS prepayments?

For SaaS prepayments, revenue is usually recognized gradually over the period of access to the service. For example, if a customer has paid for an annual subscription, revenue is not recognized immediately for the full amount. It is recognized monthly or daily over the subscription period.

This means the invoice or payment may be at the beginning of the period, but revenue is recognized over the period of providing access. As services are provided, the contract liability is debited and revenue is credited.

4. Are there fixed-price contracts?

For such contracts, it is necessary to verify whether revenue is recognized in accordance with the degree of work completion. If the contract is for 100 and only 40% of the work has been completed, revenue should be 40, not 100.

If the entire amount was recognized as revenue prematurely, the excess revenue needs to be reversed, specifically debiting revenue and crediting the contract liability.

A key feature of this type of contract is that the stage of completion must be assessed, for example, based on costs, hours, completion of interim milestones, or another method.

5. Are there T&M contracts?

For time & material contracts, revenue is usually recognized based on actual hours worked or services provided.

If hours have already been worked and the right to payment is unconditional, accounts receivable is debited and revenue is credited. If the service has already been provided but the invoice cannot yet be issued under the contract terms, then the contract asset is debited and revenue is credited.

A key feature of this type of contract is the verification of actual hours worked, acts of services rendered, and payment terms.

6. Are there implementation fees?

Implementation fees cannot always be recognized immediately. It is necessary to determine whether the implementation is a separate performance obligation or whether it is closely related to SaaS or the subscription.

If the implementation is not a separate service, revenue may be recognized over the term of the main contract rather than immediately. The key point is that not every setup fee automatically constitutes revenue at the time of invoicing.

7. Is there support or maintenance?

Support and maintenance are usually provided over time, so revenue is recognized gradually over the support period.

If the customer has paid for a year of support in advance, cash is first debited and the contract liability is credited. Then each month the contract liability is debited and revenue is credited.

The key point is that it is important not to recognize the entire annual support amount at once.

8. Are there discounts, refunds, or credits?

Discounts, refunds, and credits can reduce the transaction price. Therefore, it is necessary to verify whether revenue is overstated.

If a credit or reimbursement has been granted to the customer, it is necessary to debit revenue and credit the refund liability or accounts receivable, or the contract liability.

The key point is that variable consideration must be taken into account, and revenue should not be recognized in an amount that may be returned or reduced.

9. Are there performance obligations?

It is necessary to determine exactly what the company has promised the customer. For example, a single contract may include: a SaaS subscription, a license, implementation, support, maintenance, training, and configuration.

If these are separate performance obligations, revenue must be recognized separately for each one. The key point is that one contract does not always mean one service.

10. Should the transaction price be allocated among multiple services?

If the contract includes several separate services, the transaction price must be allocated among them. For example, the total contract price includes license + implementation + support + subscription. Then it is necessary to determine what portion of the price relates to each service.

The key point is that revenue may be recognized at different times or over different periods for different components of the contract.

11. Is there revenue for which no invoice has been issued?

Such revenue arises when the service has already been provided, revenue has already been earned, but the invoice has not yet been issued to the customer.

If the right to payment is not yet unconditional, it is necessary to debit the contract asset and credit revenue. If the right to payment is already unconditional but the invoice has not yet been issued, this may be accounts receivable rather than a contract asset.

The key point is that it is necessary to distinguish a contract asset from accounts receivable.

Typical adjustments during transformation

Thus, when transforming revenue under IFRS 15, the adjustments may include:

  1. Reclassification of advances received as contract liabilities.
  2. Recognition of contract liabilities for prepayments.
  3. Recognition of contract assets.
  4. Revenue adjustment based on degree of completion.
  5. Allocation of revenue among license, implementation, support, and subscription.