For most businesses, revenue is the ultimate measure of performance—one that every other KPI informs and serves. Although revenue is an important metric for businesses as they pursue growth, historically there have been industry-specific differences in the way businesses report their revenue and prepare their financial statements.
With revenue recognition guidelines fragmented across industries, it’s been difficult to meaningfully compare the performance of different companies—until recently. That’s where ASC 606 and IFRS 15 come in. Whether you’ve heard of these accounting standards or they’re entirely new to you, there’s a lot you can learn about what they mean for your business and how you should approach accounting and reporting revenue.
Here is your guide to the principles that govern how all private and public companies—in all industries—report meaningful financial information about the amount, nature, and timing of their revenue and cash flow from customer contracts.
What’s in this article?
- What is revenue recognition?
- What is ASC 606?
- What is IFRS 15?
- ASC 606 vs. IFRS 15
- The five-step model for ASC 606 revenue recognition
- Revenue Recognition with Stripe
What is revenue recognition?
Revenue recognition is a generally accepted accounting principle (GAAP). The principle defines when and how a business’s revenue should be recorded in its financial statements. Revenue recognition dictates when business income is realized and earned, when payment from the customer is received, and which accounting period revenue should be attributed to.
Since correctly recognizing and deferring revenue is important for understanding the profitability and financial health of a business, revenue recognition is an important consideration for every organization. Not only does it have significant implications for a company’s financial performance, compliance, and management decisions, but proper revenue recognition is necessary for staying compliant with regulatory standards. In one of our recent surveys, 35% of global finance leaders reported having to reopen their books or restate earnings at least once a quarter due to errors. Accurate and timely revenue recognition will help maintain stakeholder trust and ensure the long-term success of the company.
What is ASC 606?
Accounting Standards Codification (ASC) 606 provides businesses with a universal framework for recognizing revenue from customer sales. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) released ASC 606 in May 2014.
ASC 606 is a simplified, universal set of stipulations for revenue recognition that all businesses now adhere to. It is consistent across all industries, replacing older industry-specific revenue-recognition standards. Conversion to a standardized set of guidelines has resulted in better transparency, more accountability, and easier comparison of financial statements between companies and industries.
What is IFRS 15?
IFRS 15 is a revenue-recognition standard for businesses’ contracts with customers for the purchase of goods or services. It applies to public, private, and nonprofit entities. Like ASC 606, the purpose of IFRS 15 is to eliminate inconsistencies in the way entities across different industries approach accounting for similar financial transactions.
ASC 606 vs. IFRS 15
Both ASC 606 and IFRS 15 provide a comprehensive framework for recognizing revenue from customer contracts. They have similar underlying principles and objectives, and they both have the goal of ensuring consistency and comparability in financial reporting across different industries and geographic regions. But there are a few minor differences:
ASC 606 applies to all entities that enter into contracts with customers, while IFRS 15 applies to all entities that have customer contracts, except for contracts in the scope of IFRS 17 insurance contracts.
While both standards require similar disclosures related to revenue recognition, IFRS 15 includes additional requirements related to the nature, timing, and uncertainty of revenue and cash flows arising from customer contracts.
ASC 606 allows companies to capitalize and amortize certain incremental costs of obtaining a contract, such as sales commissions. IFRS 15 requires companies to apply a more stringent test for capitalizing contract costs, which stipulates that the costs be expected to generate future economic benefits.
Presentation of revenue
Under ASC 606, companies must present revenue in their income statement in a way that reflects the transfer of control of goods or services to the customer. But under IFRS 15, companies must present revenue in their income statements on a gross or net basis, depending on whether they are acting as a principal or an agent in the transaction.
ASC 606 allows companies to choose between two transition methods: a full retrospective approach, which requires companies to restate prior periods, or a modified retrospective approach, which allows companies to recognize the cumulative effect of applying the new standard as an adjustment to retained earnings. IFRS 15 requires companies to use either a full retrospective approach or a modified retrospective approach with practical expedients.
FASB provides an explanation of every difference between ASC 606 and IFRS 15, including granular details like differences in wording.
The five-step model for ASC 606 revenue recognition
To support their shared goal of creating a universal framework for revenue reporting, FASB and IASB broke down the reporting and preparation of financial statements into a five-step model. The steps are:
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when or as the entity satisfies a performance obligation.
For more detail on how to recognize revenue under ASC 606, see our article that goes deeper into each step here.
Revenue Recognition with Stripe
Stripe Revenue Recognition was built specifically for fast-growing businesses that use subscription-based or recurring revenue models. But it’s also broadly customizable and user friendly, making it an ideal solution for businesses at any stage of growth—no matter their revenue model. Revenue Recognition provides businesses that use Stripe with a comprehensive suite of functionality, including:
Insightful reporting tools
Revenue Recognition includes a range of reports, such as balance sheets, income statements, and revenue waterfall tables, that provide users—from accounting managers to C-suite executives—with actionable insights into their company’s growth and performance.
Revenue Recognition will automatically account for any changes to transactions and payments and update them across all reporting. Users can also import non-Stripe transactions, allowing for a complete picture of the company’s revenue—even if not all sales take place through Stripe.
Users can adjust reporting to account for deferred revenue, exclude certain revenue types, incorporate external data sources into their revenue reporting, and implement many other accounting configurations. The goal is to give users maximum flexibility to tailor their revenue reporting so it aligns with their business operations and preferences.
Revenue Recognition comes fully integrated with Stripe’s payments platform, including Stripe Billing and Stripe Invoicing, making it an effortless, out-of-the-box solution that requires no IT support to implement.
Revenue Recognition provides audit-ready statements and a full scope of support that’s engineered to keep businesses compliant with global standards such as ASC 606 and IFRS 15.