IFRS 15: Five-Step Revenue Recognition Guide for UK Startups and Founders

The IFRS 15 Five-Step Model: How to Apply Revenue Recognition Steps

For early-stage UK startups, cash in the bank feels like the ultimate measure of survival. But as you prepare for a funding round or your first audit, you quickly learn that investors and auditors speak a different language: recognised revenue. Misinterpreting the rules can lead to restating your financials, a process that erodes trust at the worst possible time. Getting this right is not just about compliance; it is about building a credible financial foundation for your business.

This is where IFRS 15 comes in. International Financial Reporting Standard 15 governs revenue from contracts with customers. For any UK company aiming for investment or an exit, from a SaaS startup in London to an e-commerce brand in Manchester, this is the rulebook. While UK private companies can use FRS 102, IFRS 15 is the global standard expected by most institutional investors. Understanding how to apply IFRS 15 revenue recognition steps is essential for accurate financial reporting.

IFRS 15 breaks down this complex topic into a logical five-step model. Think of it as a series of core questions you must answer for every single customer contract:

1. Is there an enforceable contract?
2. What distinct promises did we make to the customer?
3. What is the total price we expect to be paid?
4. How should we allocate that price across our promises?
5. When have we fulfilled each promise and can book the revenue?

To illustrate the model, we will use a running example: a UK B2B SaaS company signs a new customer to a £12,000 annual contract, paid upfront. The deal includes 12 months of software access and a mandatory premium onboarding service.

Step 1: Identify the Contract with the Customer

The first step in accounting for customer contracts is identifying whether you legally have one. IFRS 15 defines a contract more broadly than a formal, ink-signed document. It can be written, oral, or implied by an entity’s customary business practices. For a tech startup, this means your click-through terms and conditions, a signed order form, or a detailed statement of work can all constitute a contract for accounting purposes.

For a contract to be valid under IFRS 15, it must meet five specific criteria:

• The parties have approved the contract and are committed to performing their obligations.
• The rights of each party regarding the goods or services to be transferred can be identified.
• The payment terms for the goods or services can be identified.
• The contract has commercial substance (meaning the risk, timing, or amount of future cash flows is expected to change as a result of the contract).
• It is probable that the entity will collect the consideration to which it will be entitled.

For most SaaS, e-commerce, or professional services businesses, these criteria are met when a customer signs up and provides payment details. The key takeaway is that these contract identification steps are not just for your legal team; they are the starting point for your entire revenue model.

Step 2: Identify Performance Obligations

Once you have a contract, you must identify every distinct promise made to the customer. In accounting terms, each promise is a ‘performance obligation’. This is one of the most common revenue recognition challenges UK startups face, especially when multiple services are bundled into a single price. A good or service is distinct if the customer can benefit from it on its own or with other readily available resources.

The key is the word ‘distinct’. Can the customer use one part of the bundle without the other? Do you sell them separately in other deals? If the answer is yes, they are likely distinct performance obligations that must be unbundled and accounted for individually.

Let’s apply this to our SaaS example. The £12,000 deal includes two clear promises: ongoing software access and a one-time onboarding service. The software is usable without the premium onboarding, and the onboarding provides standalone value through training and setup. Therefore, we have two distinct performance obligations:

1. Performance Obligation 1: Access to the SaaS platform for 12 months. This is delivered over time.
2. Performance Obligation 2: The premium onboarding service. This is delivered at a point in time (or over a very short period).
   • E-commerce: You must estimate expected returns based on historical data and deduct this from the total price. Getting this right is vital for accurate e-commerce revenue timing.
   • SaaS: You need to factor in potential refunds from a service level agreement (SLA) or a satisfaction guarantee, or consider tiered pricing based on customer usage.
   • Professional Services: You may have a performance bonus that is contingent on meeting certain project milestones. These professional services billing rules mean you can only include the bonus in the transaction price if you are highly confident you will achieve it.
   
   
   • The company sells the 12-month software licence on its own for £11,500. This is its SSP.
   • The company offers the premium onboarding service separately for £1,500. This is its SSP.
   
   
   • Allocation to Software Access (PO 1): (£11,500 / £13,000) * £12,000 = £10,615.38
   • Allocation to Onboarding (PO 2): (£1,500 / £13,000) * £12,000 = £1,384.62
   
   
   • Over Time: Revenue is recognised progressively as the service is provided. This applies when the customer simultaneously receives and consumes the benefits. A SaaS subscription is the classic example; the value is delivered each day the platform is available.
   • At a Point in Time: Revenue is recognised in full only when control of the good or service transfers completely to the customer. An e-commerce sale is typically recognised when the product is delivered. A one-off professional service is recognised when the final report is handed over.
   
   
   • Onboarding (PO 2): This service is delivered and completed in the first month. It is recognised ‘at a point in time’ once the work is complete. So, £1,384.62 is recognised in Month 1.
   • Software Access (PO 1): This service is delivered ‘over time’ across the 12-month contract. The allocated revenue of £10,615.38 is recognised on a straight-line basis. This equals £884.62 per month (£10,615.38 / 12).
   
   
   • Month 1 Revenue: £1,384.62 (Onboarding) + £884.62 (Software) = £2,269.24
   • Months 2-12 Revenue: £884.62 each month.
   
   
   1. Cash is not revenue. You must internalise the difference between money in your Stripe account and what you can legally report as revenue on your profit and loss statement.
   2. Unbundle your promises. Look at every contract and identify each distinct good or service you have committed to delivering. Each one needs to be valued and tracked separately for revenue purposes.
   3. Document your assumptions. Your estimates for SSPs and variable consideration are judgements. Write down the logic and data you used to arrive at them. An auditor or investor will not just look at the final numbers; they will ask to see your working.
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This unbundling is crucial for recognising revenue in SaaS correctly. The same logic applies to other industries. For an e-commerce business, it could be the product and a separate installation service. For a professional services firm, it could be a discovery workshop and a subsequent implementation project.

Step 3: Determine the Transaction Price

The transaction price is the total payment you expect to receive from the customer in exchange for transferring the promised goods or services. In our simple SaaS example, this is clearly £12,000. However, determining the price is often more complex in reality.

You must account for any variable consideration. This includes things like discounts, refunds, credits, price concessions, or performance bonuses. IFRS 15 requires you to estimate the amount of variable consideration you will ultimately be entitled to and include it in the transaction price, but only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur.

Here is how this applies across different business models:

At this stage, finance teams often face the challenge of creating a system to track these variables. A simple spreadsheet might work initially, but it quickly becomes a point of failure as the business grows and contract complexity increases.

Step 4: Allocate the Transaction Price to Performance Obligations

When a contract contains multiple performance obligations, you must allocate the total transaction price to each one. You cannot simply use the prices listed in the contract, especially if an item is marketed as ‘free’. IFRS 15 is clear: the transaction price must be allocated to each distinct performance obligation based on its relative Standalone Selling Price (SSP).

The Standalone Selling Price is the price at which you would sell that specific good or service separately to a customer. If you do not have an observable SSP because you don't sell the item on its own, you must estimate it using a suitable method, such as a market assessment or a cost-plus-margin approach. This is critical for properly valuing items like ‘free’ onboarding or included support.

In our running SaaS example, the total transaction price is £12,000. Let's assume:

The total of the SSPs is £11,500 + £1,500 = £13,000. We now allocate the £12,000 contract price based on these relative values:

Notice that even though the onboarding might have been positioned as a small part of the deal, IFRS 15 requires it to be assigned a significant portion of the total revenue. You cannot simply assign a value of zero to something you promised to deliver.

Step 5: Recognise Revenue When (or as) Obligations are Satisfied

This final step determines the timing of revenue recognition. The core principle of IFRS 15 is that revenue is recognised when (or as) a performance obligation is satisfied by transferring a promised good or service to a customer. An entity transfers control when the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. This satisfaction can happen either ‘over time’ or ‘at a point in time’. This distinction is fundamental.

Let’s finalise our SaaS example. The company received £12,000 in cash upfront, but its revenue recognition schedule will look very different.

The final revenue schedule for this single contract is:

This is where the concept of deferred revenue is critical. The cash received but not yet recognised as revenue sits on your balance sheet as a liability until the service is delivered and the revenue can be moved to the profit and loss statement.

From Spreadsheet to System: Scaling Your Revenue Process

For a pre-seed startup with a few simple contracts, managing these steps in a spreadsheet alongside your Xero account is feasible. You can create a simple schedule to track the unbundling of performance obligations and the monthly revenue recognition for each customer. The pain begins as you scale.

With dozens or hundreds of contracts, each with different terms, start dates, and potential variable considerations, the manual process becomes unmanageable and prone to error. The risk of misstated financials and investor distrust becomes very real. A scenario we repeatedly see is a founder heading into a Series A fundraise, only for the due diligence process to uncover inconsistent revenue recognition policies. This forces a costly and time-consuming restatement, delaying the round and damaging credibility.

Your manual spreadsheet is the first signal that you have outgrown your current financial processes. As contract complexity grows, implementing a more robust system that can automate the IFRS 15 steps becomes a necessity, not a luxury. It ensures your financial reporting is consistent, auditable, and ready for investor scrutiny.

Key Principles for UK Founders

If you use Stripe for payments, our Stripe setup guide provides practical integration steps.

Navigating IFRS 15 for the first time can seem daunting, but it boils down to a few core principles. What founders find actually works is focusing on three key ideas:

To get started, you can use our revenue recognition policy template to document assumptions quickly and consistently.

For more detailed guidance, continue to our revenue recognition hub for related guides and next steps.

Frequently Asked Questions

Q: What is the difference between IFRS 15 and FRS 102 for UK startups?

A: IFRS 15 is the global standard, required for UK listed companies and often adopted by ambitious startups seeking international investment. FRS 102 is the UK standard for most private companies. While their five-step models are similar, IFRS 15 has more prescriptive guidance, particularly around variable consideration and contract modifications.

Q: How often should we review our Standalone Selling Prices (SSPs)?

A: Your SSPs should be reviewed regularly, at least annually, or whenever significant changes occur in your pricing strategy or the market. For example, launching a new product tier or observing new competitor pricing would trigger a review to ensure your revenue allocation remains accurate and defensible.

Q: What is deferred revenue and where does it appear on my financials?

A: Deferred revenue (or unearned revenue) is cash received from a customer for services or goods that have not yet been delivered. It is recorded as a current liability on your balance sheet. As you deliver the service over time, you recognise the revenue on your P&L and reduce the deferred revenue liability accordingly.