IFRS 15 vs ASC 606: Practical Revenue Recognition Guide for Startup Founders

IFRS 15 vs ASC 606: Key Revenue Recognition Differences for UK and US Startups

For a founder with operations or investors spanning the UK and US, juggling different accounting rulebooks can feel like a major distraction from building a business. When it comes to recognizing revenue, the two primary standards, IFRS 15 for the UK and ASC 606 for the US, appear complex. Misapplying these revenue recognition differences for UK and US startups is not just an accounting headache; it can trigger financial restatements, undermine investor trust, and create misleading performance metrics when you need them most for fundraising.

The Foundation: What IFRS 15 and ASC 606 Agree On

Before diving into the differences, it is important to understand that both IFRS 15 and ASC 606 share the same core objective: to make revenue recognition more consistent and comparable across companies. They are far more alike than they are different, built on an identical framework that standardizes how revenue is reported. The reality for most pre-seed to Series B startups is more pragmatic: getting these core principles right is the first priority.

The centerpiece of this alignment is that both standards use the 5-Step Revenue Recognition Model. This model provides a universal roadmap for accounting for revenue from customer contracts.

1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

For a SaaS or professional services startup, step two is often the most challenging. A performance obligation is a promise to deliver a distinct good or service. For example, a single contract might include a software subscription (one obligation), a separate fee for implementation (a second obligation), and ongoing premium support (a third obligation). Tracking and allocating revenue to these separate promises is difficult in a simple QuickBooks or Xero setup, risking inaccurate revenue timing. The key is to recognize that a single contract can contain multiple promises that must be accounted for separately as they are fulfilled.

Core Differences: Where IFRS 15 vs. ASC 606 Diverge for UK/US Startups

While the five-step model provides a universal foundation, three specific areas of divergence create practical challenges for startups operating across the Atlantic. These differences in accounting for contract costs, intellectual property, and impairment losses directly impact your profit and loss statement and balance sheet. This influences how investors in London and New York perceive your financial health and growth trajectory.

The First Thing You'll Notice: Handling Sales Commissions (Contract Costs)

One of the most frequent operational differences you will encounter involves how to account for the incremental costs of obtaining a contract, such as sales commissions.

For US companies following US GAAP, the rule under ASC 606 is strict. As noted in authoritative guidance, for incremental costs of obtaining a contract (e.g., sales commissions), capitalization and amortization over the expected life of the customer relationship is mandatory. The cost is not recognized as an immediate expense. Instead, it is treated as an asset on your balance sheet and expensed gradually over the period you expect to benefit from it.

Consider a scenario: your US entity pays a $2,400 commission on a two-year customer contract. In QuickBooks, you would book this to a “Capitalized Contract Costs” asset account. Each month for two years, you would then record a $100 expense, smoothing the impact on your profitability.

In the UK, IFRS 15 provides more flexibility. It offers a practical expedient for contract costs: if the amortization period for the asset would be one year or less, the cost can be expensed immediately. This simplifies accounting for shorter-term contracts.

For example, if your UK entity pays a £1,200 commission on a one-year contract, you can choose to expense the entire £1,200 right away in Xero. This simplifies bookkeeping but recognizes the full cost upfront, which lowers your reported profit in that initial month. The practical consequence tends to be a different short-term profitability profile between your UK and US entities, even for identical sales.

Intellectual Property (IP) Licensing: A Critical Divide for Tech and Biotech

For SaaS, biotech, and deeptech companies, revenue is often tied to licensing intellectual property. How and when you recognize this revenue is one of the most significant areas of divergence between the two standards.

IFRS 15, used in the UK, distinguishes IP licensing between a 'right to use' and a 'right to access'. A ‘right to use’ applies when the customer can benefit from the IP as it exists at the moment of transfer, like an off-the-shelf software license with no updates; revenue is typically recognized upfront. A ‘right to access’ applies when the IP’s value is tied to the seller’s ongoing activities, like an evolving SaaS subscription; revenue is recognized over the contract term.

In contrast, ASC 606 in the US differentiates IP licensing between 'functional' IP and 'symbolic' IP. Functional IP has significant standalone utility, such as a licensed movie or drug formula, and often results in upfront revenue recognition. Symbolic IP lacks standalone function, and its value comes from association with the seller, like a brand name or logo, which requires revenue recognition over time.

A scenario we repeatedly see is a biotech startup licensing a drug candidate to a larger pharmaceutical partner for a $5 million upfront payment. This type of transaction shows how critical the determination of revenue timing is. Under IFRS 15, if the startup has ongoing R&D obligations, it is providing a 'right to access' its evolving IP, and the revenue should be recognized over the development period. Under ASC 606, if the drug candidate's value depends on the startup’s ongoing expertise, it is likely 'symbolic' IP, also leading to revenue recognition over time. While the outcome is often similar, the analysis and terminology are different and must be documented correctly for auditors.

An Edge Case Worth Knowing: Reversing Impairment Losses

Impairment relates to a reduction in the value of an asset. In this context, it applies to a contract asset, which is revenue you have earned and recognized but cannot yet invoice. What happens if a customer’s ability to pay deteriorates but later improves?

The US standard is unforgiving. ASC 606 prohibits the reversal of an impairment loss on a contract asset. Once you write down the asset's value, that loss is permanent from an accounting perspective, even if the customer’s financial situation fully recovers.

IFRS 15 is more adaptable. It allows for the reversal of a previously recognized impairment loss on a contract asset if the customer's financial situation improves. This means the asset's value can be restored on the balance sheet to reflect the improved outlook.

Imagine a UK-based professional services firm has a £20,000 contract asset for a project. The client faces a funding shortfall, and the firm recognizes an impairment loss. Six months later, the client secures new funding and confirms its ability to pay. Under IFRS 15, the UK firm can reverse the impairment in its Xero accounts, restoring the asset’s value. A US-based firm in the same situation using QuickBooks would be unable to do so, resulting in a permanently lower asset value. You can see more practical examples in this UK guide for professional services revenue.

A Pragmatic Action Plan for Revenue Recognition Compliance

Navigating these revenue recognition standards comparison points does not require an enterprise-level system from day one. It requires a pragmatic, stage-appropriate approach.

Pre-Seed to Seed Stage

At this early stage, your focus is on cash flow and survival, not perfect compliance. Your accounting in QuickBooks or Xero should prioritize consistency. For contract costs, the simplest method for your UK entity is to use the IFRS 15 practical expedient and expense commissions on one-year deals immediately. For your US entity, you must capitalize them. The key is documenting why you are treating them differently. You do not need a complex system, but you do need a simple policy memo explaining your approach.

Series A Stage

This is where it starts to matter for due diligence. Investors and potential acquirers will scrutinize your revenue recognition policies. Your spreadsheets are now a liability due to the high risk of manual error and lack of a clear audit trail.

1. Establish a Primary Standard: If your parent company and primary investors are in the US, ASC 606 should be your group-wide policy. Your UK subsidiary will still need to report locally under IFRS 15, but your consolidated financials will follow US GAAP. Make this decision consciously.
2. Document Everything: Create a formal revenue recognition policy. For each revenue stream (e.g., SaaS subscriptions, implementation fees), document your analysis under the five-step model and justify the timing of recognition. This is crucial for managing accounting for cross-border SaaS revenue correctly.
3. Review Sales Contracts: Work with your sales team to standardize contract language. Vague promises of future functionality can turn what seems like upfront revenue into revenue that must be deferred over several years.

Series B and Beyond

By this stage, you should have a finance lead or a fractional CFO, and an audit is likely on the horizon. The risk of misapplication, which could trigger financial restatements and damage investor trust, is now very real. Your financial compliance UK vs US needs to be robust. Your systems must be capable of handling dual-reporting requirements, automating the amortization of contract costs, and managing complex multi-element arrangements. At this point, getting revenue recognition right is fundamental to strategic planning and valuation. You can see a software comparison to evaluate tools that can manage these complexities.

Frequently Asked Questions

Q: Which standard should my dual UK/US startup prioritize?
A: If your parent company and primary investors are in the US, ASC 606 should be your group-wide policy. Your UK subsidiary still needs local IFRS 15 filings, but consolidated financials will follow US GAAP. Make this decision consciously to ensure consistency for stakeholders and streamline future audits.

Q: Can I use QuickBooks or Xero for dual IFRS 15 and ASC 606 reporting?
A: While QuickBooks and Xero are excellent for early-stage accounting, they lack native functionality for complex revenue recognition like dual-reporting or automated amortization. Startups typically manage this with spreadsheets initially but should plan to adopt specialized software as they approach Series A to maintain accuracy.

Q: What is the most common revenue recognition error for international SaaS startups?
A: The most frequent error is failing to correctly identify and separate performance obligations. A single contract with software access, implementation, and support contains multiple promises. Recognizing the entire contract value upfront, instead of over time as each service is delivered, can materially misstate revenue and mislead investors.