How do companies recognize revenue under new standards?

Companies recognize revenue under the new global standards by applying a principle-based five-step model designed to reflect the transfer of promised goods or services to customers for an amount that the company expects to be entitled to. The model, issued through a joint project of the Financial Accounting Standards Board and the International Accounting Standards Board, shifts focus from transaction form to the substance of performance obligations embedded in customer contracts. Russell G. Golden of the Financial Accounting Standards Board and Hans Hoogervorst of the International Accounting Standards Board have explained that this approach improves comparability and transparency across industries by requiring consistent measurement and enhanced disclosures.

How the five-step model works

First, an entity identifies the contract with the customer and confirms enforceable rights and obligations. Next, the entity identifies distinct performance obligations within the contract; bundled promises must be separated when a customer can benefit from a good or service on its own and the promise is separately identifiable. The third step determines the transaction price, which means estimating consideration including variable amounts, significant financing components, and noncash consideration. Step four allocates the transaction price to each performance obligation based on standalone selling prices, using observable prices or estimating them when necessary. Finally, revenue is recognized when, or as, the entity satisfies a performance obligation by transferring control of the promised good or service to the customer. This transfer-based notion of control contrasts with previous criteria that emphasized risks and rewards, prompting tighter alignment of recognition with delivery.

Practical consequences and industry impacts

Adoption has practical consequences across accounting systems, tax calculations, internal controls, and investor communication. The principle-based nature increases management judgment in estimating variable consideration, determining standalone prices, and assessing contract modifications; audit scrutiny and disclosure requirements have correspondingly increased. Sectors such as software and telecommunications, where contracts often bundle subscriptions, usage, and service, have needed substantial systems changes to track performance obligations over time. Construction and long-term services face different judgment points around progress measurement and contract modifications. Companies in different jurisdictions encounter territorial nuances because implementation timing, tax treatments, and regulatory reporting can vary between countries that follow IFRS and those applying U.S. GAAP.

Human, cultural, and organizational effects also matter. Accounting teams require training to apply judgment consistently, sales and legal functions must document contracts with revenue recognition in mind, and compensation systems tied to reported revenue may need redesign to avoid perverse incentives. Smaller entities can face disproportionately high implementation costs, affecting local economies where accounting resources are scarce. Environmental and public-sector contracts introduce further complexity when obligations intersect with policy goals or community outcomes rather than straightforward commercial exchange.

The standard’s intent is to present revenue that faithfully represents economic performance, but effectiveness depends on disciplined estimation, robust internal controls, and clear external disclosures. Regulators and standard-setters continue to monitor implementation to address practice issues and promote comparability across industries and territories.