Revenue recognition under AASB 15: Apply the 5-step framework to complex contracts
Apply the AASB 15 five-step framework to recognise revenue correctly across your customer contracts.
Written by Chelsea Heywood—Small business growth and marketing writer. Read Chelsea's full bio
Published Thursday 9 July 2026
Table of contents
Key takeaways
- AASB 15 uses a five-step model to recognise revenue when you deliver goods or services to customers, not when cash is received.
- Timing matters: Record revenue as you deliver your goods or services and use a recording method that reflects your actual progress.
- Track changes to contracts, discounts, and contract-related costs carefully, and make sure your accounting reflects them consistently.
- Accounting software and automation can streamline invoicing, project tracking, inventory, and deferrals to reduce manual work.
What is revenue recognition under AASB 15?
Revenue recognition under AASB 15 is the process of recording revenue when your business delivers the goods or services a customer has paid for, and for the amount you expect to receive. AASB 15 has applied to reporting periods beginning on or after 1 January 2018 and aligns with the international standard IFRS 15.
Australian Accounting Standard AASB 15 Revenue from Contracts with Customers explains when a business can record revenue for goods or services it’s provided, and how much it can record. It applies to most situations where a customer pays for goods or services, across most industries.
The goal is to make sure revenue is recorded when the business actually delivers what it promised, and for the amount it expects to receive in return.
Understanding AASB 15 helps you make better decisions about pricing, contract revenue terms, and the timing of recognised revenue, which may differ from when you invoice customers or receive payment.
5 steps of AASB 15
AASB 15 uses a five-step model to decide how much revenue to recognise and when. Working through each step in order helps ensure your revenue outcomes are accurate and consistent.
1. Identify the contract
A contract exists when there is an enforceable agreement with a customer, even if it’s informal. This usually means both parties have approved it, payment terms are clear, and payment collection is likely.
Contracts can be written, verbal, or implied by normal business practice. For example, a signed proposal or an accepted online checkout can both qualify as a contract in this step.
Record the contract details in your accounting system or supporting documentation, and ensure they’re reflected in your accounting entries.
2. Identify performance obligations
A performance obligation is your business’s promise to deliver a distinct good or service. A good or service is 'distinct' when the customer can benefit from it on its own and it’s not tightly bundled with other promises.
Some contracts have one obligation (for example, a monthly consulting retainer). Others have several, such as software plus setup, training, and ongoing support.
Identify your performance obligations and document them in your accounting system, contract records, or revenue working papers, and link them back to the customer contract.
3. Determine the transaction price
The transaction price is the amount you expect to be paid, not just what’s on the invoice. It includes fixed amounts and estimates of variable amounts, such as bonuses, penalties, or usage-based fees.
You must also consider whether financing is involved (for example, very long payment terms) and whether you’re collecting money on behalf of someone else, like GST.
Assess the total amount you expect to receive under the contract, including any variable amounts, and record the basis for your estimates in your accounting software or supporting documentation.
4. Allocate the transaction price
If a contract has more than one performance obligation, you must split the total price between them. This is usually based on stand-alone selling prices, that is, what you would charge for each item separately.
When stand-alone prices aren’t clear, you may need to estimate them using observable prices, margins, or cost-plus methods.
For example: if you sell software bundled with implementation but you don’t sell implementation separately, you might not have an observable stand-alone price. In this case, you may estimate the price using expected costs plus a reasonable margin, or by referencing similar services sold in the market.
5. Recognise revenue
You recognise revenue when, or as, you deliver the work, known as satisfying a performance obligation. This can happen over time or at a point in time, depending on how the customer receives the benefit.
To recognise revenue, record when each performance obligation is satisfied in your accounts, based on how and when the customer receives your goods or services.
Timing differences between invoicing, cash received, and reported revenue can also appear at this step. Track deferred or unearned revenue carefully to comply with AASB 15 and maintain accurate financial records for audits, tax, and business decisions.
When to recognise revenue over time or at a point in time
AASB 15 sets out criteria to show how a business delivers its goods or services: either over time or at a single point in time. It also explains methods to measure your progress delivering the work, so you know when to recognise revenue.
For each performance obligation in your business:
- Decide when revenue should be recognised, either over time or at a point in time.
- Record the revenue in your accounts accordingly.
- Document the basis for your decision in your accounting system or supporting contract files.
Over time criteria
You recognise revenue over time if one of these applies:
- The customer receives and consumes the goods and services as you deliver them, for example, if you’re providing ongoing services.
- Your work creates or enhances an asset the customer controls, such as building on their land.
- Your work has no alternative use to you, and you have a right to payment for work completed to date.
If none of the above criteria apply, you will need to recognise revenue at a point in time.
Point in time indicators
Using point in time indicators, recognise revenue at the moment the customer receives control of the goods or services.
Look for signs like:
- The customer has accepted the goods or service, like signing a delivery note or confirming receipt.
- Legal ownership has passed from the business to the customer; the invoice states the goods now belong to them.
- The customer becomes responsible for any damage or loss after you’ve delivered the goods or services.
- You can expect payment, for example the contract says you can invoice the customer once the goods are delivered.
Retail sales and one-off product deliveries often fall into this category.
Input and output methods to measure progress
When recognising revenue over time, you need to track how much of the goods or services you’ve delivered (your progress). You can do this using:
- Output methods: Measure progress by what the customer has received, such as milestones completed, units delivered, or project phases finished.
- Input methods: Measure progress by the effort or resources used, such as costs incurred, labour hours, or materials consumed.
How to apply these methods:
- Choose the method that best reflects how the work or goods are delivered to the customer.
- Track progress regularly and record revenue proportionally in your accounts.
- Keep supporting documentation to show your calculations.
This ensures compliance with AASB 15 and provides a clear audit trail.
Some other less-common methods can include:
- Surveying work performed: Estimate progress based on team or client assessments of work completed.
- Time-based methods: Use time elapsed to recognise revenue, such as for subscriptions or monthly service delivery.
- Units-of-delivery adjusted for quality or performance: for products or projects that you have adjusted to fix defects, rework, or change performance measures
- Milestone payment or achievement-based methods: Recognise revenue after meeting specific contractual milestones, often used in long-term construction or software contracts.
Handling variable pricing and contract changes
Not all contracts have fixed prices or stay the same from start to finish. AASB 15 sets out how to recognise revenue when prices vary or contracts are modified.
Variable consideration and constraint
You create variable consideration when your contract offers pricing that can change, such as discounts, rebates, performance bonuses, or penalties. This means the final amount you get paid could be higher or lower than the original price.
Decide and record how much you expect to receive under the contract. If there’s a chance any revenue amount could be taken back later, for example, a bonus not achieved or a rebate triggered, don’t include it in your revenue yet. This is called applying a constraint.
This prevents revenue being recognised too early and then needing to be reduced later.
Capitalising contract costs
You may incur costs to win or deliver a contract, such as sales commissions or setup costs.
Identify costs that relate directly to the contract and that you expect to recover, and spread them out over the contract period to avoid recording large upfront costs in financial statements before earning income.
For example, if you owe a $12,000 sales commission for winning a 12-month contract, expense $1,000 per month to recognise revenue evenly over the 12 months.
Contract revenue modifications
Contract modification occurs when the scope or price changes after approval.
Review any contract modification to determine whether it creates a new contract or changes the existing one:
- If the customer agrees to buy extra goods or services that can stand on their own, and you charge your usual price for them, then this is an additional purchase or upsell and requires a new contract.
- If the additional work is closely linked to what you’re already delivering, or is priced differently from your stand-alone rate, adjust the existing contract and update your revenue recognition accordingly.
Examples for common Australian small business contracts
Seeing how the rules work in everyday contracts makes it easier to apply them correctly. Use the examples below to decide when to recognise revenue and what to check in your own contracts.
Professional services retainers
If you charge a monthly retainer for ongoing services, treat the work as one service delivered over time.
Recognise revenue evenly over the period you provide the service, not when you send the invoice or receive payment.
If the client doesn’t use all available hours, only recognise extra revenue if the contract clearly allows you to do so.
Construction and long-term jobs
Construction and long-term projects often meet the over-time criteria, especially when you build on land the customer owns or controls.
Recognise revenue as the work progresses, usually by tracking costs incurred compared to total expected costs.
Before including variations or claims in revenue, confirm they are approved and you expect to recover the revenue amount.
SaaS subscriptions
SaaS subscriptions usually involve ongoing access, so these businesses typically recognise revenue over the subscription period.
If you charge for setup or implementation, assess whether that work is a separate service and recognise it separately if needed.
When customers pay upfront, record the amount as deferred revenue and recognise it gradually as you deliver the service.
Retail and e-commerce
For retail and online sales, businesses recognise revenue when the customer receives the goods or collects them.
Estimate the impact of expected returns or refunds and reduce revenue accordingly.
Treat gift cards as a liability until the customer redeems them, or until you can reasonably recognise unused balances.
Manufacturing and bundled goods
If you sell bundles, such as equipment with maintenance or support, separate each part of the sale in your revenue recognition.
Allocate the price to each component and recognise revenue for each one based on how and when you deliver it.
If you skip this step, you risk recording income at the wrong time and recognising revenue too early.
Simplify revenue recognition with Xero
While AASB 15 sets the rules, tools like Xero help apply them consistently. Tracking invoices, deferred revenue, and contract terms in one system reduces manual spreadsheets and errors.
Using repeating invoices, tracking categories, and balance sheet accounts for unearned revenue can make AASB 15 compliance far more manageable for small teams.
Ready to get started? Get one month free and see how Xero fits your business.
FAQs on revenue recognition under AASB 15
Find out about key revenue recognition principles and how to apply revenue recognition in accounting.
Is AASB 15 the same as IFRS 15?
Yes. AASB 15 is the Australian equivalent of IFRS 15, with the same core principles and five-step model: identify the contract, identify performance obligations, determine transaction price, allocate transaction price, recognise revenue.
How is revenue recognition different from cash accounting?
Revenue or income recognition focuses on when goods or services are delivered, not when cash is received. Cash accounting records income only when money hits the bank.
When should I recognise revenue over time?
Recognise revenue over time when the customer receives benefits as you deliver goods or services, or controls the asset while it is being created. For example, many consulting projects, service contracts, and construction agreements meet this test.
Do small businesses need specialised software for revenue recognition?
Many small businesses can manage AASB 15 without expensive or complex software. Cloud accounting tools make it easier to track contracts, measure progress, and record revenue accurately.
By setting up contracts correctly and keeping supporting documentation, you can ensure your recognised revenue complies with AASB 15 and more easily maintain a clear audit trail.
What disclosures might small entities need under AASB 15?
Even small businesses may need to explain the types of revenue they earn, contract balances, and any key judgements they have made, such as when to recognise revenue or how they measure progress on work delivered.
The exact level of detail depends on your reporting requirements under the AASB.
Get one month free
Purchase any Xero plan, and we will give you the first month free.