A software company invoices a customer 1,200 for a 12-month subscription on 1 January and collects the cash the same day.
Under IFRS 15 the service is delivered over time, so revenue on 1 January is zero. Cash is up 1,200 and a contract liability of 1,200 sits on the balance sheet.
Each month, 100 moves from liability to revenue. By 31 December the liability is gone.
Deferred revenue, IFRS 15
1,200 collected on day one, earned over twelve months
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revenue recognised to datecontract liability
doubleentry.lifeIllustrative
| Date | Cash received | Revenue to date | Contract liability |
|---|---|---|---|
| 1 Jan | 1,200 | 0 | 1,200 |
| 31 Mar | 1,200 | 300 | 900 |
| 30 Jun | 1,200 | 600 | 600 |
| 30 Sep | 1,200 | 900 | 300 |
| 31 Dec | 1,200 | 1,200 | 0 |
Illustrative case, round numbers.
A company growing on upfront annual billing shows cash flow running ahead of revenue. The gap is that liability line.
Deferred revenue is cash the company has already taken and still owes in service.