Key Points
- Accrued revenue arises when performance precedes invoicing, creating a contract asset on the balance sheet.
- On mid-market engagements, accrued revenue balances at year-end often represent 5% to 15% of quarterly revenue.
- Misstating the cut-off date for revenue accruals is one of the fastest routes to a modified opinion on revenue completeness.
- The auditor tests accrued revenue by matching post-year-end invoices back to pre-year-end delivery or service evidence.
What is Accrued Revenue?
IFRS 15.107 requires an entity to recognise a contract asset when it transfers goods or services to a customer before the customer pays or before payment is due. The contract asset represents the entity's right to consideration in exchange for performance already completed. Once the right to consideration becomes unconditional (typically when the entity issues an invoice), the contract asset reclassifies to a trade receivable.
The practical trigger is timing. A consulting firm completes 40 hours of advisory work in December but invoices in January. A manufacturer ships goods on 28 December under DDP terms, with the invoice dated 3 January. In both cases, revenue recognition under IFRS 15.31–38 follows the satisfaction of the performance obligation, not the invoice date. The entity records accrued revenue at year-end.
For auditors, the risk sits in completeness and existence. ISA 315.A232 identifies revenue recognition as a presumed fraud risk. Testing accrued revenue means confirming that each accrued balance reflects a genuine performance obligation satisfied before the reporting date. The auditor examines delivery notes, timesheets, completion certificates, and post-year-end invoicing patterns. Where the entity applies the percentage-of-completion method on long-term contracts, the accrued revenue balance depends on management's estimate of progress, which introduces estimation risk under ISA 540.
Worked example
Client: Irish SaaS company, FY2025, revenue €8M, IFRS reporter. O'Sullivan sells annual software licences with bundled implementation services. Implementation projects typically run four to eight weeks. The company invoices the full contract price upon licence activation, but IFRS 15 requires separate recognition of the implementation service over the service period.
Step 1 — Identify contracts with accrued revenue at 31 December 2025
The auditor selects all contracts signed between 1 November and 31 December 2025 where implementation was in progress at year-end. Fourteen contracts meet this criterion. Total contract value across the fourteen is €1.2M, of which €340,000 relates to the implementation component based on the entity's standalone selling price allocation under IFRS 15.76–80.
Documentation note: record the population of contracts examined, the basis for identifying contracts with in-progress implementation, the standalone selling price allocation method used by the entity, and the source documents (signed contracts, project status reports) reviewed.
Step 2 — Measure accrued revenue for implementation services
For each of the fourteen contracts, the auditor obtains the project manager's progress report as at 31 December 2025. O'Sullivan measures progress using an input method (hours incurred versus total estimated hours). Across the fourteen contracts, average completion is 55%, producing accrued revenue of €187,000 (55% of €340,000). Management has recorded €179,000 in the general ledger.
Documentation note: record the progress measurement method, the hours data obtained from the timesheet system, the estimated total hours per contract (and who approved them), and the calculation of accrued revenue per contract. Note the €8,000 difference between the auditor's calculation and the recorded balance.
Step 3 — Evaluate the difference
The €8,000 gap traces to two contracts where project managers updated their completion estimates in early January but the finance team used the November progress reports for the December accrual. The auditor recalculates using the December timesheets. One contract was 60% complete (not 45% as recorded) and the other was 70% complete (not 55%).
Documentation note: record the root cause of the difference, the corrected completion percentages with supporting timesheet evidence, and the proposed adjustment. Note whether the €8,000 misstatement is individually or cumulatively material when aggregated with other uncorrected misstatements per ISA 450.A5.
Step 4 — Confirm post-year-end invoicing supports the accrual
The auditor traces ten of the fourteen contracts to invoices issued in January and February 2026. All ten invoices include both the licence fee and the implementation fee, confirming the contractual arrangement. The remaining four contracts were invoiced in March; the auditor confirms the delay is consistent with O'Sullivan's billing cycle for smaller contracts.
Documentation note: record the post-year-end invoices examined, the dates of invoicing, the amounts, and the reconciliation to the accrued revenue balance. Note any contracts where invoicing was delayed beyond normal billing cycles.
Conclusion: the accrued revenue balance of €187,000 (after adjustment) is defensible because each contract's progress is supported by timesheet data, the standalone selling price allocation follows IFRS 15.76–80, and post-year-end invoicing confirms the contractual basis for the accrued amounts.
Why it matters in practice
- Teams frequently test accrued revenue by agreeing amounts to post-year-end invoices alone, without verifying that the performance obligation was satisfied before the reporting date. IFRS 15.38 ties revenue recognition to the transfer of control, not to invoicing. An invoice issued in January for work completed in January does not support a December accrual, even if management recorded it in December.
- On engagements involving percentage-of-completion estimates, auditors often accept management's progress reports without independently verifying the inputs. ISA 540.13(a) requires the auditor to evaluate whether the entity's method for developing the estimate is appropriate. For input-based methods, that means testing hours incurred against timesheets (not just project manager assertions) and challenging the reasonableness of total estimated hours.
Accrued revenue vs. [deferred revenue](/glossary/deferred-revenue)
| Dimension | Accrued revenue | Deferred revenue |
|---|---|---|
| Balance sheet classification | Asset (contract asset or accrued receivable) | Liability (contract liability) |
| Trigger | Entity performs before the customer pays or is invoiced | Customer pays before the entity performs |
| Revenue recognition timing | Revenue already recognised; cash collection follows | Revenue not yet recognised; cash already received |
| Audit focus | Completeness and existence of performance before year-end | Occurrence and accuracy of the deferral calculation |
| Common example | Consulting hours worked in December, invoiced in January | Annual subscription fee collected in October for a 12-month licence period |
Accrued revenue and deferred revenue sit on opposite sides of the same timing question. Accrued revenue means the entity has performed but not yet billed. Deferred revenue means the entity has billed (or collected cash) but not yet performed. The auditor tests them in opposite directions: for accrued revenue, confirm performance occurred before year-end; for deferred revenue, confirm performance had not yet occurred.
Related terms
Frequently asked questions
What is the difference between accrued revenue and a contract asset?
Under IFRS 15.107, a contract asset exists when the entity's right to consideration is conditional on future performance or another condition besides the passage of time. Accrued revenue is the commonly used term for this balance in practice. Once the right becomes unconditional (typically upon invoicing), the amount reclassifies to a trade receivable under IFRS 15.108.
How do I audit accrued revenue on a long-term contract?
Obtain the contract, identify each performance obligation under IFRS 15.22, and determine the method used to measure progress (output or input). Test the inputs to the progress calculation independently. For input methods, agree hours or costs to underlying records. For output methods, inspect completion certificates or deliverable acceptances. ISA 540.18 requires the auditor to evaluate the reasonableness of management's assumptions underpinning the estimate.
When should accrued revenue be reversed?
The accrued balance reverses when the entity invoices the customer, because the contract asset reclassifies to a trade receivable at that point. IFRS 15.108 specifies that a receivable exists when the right to consideration becomes unconditional. If the entity determines that collection is no longer probable, the accrued revenue may need to be derecognised or impaired under IFRS 9.5.5, depending on the stage of the contract.