- A subscription is a promise to provide the service over time, so under IFRS 15 its revenue is recognised evenly over the subscription, not when it's invoiced or paid.
- In the example, one £120k annual contract starting on 1 April gives £120k of ARR and £120k of cash by 31 December, but only £90k of revenue. The other £30k is deferred revenue, a liability.
- Billing annually up front doesn't change revenue at all. It changes cash: £30k more cash by the year end than quarterly or monthly billing.
- ARR is a KPI, not an accounting number: it annualises the recurring contracts in force at a date.
Software-as-a-service (SaaS) finance teams track four numbers that sound alike and rarely match: annual recurring revenue (ARR), invoices, cash and revenue. This post follows a single example contract through a year to show why, using IFRS 15 Revenue from Contracts with Customers. The figures are illustrative.
The contract: a customer signs a one-year subscription for £120,000, running from 1 April 2026 to 31 March 2027. It's invoiced annually in advance on 1 April, payable on that date, and the customer pays on 15 May. The company's financial year ends on 31 December.
Revenue follows the service, not the invoice
IFRS 15 recognises revenue when (or as) the company satisfies its performance obligations. Access to a software platform for a year is a service provided continuously, so the obligation is satisfied over time and the revenue is recognised evenly: £10,000 a month. The invoice date and the payment date don't change that. They only decide what sits on the balance sheet in the meantime.
What sits on the balance sheet
On 1 April the invoice is due, so the company has an unconditional right to £120,000: a trade receivable. It hasn't provided any service yet, so the same £120,000 is a contract liability, usually called deferred revenue. Each month, £10,000 moves from deferred revenue into revenue. When the customer pays on 15 May, the receivable becomes cash.
| Date | Entry | Debit | Credit | £ |
|---|---|---|---|---|
| 1 Apr | Invoice the annual fee | Trade receivables | Contract liability (deferred revenue) | 120,000 |
| 30 Apr, and each month end | Recognise a month of service | Contract liability | Revenue | 10,000 |
| 15 May | Customer pays | Cash | Trade receivables | 120,000 |
VAT is left out to keep the example simple.
At the year end: four different numbers
On 31 December the contract has run for nine of its twelve months. ARR is £120,000, because the contract is in force and recurring. Cash collected is £120,000. Revenue for the year is £90,000. The remaining £30,000 is still deferred revenue, and it becomes revenue between January and March.
ARR isn't revenue
ARR isn't defined by IFRS. It's a management KPI: the annualised value of recurring contracts in force at a date. It's useful for tracking growth, because a new contract adds its full annual value on the day it starts. But it counts revenue that hasn't been earned yet, and it ignores one-off fees and the timing of cancellations. That's why investors look at ARR and audited revenue side by side.
Billing frequency changes cash, not revenue
Billing the same contract quarterly or monthly in advance leaves revenue unchanged at £90,000 for the year, because the service provided is the same. What changes is cash: annual upfront billing collects £30,000 more by 31 December, and that £30,000 sits on the balance sheet as deferred revenue. That's why SaaS businesses offer discounts for paying annually: the customer funds part of the company's working capital.
Where it gets harder
- Set-up and onboarding fees. If set-up doesn't transfer a distinct service to the customer, the fee is part of the subscription and is recognised over the contract, not when it's invoiced.
- Multi-year contracts with discounts or free months. The transaction price is spread across the whole service period, so a free first month doesn't mean a month without revenue.
- Usage-based pricing. Variable fees are recognised as the usage happens, with limits on estimating them in advance.
- Cancellable contracts. If the customer can cancel before the invoice is due, there may be no receivable or contract liability until payment is due.
Each of these depends on the contract terms, so check the details of yours with your auditor.
Make these charts with your own numbers
FP&A teams use charts like these in board packs and investor updates to explain why cash, revenue and ARR move differently. Paste a month-by-month table into the line chart race, the waterfall chart or the grouped bar chart and download it as a video, image or PowerPoint slide.
Sources and method
Illustrative example, not advice. A single non-cancellable one-year subscription for £120,000, invoiced on 1 April 2026 with payment due on that date, paid on 15 May 2026, with revenue recognised evenly over the twelve months as a service provided over time. VAT, financing components and contract costs are ignored. Billing comparisons assume each invoice is raised in advance and paid on its due date.