When should revenue be recognized according to the revenue recognition criteria?

Revenue should be recognized when performance obligations are met because this approach aligns with the principles set out in the IFRS 15 and ASC 606 revenue recognition standards. These standards emphasize that revenue should be recognized when control of the goods or services is transferred to the customer, reflecting the completion of a performance obligation. This ensures that the revenue recognized corresponds accurately to the actual economic activity that has occurred, providing a clearer picture of a company’s financial performance and position.

By focusing on the fulfillment of performance obligations, businesses can provide more relevant information to financial statement users about when they have truly earned revenue, which is essential for understanding the timing of cash flows and profitability. This principle is more reliable than revenue recognition at cash receipt or billing, both of which could distort the timing and relevance of revenue reporting. Additionally, recognizing revenue at the end of the accounting period does not take into account the actual transfer of goods or services, which is critical in determining revenue.