What is unearned revenue (a contract liability) under IFRS, and why does it matter?
Unearned revenue is money you’ve received from a customer before you’ve delivered the related goods or services. In accounting terms, it’s commonly treated as a liability—because you still “owe” performance to the customer.
Under IFRS 15, revenue is recognised when control of goods or services transfers to the customer, in an amount reflecting what the entity expects to be entitled to.
When you’ve been paid in advance, that usually creates a contract liability until you fulfil the obligation.
Everyday examples
- Annual software subscription billed upfront
- Maintenance contracts paid at the start of the year
- Training delivered over time, paid in advance
- Deposits for services that will be performed later
Why it matters
Unearned revenue affects:
- Profit timing: cash comes in now, but revenue is recognised later.
- Balance sheet health: large contract liabilities can look “debt-like” to non-finance readers, even though they represent future service delivery.
- Forecasting accuracy: if you don’t track deferred/unearned revenue properly, you can overstate short-term performance.
- Operational planning: finance and delivery teams need the same view of “what we owe customers.”
How it flows through the accounts
A simplified flow looks like this:
- Customer pays upfront → Debit cash, credit unearned revenue (liability)
- You deliver service over time → Debit unearned revenue, credit revenue
The “over time” part is especially important for subscription and service businesses. IFRS 15 provides principles for recognising revenue as performance obligations are satisfied.
Common pitfalls
- Recognising all revenue on invoice date even when delivery is later
- Not aligning revenue schedules with contract terms
- Missing renewals/upsells that change performance obligations
- Poor linkage between billing, contracts, and revenue recognition
For groups with multiple entities, unearned revenue also needs consistent treatment across companies so that consolidation and management reporting stay reliable.
- Is unearned revenue the same as deferred revenue?
Often used interchangeably in practice—both describe cash collected before earning revenue. - Does unearned revenue mean the business is doing badly?
Not necessarily. It can indicate strong cash collection and prepaid demand—so long as delivery is managed well. - Where does it appear in the financial statements?
Typically under current (and sometimes non-current) liabilities, depending on when you expect to deliver.
