When are free trials part of a contract?
IFRS 15 applies only once there is a contract with commercial substance, in which both parties are committed and the customer will pay. A trial that the user can walk away from without paying is not a contract, so free trials create no revenue, and the costs of hosting and supporting trial users are expensed as incurred, usually as marketing. When the user converts to a paid plan, the contract starts; the trial period does not create revenue after the event. If, instead, the customer signs a paid commitment at the start and the first months happen to be free, the free months are part of the contract. Costs of running trials are generally not capitalised as costs to fulfil a contract, because they are not tied to a specific contract.
How are free months in a committed contract recognised?
A customer signs a non-cancellable 12-month subscription on 1 January: the first 3 months are free, then it pays US$ 100 a month for 9 months. The transaction price is 900 for a year of access delivered evenly, so revenue is 75 a month, including the free months.
| US$ | Billed | Revenue | Contract asset at quarter end |
|---|---|---|---|
| Quarter 1 | 0 | 225 | 225 |
| Quarter 2 | 300 | 225 | 150 |
| Quarter 3 | 300 | 225 | 75 |
| Quarter 4 | 300 | 225 | 0 |
| Total | 900 | 900 |
The contract asset of 225 at the end of the first quarter is the revenue earned but not yet billed; it unwinds by 75 a quarter as billing runs above revenue. If the customer can cancel without penalty until the end of the free months, those months work like a trial: no enforceable contract exists until the paid commitment starts, and the 900 is recognised over the 9 paid months. The same analysis applies to price ramps in multi-year deals.
How are introductory discounts on monthly plans treated?
On a monthly plan that the customer can cancel at any time, each month is in effect a separate contract, so revenue generally follows billing: an offer of half price for three months gives revenue of half the normal fee in those months. Strictly, the right to keep the introductory price for months two and three is a discount the customer obtains only by signing up in month one, so it can be a material right, and part of month one's fee would be deferred to the later discounted months. Most companies find the effect immaterial for short offers, but long or deep introductory discounts need the analysis. See performance obligations.
When is a discount on future purchases a material right?
A customer pays US$ 1,200 for an annual plan and receives an option to renew next year at 40% off, a discount the company does not give to other customers. The company expects 60% of such customers to renew. The stand-alone selling price of the option is the discount of 480 multiplied by the 60% likelihood: 288.
| US$ | Stand-alone selling price | Allocated price | Recognised |
|---|---|---|---|
| Year 1 subscription | 1,200 | 968 | Evenly over year 1 |
| Renewal discount option | 288 | 232 | On renewal, or when the option lapses |
| Total | 1,488 | 1,200 |
If the customer renews, the 232 deferred is recognised over year 2 with the renewal fee. IFRS 15 also offers a practical alternative for renewals of similar services: allocate the price to the renewal services expected to be provided. A discount that any new customer could get without the first contract is not a material right, but simply a marketing offer.
How are freemium models treated?
Users of a free tier who pay nothing have no contract with the company, so hosting them is an expense. A paid plan that gives the paying customer's own non-paying users access is part of that paid contract. A promise to paying customers of future features at no extra charge can be a performance obligation if it is specific, so companies take care with roadmap commitments in sales contracts.
What about money-back guarantees?
A right to cancel within 30 days for a full refund makes part of the consideration variable. Revenue is still recognised as the service is provided, but only for the amount the company expects to keep, with a refund liability for expected refunds based on experience. See variable consideration.
How does US GAAP differ?
ASC 606 gives the same answers on trials, free months, termination rights and material rights. App store trials and subscriptions follow the same rules; see app store revenue, SaaS revenue recognition and SaaS accounting.
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Questions people ask
Do free trials create revenue under IFRS 15?
No. A trial the user can leave without paying is not a contract, so there is no revenue and the costs are expensed.
How are free months in a 12-month contract recognised?
The total price for the committed term is recognised evenly over all twelve months, with a contract asset while revenue exceeds billing.
Are introductory discounts on monthly plans deferred?
Usually not; revenue follows billing, although a right to keep a deep or long discount can be a material right.
When is a renewal discount a material right?
When it gives a discount the customer would not get without the original contract, such as one not offered to other customers.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IFRS Foundation: IFRS 15 Revenue from Contracts with Customers
- FASB Accounting Standards Codification: Topic 606, Revenue from Contracts with Customers
- Financial Accounting Standards Board: Revenue recognition
Rules and fees change. If you are reading this long after October 8, 2026, confirm the figures with the source before you rely on them.
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This guide is general information. It is not tax or legal advice for your situation.