The IFRS 15 Five-Step Model
This is the core framework. Master these five steps, and you can solve almost any revenue recognition problem.
1Identify the Contract with the Customer
Before you can recognize revenue, you must have a valid contract. A contract meets all 5 of these criteria:
- Approved by all parties (oral, written, or implied)
- Each party's rights can be identified
- Payment terms can be identified
- The contract has commercial substance
- Collection of consideration is probable
Collectability: You only look at the customer's ability and intention to pay. If it's not probable, you don't have a contract under IFRS 15.
2Identify the Performance Obligations (POs)
A PO is a promise to transfer a good or service. The key is determining if the goods/services are Distinct.
Criteria for a Distinct PO:
Customer can benefit from the good/service on its own or with other readily available resources.
The promise to transfer is distinct from other promises in the contract (not highly integrated or complexly interdependent).
Common Example: A laptop (PO 1) and a 1-year software license (PO 2). They are distinct because the customer can use the laptop without the specific software and vice versa.
3Determine the Transaction Price
This is the amount the entity expects to be entitled to receive. It's not always just a flat fee. You must consider:
4Allocate Transaction Price to POs
If a contract has multiple POs, you must split the total price between them based on their Relative Stand-Alone Selling Prices (SASP).
Allocation Example
Total Bundle Price charged: R1,200
| PO Item | SASP | Calculation | Allocation |
|---|---|---|---|
| Handset | R1,000 | 10/15 x 1200 | R800 |
| Service | R500 | 5/15 x 1200 | R400 |
| TOTAL | R1,500 | - | R1,200 |
5Recognize Revenue
Revenue is recognized when (or as) the entity satisfies a PO by transferring control of the good or service.
Over Time
Recognize revenue as work progresses if ANY of these apply:
- Customer simultaneously consumes benefit (e.g., cleaning service)
- Entity creates/enhances asset customer controls
- Asset has no alternative use AND entity has right to payment for work done
Point in Time
If it doesn't meet 'Over Time' criteria. Look for indicators of control transfer:
- Legal title transferred
- Physical possession transferred
- Customer has significant risks and rewards of ownership
- Customer has accepted the asset
Summary
The five-step model is a logical chain. If you miss a step or misidentify a PO, your entire revenue recognition will be incorrect. Always work through the steps in order!