Revenue Recognition
Flowchart

Understanding the IFRS 15 Five-Step Revenue Recognition Model

IFRS 15 Revenue from Contracts with Customers replaced IAS 18 Revenue, IAS 11 Construction Contracts, and their related interpretations with a single, comprehensive revenue recognition framework. The standard applies to all contracts with customers, with limited exceptions for leases (IFRS 16), insurance contracts (IFRS 17), and financial instruments (IFRS 9). At its core, IFRS 15 establishes a five-step model that entities apply to determine when and how much revenue to recognise. With 129 paragraphs in the main body and extensive application guidance in Appendix B, manually navigating the standard for each contract is impractical — which is precisely why an interactive decision tree approach is essential.

Step 1: Identify the Contract (IFRS 15.9–21)

A contract is an agreement between two or more parties that creates enforceable rights and obligations. IFRS 15.9 requires five criteria to all be met before a contract exists: the parties have approved the contract and are committed to perform, each party's rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable the entity will collect the consideration. If any criterion is not met, IFRS 15.15 requires the entity to recognise consideration received only as a liability until the criteria are met or the contract is terminated. This step also addresses contract combinations (IFRS 15.17) — where multiple contracts entered into near the same time should be treated as one — and contract modifications (IFRS 15.18–21), which are accounted for as a separate contract, prospectively, or as a cumulative catch-up depending on whether the modification adds distinct goods or services at commensurate pricing.

Step 2: Identify the Performance Obligations (IFRS 15.22–30)

At contract inception, the entity assesses each promised good or service and identifies those that are distinct — forming separate performance obligations. A good or service is distinct under IFRS 15.27 when it meets two criteria: the customer can benefit from it on its own or together with readily available resources (capable of being distinct), and the promise to transfer it is separately identifiable from other promises in the contract (distinct within the contract context). IFRS 15.29 provides guidance on when promises are not separately identifiable, including significant integration, significant modification or customisation of other promises, and high interdependence. Where goods or services are not distinct, they must be combined with other promises until the resulting bundle is distinct (IFRS 15.30). The series provision in IFRS 15.22(b) treats a series of substantially similar distinct goods or services with the same transfer pattern as a single performance obligation.

Step 3: Determine the Transaction Price (IFRS 15.47–72)

The transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring goods or services. Five components may affect the price: variable consideration (IFRS 15.50–55), estimated using the expected value or most likely amount method, subject to a constraint that limits inclusion to amounts highly probable not to result in a significant reversal (IFRS 15.56); significant financing components (IFRS 15.60–65), with a practical expedient for contracts where payment occurs within one year of transfer (IFRS 15.63); non-cash consideration measured at fair value (IFRS 15.66); and consideration payable to a customer, which reduces the transaction price unless the payment is for a distinct good or service (IFRS 15.70).

Step 4: Allocate the Transaction Price (IFRS 15.73–90)

When a contract has multiple performance obligations, the transaction price must be allocated to each based on their relative standalone selling prices (SSP). IFRS 15.76–80 provides four methods for estimating SSP: observable price when sold separately (preferred), adjusted market assessment approach, expected cost plus margin approach, and residual approach (permitted only when the SSP is highly variable or uncertain, per IFRS 15.79). IFRS 15.82 permits allocation of a discount entirely to specific performance obligations when certain criteria are met, and IFRS 15.84–86 permits variable consideration to be allocated entirely to a specific performance obligation if the variable payment relates specifically to satisfying that obligation.

Step 5: Recognise Revenue (IFRS 15.31–45)

Revenue is recognised when the entity satisfies a performance obligation by transferring a promised good or service to the customer — that is, when the customer obtains control. IFRS 15.35 provides three over-time criteria: if any one is met, revenue is recognised over time using an appropriate progress measurement method (output or input methods, per IFRS 15.B15–B19). If none of the over-time criteria are met, revenue is recognised at the point in time when control transfers, using the indicators in IFRS 15.38 — including present right to payment, transfer of legal title, physical possession, risks and rewards, and customer acceptance.

IFRS 15 Revenue Recognition Audit Toolkit — free PDF

Complete audit toolkit: IFRS 15 five-step decision flowchart poster (A3 printable), contract assessment working paper template, performance obligation identification checklist, SSP allocation worksheet, over-time vs. point-in-time determination guide, industry-specific application notes for 12 sectors, and ISA 240/315 fraud risk assessment for revenue.

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