The Five-Step Model
IFRS 15 requires revenue to be recognised through a five-step model: identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price to each performance obligation, and recognise revenue as each obligation is satisfied.
In principle this sounds mechanical. In practice, steps two, three, and five are where most of the technical judgment — and most of the risk of getting it wrong — sits.
Identifying Performance Obligations
A contract can contain more performance obligations than it appears to on the surface. A software licence bundled with implementation services, ongoing support, and future upgrades may need to be unbundled into separate performance obligations, each recognised on its own pattern.
The test is whether a good or service is 'distinct' — capable of being used on its own or with readily available resources, and separately identifiable from other promises in the contract. Getting this wrong typically means recognising revenue too early.
Variable Consideration
Discounts, rebates, refunds, credits, performance bonuses, and penalties all fall under variable consideration. IFRS 15 requires an estimate of variable consideration using either the expected value method or the most likely amount method — whichever better predicts the amount the business will be entitled to.
Critically, variable consideration is only included in the transaction price to the extent it is highly probable that a significant reversal will not occur once the uncertainty resolves. This constraint is frequently under-applied in practice, inflating revenue prematurely.
Point in Time vs Over Time
Revenue is recognised over time only if one of three criteria is met: the customer simultaneously receives and consumes the benefit as the entity performs; the entity's performance creates or enhances an asset the customer controls as it's created; or the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
If none of these apply, revenue is recognised at the point in time control transfers to the customer — which is not always the same moment as delivery, shipment, or invoicing.
Principal vs Agent
When a third party is involved in providing goods or services to the customer, the business must determine whether it is acting as principal (recognising revenue gross) or agent (recognising only its commission or fee, net). The determining factor is control — specifically, whether the entity controls the good or service before it transfers to the customer.