The Five-Step Model: A Detailed Walkthrough

Step 1: Identify the Contract with a Customer

A contract is an agreement that creates enforceable rights and obligations. To apply IFRS 15, a contract must be approved, the parties' rights/payment terms must be identifiable, it must have commercial substance, and collection of consideration must be probable.

Step 2: Identify the Performance Obligations

A performance obligation is a promise to transfer a distinct good or service to the customer.

• "Distinct" means:
  1. The customer can benefit from the good/service on its own or with other readily available resources.
  2. The promise to transfer is separately identifiable from other promises in the contract (not highly dependent or interrelated).

Example: Selling a phone with a one-year service plan. The phone is distinct; the service is distinct. They are separate performance obligations.

Step 3: Determine the Transaction Price

The transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring goods/services. Key considerations include:

• Variable Consideration (discounts, rebates, bonuses): Estimate using the expected value or most likely amount, but only include to the extent it is highly probable that a significant reversal won't occur later.
• Time Value of Money: If the contract includes a significant financing component, adjust the transaction price (recognize interest).
• Non-cash Consideration: Measure at fair value.
• Consideration payable to a customer (e.g., slotting fees): Treated as a reduction of the transaction price.

Step 4: Allocate the Transaction Price to Performance Obligations

Allocate based on the standalone selling prices of each distinct good/service. If not directly observable, estimate it.

Step 5: Recognize Revenue When (or As) Performance Obligations are Satisfied

This is the core recognition event. A performance obligation is satisfied when control of the good/service transfers to the customer.

• Recognize revenue at a point in time (e.g., sale of a car, a one-time service). Indicators include: customer has legal title, physical possession, significant risks/rewards, or has accepted the asset.
• Recognize revenue over time if one of these criteria is met:
  1. Customer receives and consumes benefits as the entity performs.
  2. Entity's performance creates/enhances an asset the customer controls as it is created.
  3. Entity's performance does not create an alternative use and the entity has an enforceable right to payment for performance completed to date.
  If revenue is recognized over time, measure progress toward satisfaction (e.g., output or input methods).

Example - Over Time: A construction contract where the customer controls the building as it is built (criterion 2). Revenue is recognized as work progresses.