The 5-step approach to revenue recognition

In this step, an entity should analyse which contracts must be combined under IFRS 15 and how to treat the modification of contracts.

For example, should an additional construction contract to construct a footbridge near a housing estate be combined with the main contract for the construction of the housing estate or be treated as a separate contract?

In this step, an entity should:

• determine whether goods or a service may be separated;
• determine whether a good or service is distinct in the context of the contract.

For example, the sales of a machine with assembly and maintenance services — which of these performances form a single obligation and which of them are separate and independent performances. 

According to the Standard, the price of the transaction (individual contractual performances) should take into account:

• the variable compensation (bonuses, refunds and returns of goods, penalties, discounts, quantity discounts);
• the time value of money;
• cash consideration (barter);
• the consideration paid to the customer (e.g. covering the cost of adjustments needed to use purchased products).

The transaction price (taking into account the components identified in Step 3, is usually allocated by reference to their relative standalone selling prices).

Revenue is recognised when (or as) the entity satisfies performance obligations (goods and services are transferred).

A good is transferred and a service is performed when the customer gains control of them (‘risks and rewards’ have been abandoned).