Last reviewed: July 2026.
IFRS 15 Revenue from Contracts with Customers establishes a single model for recognising revenue from customer contracts. Its core principle is to recognise revenue in a way that depicts the transfer of promised goods or services in an amount reflecting the consideration the entity expects to receive.
Revenue is not recognised merely because cash is received, an invoice is issued or a contract is signed. The entity applies the five-step model and considers collectability, performance obligations, variable consideration, allocation and transfer of control.
The IFRS 15 five-step model
| Step | Question | Typical output |
|---|---|---|
| 1. Identify the contract | Are approved, enforceable rights, payment terms and commercial substance present, and is collection probable? | A contract accounted for under IFRS 15. |
| 2. Identify performance obligations | Which promised goods or services are distinct? | Separate units of account for revenue recognition. |
| 3. Determine transaction price | What consideration is expected, including variable and financing effects? | Estimated consideration subject to constraints. |
| 4. Allocate transaction price | How should consideration be allocated using relative stand-alone selling prices? | Amount assigned to each performance obligation. |
| 5. Recognise revenue | When does control transfer? | Revenue at a point in time or over time. |
Step 1: identify the contract
A contract is within the model when the parties approve it, rights and payment terms can be identified, it has commercial substance and collection of consideration is probable under the Standard’s criteria. Contracts may be written, oral or implied by customary business practices.
Contracts entered into at or near the same time with the same customer may need to be combined when they are negotiated as a package, consideration depends on the other contract, or promised goods or services form one performance obligation.
Step 2: identify performance obligations
A performance obligation is a promise to transfer a distinct good or service, or a distinct series. A promise is distinct when the customer can benefit from it and it is separately identifiable from other promises in the contract.
For example, equipment, installation, training and maintenance may be separate performance obligations or part of an integrated combined output depending on the facts.
Step 3: determine the transaction price
The transaction price includes fixed consideration and estimates of variable consideration such as bonuses, discounts, refunds, rebates, penalties and returns. Variable consideration is constrained so that a significant revenue reversal is not highly probable when the uncertainty is resolved.
Consider significant financing components, non-cash consideration and consideration payable to the customer. Amounts collected on behalf of third parties are not revenue.
Step 4: allocate the transaction price
Allocate consideration to performance obligations based on relative stand-alone selling prices at contract inception. Observable prices are preferred. When a price is not directly observable, estimate it using an appropriate method such as adjusted market assessment, expected cost plus margin, or a residual approach when the requirements are met.
Discounts and variable amounts may sometimes be allocated to a specific performance obligation when the criteria are satisfied.
Step 5: recognise revenue when control transfers
Revenue is recognised over time when one of the over-time criteria is met; otherwise it is recognised at a point in time. Over-time criteria include situations where the customer simultaneously receives and consumes benefits, controls the asset as it is created, or the asset has no alternative use and the entity has an enforceable right to payment for performance completed.
For point-in-time recognition, indicators include present right to payment, legal title, physical possession, risks and rewards, and customer acceptance.
Contract assets, receivables and contract liabilities
- Receivable: an unconditional right to consideration, with only the passage of time required before payment.
- Contract asset: a right to consideration that depends on something other than time, such as completing another performance obligation.
- Contract liability: an obligation to transfer goods or services for which consideration has been received or is due.
Worked allocation example
A company sells equipment and one year of support for a combined price of 90,000 CU. Stand-alone selling prices are 80,000 CU for equipment and 20,000 CU for support. The total stand-alone value is 100,000 CU.
- Equipment allocation: 90,000 × 80/100 = 72,000 CU
- Support allocation: 90,000 × 20/100 = 18,000 CU
If control of the equipment transfers on delivery, 72,000 CU is recognised then. The 18,000 CU support revenue is recognised over the service period as the obligation is satisfied.
Principal versus agent
When another party provides goods or services, the entity determines whether it controls the specified good or service before transfer. A principal recognises gross revenue; an agent recognises the fee or commission. Inventory risk, pricing discretion and responsibility for fulfilment are indicators, but the conclusion is based on control.
Contract modifications
A modification may be accounted for as a separate contract, termination and creation of a new contract, or a cumulative catch-up adjustment. The treatment depends on whether additional goods or services are distinct and whether the price reflects stand-alone selling prices.
Disclosures and controls
Entities disclose disaggregated revenue, contract balances, performance obligations, significant judgements and assets recognised from contract costs as required. Strong controls should cover contract approval, master data, modifications, estimates, stand-alone prices, cut-off and reconciliations.
See the discussions of accounting policies and estimates, substance over form, and accrual accounting.
Common mistakes
- recognising revenue when cash is received rather than when control transfers;
- failing to separate distinct promises;
- ignoring variable-consideration constraints;
- allocating discounts without assessing the contract terms;
- confusing a receivable with a contract asset;
- recognising gross revenue when acting as an agent;
- failing to update estimates and modifications.
Key takeaway
IFRS 15 replaces broad “realisation” rules with a structured contract analysis. Reliable revenue reporting identifies the contract and promises, estimates and allocates consideration, and recognises revenue when control of goods or services passes to the customer.
Official reference: IFRS 15 Revenue from Contracts with Customers and the IFRS Conceptual Framework.
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