## Learning Outcomes

After reading this article, you will be able to explain and apply the IFRS 15 five-step revenue recognition model, identify and assess separate performance obligations, allocate the transaction price, and distinguish between revenue recognised over time and at a point in time. You will also know how to apply these concepts to complex contract scenarios, such as variable consideration, contract modifications, and principal versus agent decisions, as required for ACCA SBR.

## ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand the practical application of IFRS 15 in revenue recognition. In particular, this article addresses:

- The principles for recognising revenue from contracts with customers under IFRS 15
- The five-step model for revenue recognition
- Identification and assessment of distinct performance obligations
- Judging when to recognise revenue over time or at a point in time
- The allocation of transaction price to performance obligations
- Dealing with variable consideration, modifications, and agent/principal scenarios

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which of the following is not a step in the IFRS 15 revenue recognition model?
   a) Identify the contract with the customer
   b) Determine warranty obligations under IAS 37
   c) Allocate the transaction price
   d) Recognise revenue when the obligation is satisfied

2. True or false? A contract contains two performance obligations if a good and a related service can each be sold and used independently.

3. When is revenue recognised "over time" under IFRS 15?
   a) When cash is received
   b) When control transfers and benefits pass to the customer continuously
   c) At the point when legal title passes
   d) When all performance obligations in the contract are completed

4. Briefly explain what is meant by "variable consideration" under IFRS 15 and how it affects the transaction price.

5. In what situation is an entity acting as an agent rather than a principal for revenue recognition purposes?

## Introduction

IFRS 15 _Revenue from Contracts with Customers_ sets out a comprehensive model for recognising revenue from all contracts with customers except those covered by other standards. The standard responds to previous inconsistencies and aims for global comparability by introducing a single five-step process. For ACCA Strategic Business Reporting (SBR) SBR exam, it is essential to be able to apply each step of the model, identify distinct performance obligations, and properly measure revenue—including complex arrangements such as bundled goods and services, variable consideration, contract modifications, and agent/principal considerations.

> **Key Term: IFRS 15 five-step model**
> A structured process to recognise revenue from contracts with customers, involving identification of the contract, performance obligations, transaction price, its allocation, and revenue recognition based on satisfaction of obligations.

### The Five-Step Revenue Recognition Model

![IFRS 15 criteria for determining whether promised goods or services are distinct or combined into a single performance obligation.](https://static.pastpaperhero.com/images/acca-sbr-revenue-from-contracts-with-customers-ifrs-15-five-step-model-and-performance-obligations_00.png)

_Performance obligation assessment under IFRS 15 applies the capable-of-being-distinct and separately identifiable tests to classify promises within a contract._

### Step 1: Identify the Contract with the Customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations. It may be written, oral, or implied by customary business practice. The contract must be approved, define the rights and payment terms, have commercial substance, and it must be probable that consideration will be collected.

> **Key Term: contract**
> An agreement between parties that creates enforceable obligations and rights under IFRS 15.

### Step 2: Identify the Separate Performance Obligations

A contract may include one or more promises to transfer goods or services. Each distinct good or service forms a separate performance obligation.

A good or service is _distinct_ if:

- The customer can benefit from it either on its own or with readily available resources, and
- The obligation to transfer the good or service is separately identifiable in the context of the contract.

Combined services (e.g. integrating a variety of activities to deliver a building) may constitute a single performance obligation if the goods or services are highly interrelated.

> **Key Term: performance obligation**
> A promise in a contract to transfer a distinct good or service to the customer.

### Step 3: Determine the Transaction Price

The transaction price is the amount of consideration the entity expects to receive for providing promised goods or services. This can include fixed and variable amounts, significant financing components, non-cash consideration, and amounts payable to the customer.

> **Key Term: transaction price**
> The total amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services.

Variable consideration is included in the transaction price only if it is _highly probable_ that a significant reversal of revenue will not occur when the uncertainty is resolved.

> **Key Term: variable consideration**
> Consideration in a contract that is contingent on future events, such as incentives, penalties, bonuses, or rebates.
> **Key Term: significant financing component**
> An element of the transaction price where timing of payments provides a material benefit to either the customer or the entity.

### Step 4: Allocate the Transaction Price to the Performance Obligations

The total transaction price is allocated to each performance obligation based on standalone selling prices, i.e. the amount the good or service would be sold for separately to a customer. If a standalone selling price is not directly observable, it must be estimated.

### Step 5: Recognise Revenue When (or As) a Performance Obligation is Satisfied

Revenue is recognised when control of a good or service passes to the customer. Control refers to the ability to direct the use of and obtain the benefits from the asset. A performance obligation may be satisfied either at a point in time (e.g., delivery of a product) or _over time_ (e.g., construction services where the customer controls work-in-progress).

> **Key Term: control (of an asset)**
> The ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset.

Revenue for performance obligations satisfied over time should be recognised using a method that faithfully reflects the pattern of transfer—either inputs (cost incurred) or outputs (units delivered).

### Worked Example 1.1

Scenario:
On 1 March, ByteTech enters a contract to deliver bespoke software and three years of monthly technical support for a total consideration of \$12,000. The standalone selling price is \$10,000 for the software and \$4,800 for the three-year support.
ByteTech delivers the software and begins support immediately.

How should revenue be recognised at 31 December when ten months have elapsed?

> **Answer:**
> Step 1: Contract exists (all criteria met).
> Step 2: Two performance obligations—software and support.
> Step 3: Total price is \$12,000.
> Step 4: Allocate price based on relative standalone prices:
>
> - Software: (\$10,000 ÷ \$14,800) × \$12,000 = \$8,108
> - Support: (\$4,800 ÷ \$14,800) × \$12,000 = \$3,892
>   Step 5:
> - Software: Recognise full \$8,108 at delivery (point in time).
> - Support: Recognise \$1,297 (\$3,892 × 10/36 months) over ten months.
>   Total revenue recognised after ten months: \$8,108 + \$1,297 = \$9,405.

### Performance Obligations Satisfied Over Time vs At a Point in Time

Under IFRS 15, revenue is recognised _over time_ if any of the following apply:

- The customer receives and consumes the benefits simultaneously,
- The customer controls the asset as it is created or enhanced,
- 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 apply, the performance obligation is satisfied at a point in time.

### Worked Example 1.2

Scenario:
BuildPro enters a contract to design and construct a bridge. The customer makes non-refundable progress payments throughout the build. Under the contract, the bridge is bespoke and cannot be repurposed for other customers, and BuildPro is entitled to payment for work done if the customer cancels.

Should revenue be recognised over time or at a point in time?

> **Answer:**
> Since the asset has no alternative use and BuildPro is entitled to payment for performance completed to date, revenue should be recognised over time, based on the proportion of work completed.

### Variable Consideration and Constraints

If a portion of consideration is contingent (e.g. a performance bonus, penalties for late delivery), the amount included in the transaction price must be such that it is highly probable there will not be a significant reversal. Two estimation methods are permitted:

- Expected value (probability weighted),
- Most likely amount.

A refund liability must be recognised in cases where rights of return exist.

### Worked Example 1.3

Scenario:
InnovApp sells 1,000 units for \$30,000 with the right for customers to return unused units within 60 days for a full refund. Based on experience, InnovApp expects that 5% will be returned. Each unit costs \$20.

What is the revenue at the date of sale?

> **Answer:**
>
> - Revenue recognised: 950 × \$30 = \$28,500
> - Refund liability: 50 × \$30 = \$1,500
> - Asset for recovery of inventory: 50 × \$20 = \$1,000

### Principal vs Agent

Under IFRS 15, an entity is a principal if it controls a specified good or service before transfer to the customer. An agent arranges for another party to provide the good or service.

> **Key Term: principal vs agent**
> Principal recognises gross revenue; agent recognises only the commission or fee.

### Contract Modifications

A contract modification occurs when the scope or price of a contract changes. Treatment depends on whether the additional goods or services are distinct and priced at their standalone selling price:

- If both criteria are met, account as a separate contract.
- If not, adjust the original contract and revenue accordingly.

> **Exam Warning:**
> In the exam, always specify which step of the model your answer addresses. Marks are often lost for failing to articulate, for example, the process used to identify separate performance obligations, or for not calculating variable consideration correctly.
>
> **Revision Tip:**
> Focus revision on interpreting complex contract scenarios. Examiners frequently assess your ability to judge whether goods or services are distinct and when control passes.

## Summary

IFRS 15 provides a five-step model to record revenue, ensuring that amounts reported reflect the actual transfer of control of goods or services to customers. The model specifically requires identification of all performance obligations in a contract, careful consideration of variable consideration and constraints, and precise determination of when (or as) revenue should be recognised. Correct application of the model improves the comparability and reliability of reported revenue figures.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Explain and apply the IFRS 15 five-step model for revenue recognition
- Identify and assess distinct performance obligations in customer contracts
- Determine and allocate the transaction price, including variable consideration
- Judge when to recognise revenue over time versus at a point in time
- Account for contract modifications and rights of return
- Distinguish between principal and agent roles for revenue purposes

## Key Terms and Concepts

- IFRS 15 five-step model
- contract
- performance obligation
- transaction price
- variable consideration
- significant financing component
- control (of an asset)
- principal vs agent


Revenue from contracts with customers (IFRS 15) - Five-step model and performance obligations