Step 1: Identify the Contract with the Customer

A contract exists when:

✅ It is approved by all parties and creates enforceable rights and obligations

✅ Payment terms and commercial substance exist

✅ The entity expects to collect consideration

💡 Example:

1). A software company enters into a 3-year contract to provide cloud storage services. The contract has clear terms, and the customer has the ability to pay. This is a valid contract under IFRS 15.

2). A construction company’s contract with the government to build a public park for free is not a revenue contract under IFRS 15 because there is no direct exchange of goods or services with a customer.

Step 2: Identify Separate Performance Obligations

A contract may have multiple performance obligations if:

🔹 The goods/services are distinct

🔹 The customer can benefit from them separately

💡 Example: A mobile company sells a phone with a 12-month free subscription to music streaming. The phone and subscription are distinct performance obligations since each can be used separately.

🚨 Key Considerations:

• A single obligation exists if goods/services are highly interrelated and modifying one significantly affects the other.

Step 3: Determine the Transaction Price

The total price of the contract may include:

✅ Fixed amounts

✅ Variable consideration (discounts, rebates, performance bonuses)

✅ Significant financing components (if payment is deferred over a long period)

✅ Non-cash consideration (e.g., customer provides materials in exchange for services)

💡 Example: A real estate developer sells apartments off-plan with an option to pay in installments over 5 years. The price includes a financing component, so adjustments may be required.

🚨 Key Considerations:

• Variable Consideration is estimated using the expected value or most likely amount method.
• Constraints on Variable Consideration prevent recognizing revenue if reversal is likely.

Step 4: Allocate the Transaction Price to Performance Obligations

If multiple obligations exist, price allocation should be based on:

🔹 The standalone selling price of each good/service

🔹 Adjustments based on observable inputs or estimations

💡 Example: A software package is sold for $1,000, including a one-year support service. If the standalone prices are:

• Software: $900
• Support: $200
• Then, the transaction price ($1,000) should be allocated proportionally.

🚨 Key Considerations:

• If no standalone price is available, estimation techniques (cost-plus margin, market assessment) should be used.

Step 5: Recognize Revenue When (or As) Performance Obligation is Satisfied

Revenue is recognized either:

✅ Over time – When control is transferred continuously

✅ At a point in time – When control is transferred at a single moment

📌 Indicators of Control Transfer:

• The entity has a right to payment
• The customer has physical possession
• The customer has legal ownership

💡 Examples:

🔹 Over time: A construction company builds a bridge for a government entity. The revenue is recognized progressively as the work is completed.

🔹 At a point in time: A retailer sells a laptop to a customer. The revenue is recognized at the time of sale.

Contract Modifications

🔹 A contract modification occurs when price/scope changes.

🔹 If new goods/services are distinct, treat as a separate contract.

🔹 If not distinct, adjust the original contract.

💡 Example: A telecom company adds extra data services to an existing contract at a discounted price. This may be treated as a contract modification.

Principal vs. Agent Consideration

✅ Principal (recognizes full revenue) – When the entity controls the good/service before transferring it. This means the entity has the primary responsibility for fulfilling the contract, bears inventory risk, and has pricing discretion. The Principal records gross revenue (total selling price) because they are responsible for delivering the product or service.

✅ Agent (recognizes commission revenue) – When the entity arranges for another party to provide the good/service. The Agent facilitates the transaction between the customer and the actual provider, earning a commission or service fee. The Agent records only the commission revenue, not the total selling price, since they do not assume the risks and rewards of ownership.

💡 Example: An online marketplace sells products from third-party vendors. If the marketplace does not control the inventory, it should recognize only commission revenue, not full sales revenue.

Licensing Revenue

🔹 Right to access IP (recognized over time) – e.g., software subscriptions

🔹 Right to use IP (recognized at a point in time) – e.g., sale of a movie script

💡 Example: A software company grants a 5-year right to use its patented technology. Revenue is recognized over time because the customer benefits continuously.

Disclosure Requirements under IFRS 15

Entities must disclose:

✅ Revenue disaggregated by product line, region, or contract type

✅ Contract balances (assets, liabilities, receivables)

✅ Performance obligations and their expected timing

✅ Significant judgments made in applying IFRS 15

💡 Example: A manufacturing company reports revenue in three segments—North America, Europe, and Asia-Pacific—to provide transparency on performance.