The five-step revenue model

IFRS 15 Revenue from Contracts with Customers (and its US twin, ASC 606) has one core principle: recognise revenue to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration the entity expects to be entitled to in exchange. Revenue follows performance — not the invoice, and not the cash.

The principle is applied in five steps:

1. Identify the contract. A contract exists for IFRS 15 purposes when the parties have approved it and are committed to it, each party's rights and the payment terms can be identified, it has commercial substance, and it is probable the entity will collect the consideration (IFRS 15.9). A contract can be written, oral or implied by customary business practice — a signature is not required. Contracts negotiated as a package with the same customer at or near the same time may have to be combined (IFRS 15.17).
2. Identify the performance obligations — each promise to transfer a distinct good or service (or a series of substantially the same services).
3. Determine the transaction price — fixed amounts plus estimated variable consideration (discounts, rebates, bonuses, penalties), adjusted for a significant financing component, non-cash consideration and consideration payable to the customer. Amounts collected for third parties, such as VAT, are excluded.
4. Allocate the transaction price to the performance obligations in proportion to their stand-alone selling prices (SSP).
5. Recognise revenue when (or as) each performance obligation is satisfied — when control of the good or service passes to the customer, either at a point in time or over time.

Steps 1–4 are about how much; step 5 is about when. Most errors in practice come from skipping step 2 (treating a bundle as one sale) or step 4 (putting the whole price on the item delivered first).