Financial Reporting · Revenue

IFRS 15 Five-Step Revenue Model Explained for ACCA FR

Updated 11 October 2026 · Fact-checked

IFRS 15 says you recognise revenue when you transfer promised goods or services to a customer, at the amount you expect to receive. You apply five steps: identify the contract, identify performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue as each obligation is satisfied.

Understand IFRS 15 Five-Step Revenue Model

IFRS 15 has one core principle. An entity recognises revenue to show the transfer of promised goods or services to customers, in an amount that reflects the consideration it expects to be entitled to in exchange.

Think of it as a story told in five steps. First, is there a valid contract? Second, what exactly did you promise to deliver? Third, how much will you be paid? Fourth, how does that price split across each promise? Fifth, when does each promise get delivered?

The key idea is control. Revenue is recognised when the customer obtains control of the good or service, not when cash is received or an invoice is raised. Control can pass at a point in time (a sale of goods) or over time (a service or a construction contract).

A performance obligation is a promise to transfer a distinct good or service. A good or service is distinct if the customer can benefit from it on its own or with readily available resources, and it is separately identifiable from other promises in the contract. Each distinct promise is accounted for separately.

The transaction price is the amount you expect to be entitled to, excluding amounts collected for third parties such as sales tax. It can include variable amounts like discounts, rebates and bonuses, and it is adjusted for a significant financing component.

Key rules to remember

Core principle: Revenue is recognised when (or as) control of a promised good or service transfers to the customer; The amount is the consideration the entity expects to be entitled to.
The five steps: 1 Identify the contract → 2 Identify performance obligations → 3 Determine transaction price → 4 Allocate price → 5 Recognise revenue when (or as) each obligation is satisfied; Write these as headings in written answers.
Contract criteria (Step 1): Approved and parties committed; rights identifiable; payment terms identifiable; commercial substance; collection probable; If these are not met, receipts are generally recognised as a liability, not revenue.
Allocation by relative stand-alone selling price: Allocated price = Stand-alone selling price of obligation ÷ Total of stand-alone selling prices × Transaction price; Use this when a bundle is sold at a discount to the sum of stand-alone prices.
Over time criteria (Step 5): Over time if: customer receives and consumes benefits as you perform; OR your work creates or enhances an asset the customer controls; OR the asset has no alternative use to you and you have an enforceable right to payment for work done to date; If none are met, revenue is recognised at a point in time.

How to solve IFRS 15 Five-Step Revenue Model questions

Work through the five steps in order every time. Write a short line for each step, even if it is only a note that the step is straightforward.

1Step 1: Check there is a contract that meets the criteria. Note any contract modification or combination of contracts.
2Step 2: List every promise in the contract. Decide which are distinct and so separate performance obligations. Bundles that are not distinct are treated as one.
3Step 3: Work out the transaction price. Adjust for variable consideration, financing components and amounts collected for third parties.
4Step 4: If there is more than one obligation, allocate the price using relative stand-alone selling prices.
5Step 5: For each obligation decide over time or at a point in time. Apply the over-time criteria first.
6Calculate the revenue for the period. For over time, use a measure of progress such as costs incurred to total expected costs.
7State the double entry: receivable or cash, contract asset or liability, and revenue. Check the totals reconcile to the transaction price.

Quickest way: Five-line table-free scan

When to use it: Use this for Section A and Section B objective questions where you have about three minutes per question.

Underline what is promised. Count the distinct goods or services.
Ask whether the customer can use each item alone. If not, treat the items as one obligation.
Find the price and any variable or discounted element. Allocate in proportion to stand-alone prices.
Ask when control passes: delivery, acceptance, or progressively as work is done.
Compute only the amount for the current period, then check the option you choose is consistent with timing.

Common mistakes in IFRS 15 Five-Step Revenue Model

Recognising revenue when cash is received or the invoice is issued.
Older cash and invoice habits carry over into the exam.
Fix: Always ask when control passes. Cash received early is a contract liability, not revenue.
Treating a bundle as one obligation when the parts are distinct.
The question gives a single price, so it feels like one item.
Fix: Test each item for being distinct. If so, allocate the single price by relative stand-alone selling prices.
Allocating a discount entirely to one item.
Students take the cheapest route to a quick answer.
Fix: Spread the discount across all obligations in proportion to stand-alone prices, unless the question gives evidence it belongs to specific items.
Ignoring variable consideration or financing components in the transaction price.
These details sit in the small print of the scenario.
Fix: Scan the scenario for rebates, bonuses, penalties and payments due long after delivery before you calculate anything.
Including sales tax or amounts collected for third parties in revenue.
The gross invoice figure looks like the price.
Fix: Remove amounts you collect on behalf of others. They are a liability, not revenue.
Choosing over time or point in time without checking the criteria.
Students rely on the type of business instead of the contract terms.
Fix: Test the three over-time criteria. If none apply, revenue is at a point in time.

Worked examples

Example 1

Alpha sells a machine and one year of installation support to a customer for $120,000 in total. Stand-alone selling prices are $110,000 for the machine and $30,000 for the support. The machine is delivered and control passes on 1 October. Support is provided evenly over 12 months from 1 October. Alpha's year end is 31 December. Calculate revenue for the year.

Show the solution

Step 1: A valid contract exists.
Step 2: Two distinct obligations: the machine and the support.
Step 3: Transaction price is $120,000.
Step 4: Total stand-alone prices = 110,000 + 30,000 = $140,000. Machine = 110,000 ÷ 140,000 × 120,000 = $94,286 (rounded). Support = 30,000 ÷ 140,000 × 120,000 = $25,714 (rounded).
Step 5: The machine is recognised at a point in time on delivery: $94,286. Support is over time: 3 months of 12 = 25% × 25,714 = $6,429 (rounded).

Answer: Revenue for the year is $94,286 + $6,429 = $100,715 (rounded figures).

Example 2

Beta signs a contract to build a facility for a customer for $500,000. Beta has an enforceable right to payment for work done to date and the facility has no alternative use to Beta. Total expected costs are $400,000. Costs incurred to the year end are $240,000. Calculate revenue and profit for the year, and identify the timing of recognition.

Show the solution

Step 1: A valid contract exists.
Step 2: One performance obligation, the facility.
Step 3: Transaction price is $500,000.
Step 4: No allocation is needed with one obligation.
Step 5: Both over-time conditions are met for the asset having no alternative use and the enforceable right to payment, so revenue is recognised over time.
Progress = 240,000 ÷ 400,000 = 60%.
Revenue = 60% × 500,000 = $300,000. Cost of sales = $240,000. Profit = 300,000 − 240,000 = $60,000.

Answer: Revenue is $300,000 recognised over time, with profit of $60,000 for the year.

Exam tips

Name the step you are applying in written answers. Markers reward the structure of the model.
In objective questions, read for hidden traps: discounts, rebates, deferred payment and amounts collected for third parties.
Always state why you chose over time or point in time by referring to the contract terms.
Show allocation workings clearly. Even if the final answer is wrong, method marks are available in Section C.
Check your total revenue across all obligations does not exceed the transaction price.

Practice questions from Revenue

IFRS 15 Five-Step Revenue Model in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IFRS 15 Five-Step Revenue Model: frequently asked questions

What are the five steps of IFRS 15?

Identify the contract, identify the performance obligations, determine the transaction price, allocate the price to the obligations, and recognise revenue when or as each obligation is satisfied. Learn them in order because exam answers are built on this sequence.

How do I decide whether revenue is over time or at a point in time?

Test the three over-time criteria: the customer consumes benefits as you perform, your work creates or enhances an asset the customer controls, or the asset has no alternative use and you have an enforceable right to payment to date. If none apply, recognise revenue at a point in time when control passes.

What is a performance obligation?

It is a promise in a contract to transfer a distinct good or service to the customer. Each distinct promise is accounted for separately. A promise is distinct if the customer can benefit from it and it is separately identifiable from other promises in the contract.

How is the IFRS 15 model tested in the FR exam?

It appears in objective questions on allocation, timing and variable consideration, and in constructed response questions as part of a wider set of financial statements. Practise both calculations and short written explanations.