Strategic Business Reporting (International) · Revenue

IFRS 15 Five-Step Revenue Model Explained for ACCA SBR

Updated 11 October 2026 · Fact-checked

IFRS 15 sets one model for revenue from contracts with customers. You identify the contract, identify performance obligations, determine the transaction price, allocate that price to the obligations, and recognise revenue when or as each obligation is satisfied, meaning control passes to the customer.

Understand IFRS 15 Five-Step Revenue Model

Revenue is the main number in most financial statements, so it is a prime target for error and manipulation. IFRS 15 gives one principle: recognise revenue to show the transfer of promised goods or services to a customer, at the amount the entity expects to be entitled to.

The standard applies to contracts with customers. It does not apply to leases (IFRS 16), insurance contracts (IFRS 17), financial instruments and other contractual rights or obligations within IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28, and non-monetary exchanges between entities in the same line of business to help sales to customers. A customer is a party that has contracted to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration.

The model has five steps. Step 1: identify the contract. Step 2: identify the performance obligations, which are the distinct goods or services promised. Step 3: determine the transaction price. Step 4: allocate the price to each obligation, normally in proportion to standalone selling prices. Step 5: recognise revenue when (or as) each obligation is satisfied.

The key idea in step 5 is control. Revenue is recognised when the customer obtains control of the asset, not when risks and rewards move or when cash is received. Control can pass over time or at a point in time. Over time applies if the customer receives and consumes the benefit as you perform, if your performance creates or enhances an asset the customer controls, or if the asset has no alternative use to you and you have an enforceable right to payment for work done to date.

In SBR, the examiner gives a messy scenario and asks how revenue should be treated. You are rarely asked to recite the steps. You are asked to apply them, to spot which step is the problem, and to give a number and a clear reason.

Key rules to remember

Contract existence criteria (step 1): Approved and parties committed; rights identifiable; payment terms identifiable; commercial substance; collection of consideration probable; All five must be met. If not, do not apply the model. Reassess the criteria if facts and circumstances change. Until they are met, recognise consideration received as a liability. Recognise it as revenue only when the entity has no remaining obligations and has received substantially all of the consideration, which is non-refundable, or when the contract has been terminated and the consideration received is non-refundable. If the criteria are met later, start applying the model from then.
Distinct good or service (step 2): Distinct if the customer can benefit from it on its own or with readily available resources AND it is separately identifiable in the contract; Both tests are needed. If not distinct, combine with other goods or services until a bundle is distinct.
Transaction price (step 3): Fixed amounts + estimated variable consideration (constrained) ± significant financing effect + non-cash consideration at fair value − consideration payable to customer; Exclude amounts collected for third parties, such as sales tax. Variable consideration uses expected value or most likely amount, included only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur.
Allocation (step 4): Price allocated to obligation = Standalone selling price of obligation ÷ Total of standalone selling prices × Transaction price; Discounts are normally spread across all obligations pro rata unless there is observable evidence they relate to specific ones.
Recognition (step 5): Revenue recognised when (or as) control of the promised good or service passes to the customer; Over time if one of the three over-time criteria is met. Otherwise at a point in time.

How to solve IFRS 15 Five-Step Revenue Model questions

Work through the steps in order and name each step in your answer. Examiners award marks for the step, the rule and the application to the facts.

1Check scope. Is the counterparty a customer, and is the contract outside leases, financial instruments and insurance?
2Test the contract against the five criteria. If any fails, say revenue cannot be recognised yet and cash received is a liability.
3List every promise in the scenario. Decide which are distinct using both tests, and group non-distinct promises together.
4Work out the transaction price. Adjust for variable consideration (apply the constraint), significant financing, non-cash items and amounts payable to the customer.
5Allocate the price using standalone selling prices. If no observable price exists, estimate one, for example by cost plus margin or adjusted market assessment.
6For each obligation decide over time or point in time. If over time, choose a measure of progress that reflects the transfer of control.
7Calculate revenue for the period, and state the statement of financial position effect: contract asset, contract liability or receivable.
8Conclude with a clear recommendation and mention any judgement, disclosure or ethical point such as aggressive timing.

Quickest way: Five-line scan for exam scenarios

When to use it: Use when time is short and the scenario is long. It helps you find the issue and structure the answer quickly.

Underline each promise made to the customer, each price element, and each date or event.
Write C, P, T, A, R on your plan page and note the fact that drives each step.
Mark the step where the scenario creates doubt, such as a bundle, a bonus, a delay in payment or a right of return.
Answer the doubtful steps in full. Cover the other steps in one line each.
Finish with the numbers: revenue in the period and the balance sheet entry.

Common mistakes in IFRS 15 Five-Step Revenue Model

Recognising revenue when cash is received or the invoice is raised.
It is the old habit from cash and invoice based thinking.
Fix: Ask only one question: has control passed? Cash and invoices matter only for contract assets, liabilities and receivables.
Treating every item in a bundle as a separate obligation.
Students count the items listed rather than testing whether each is distinct.
Fix: Apply both distinct tests. Highly integrated or significantly customised items form one obligation.
Allocating the price using the contract prices rather than standalone selling prices.
The contract shows a price per item, so it looks usable.
Fix: Allocate pro rata to standalone selling prices, even if the contract states different prices.
Including all variable consideration in the transaction price.
Students forget the constraint, or treat a hoped-for bonus as certain.
Fix: Estimate it, then include only the amount where it is highly probable that a significant reversal of cumulative revenue will not occur.
Ignoring step 1 when the customer's ability to pay is doubtful.
Students go straight to the calculations.
Fix: Check the five criteria first. If collection is not probable, no revenue and the cash received is a liability.
Ignoring a significant financing component or treating a deposit as revenue.
Payment timing is seen as a cash matter only.
Fix: If payment and delivery are far apart and the benefit is significant, adjust the price for the time value of money and show interest separately.

Worked examples

Example 1

Alpha sells a machine and a one-year maintenance service to a customer for a total of $120,000. Alpha sells the machine separately for $100,000 and the maintenance separately for $20,000. The machine is delivered on 1 October and control passes then. Maintenance runs evenly from 1 October. Alpha's year end is 31 December. Explain the IFRS 15 treatment and calculate revenue for the year.

Show the solution

Step 1: a contract exists, assuming the five criteria are met, and the customer is a customer in Alpha's ordinary activities.
Step 2: the machine and maintenance are distinct. The customer can benefit from the machine and the maintenance on their own or with readily available resources, and the separate sales are supporting evidence of this. They are also separately identifiable, because the maintenance does not significantly modify the machine.
Step 3: the transaction price is $120,000, fixed.
Step 4: standalone selling prices total $120,000, which equals the price, so there is no discount. The machine gets $100,000 and maintenance gets $20,000.
Step 5: the machine is satisfied at a point in time when control passes on 1 October, so recognise $100,000. Maintenance is satisfied over time as the customer consumes the service, so recognise on a time basis: $20,000 × 3/12 = $5,000.

Answer: Revenue for the year is $105,000 ($100,000 + $5,000). The remaining $15,000 of maintenance is a contract liability (deferred income) if already billed or paid.

Example 2

Beta signs a contract to supply a software licence, installation and one year of support for $90,000 in total. Standalone selling prices are licence $60,000, installation $30,000 and support $30,000. Beta has no evidence that the discount relates to one item. Calculate the amount allocated to each obligation, and state when it is recognised if the licence is a right to use delivered at the start, installation is completed immediately after, and support is provided evenly over the year.

Show the solution

Step 1: assume the five contract criteria are met.
Step 2: assume installation is routine and does not significantly customise or modify the licence. Apply both tests. First, each item is capable of being distinct, because the customer can benefit from it on its own or with readily available resources. Being sold separately is supporting evidence of this, not the test itself. Second, each item is separately identifiable, because installation is routine, so the items are not highly integrated and do not significantly affect each other. There are three performance obligations.
Step 3: the transaction price is $90,000.
Step 4: total standalone selling prices are $60,000 + $30,000 + $30,000 = $120,000. The discount is $30,000, and it is spread pro rata.
Licence: $60,000 ÷ $120,000 × $90,000 = $45,000.
Installation: $30,000 ÷ $120,000 × $90,000 = $22,500.
Support: $30,000 ÷ $120,000 × $90,000 = $22,500.
Step 5: recognise the licence and installation when each is delivered or completed, as they are satisfied at a point in time. Recognise support evenly over the year.

Answer: On the assumption that installation is routine and does not significantly modify the licence, there are three obligations. Allocation is licence $45,000, installation $22,500 and support $22,500, which totals $90,000. The first two are recognised at a point in time, and support is recognised over time across the year.

Exam tips

Name each step by its label in your answer. It makes marks easy for the marker to find.
When a scenario looks like a trap, test step 1 first. A contract that fails the criteria changes the whole answer.
Show the allocation as a one-line fraction so that method marks are earned even if your arithmetic slips.
Use the exact words of the scenario when you explain control, such as customer controls the asset or Alpha has an enforceable right to payment.
Add one professional skills point where it fits, such as questioning management's aggressive timing of revenue.

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 as each obligation is satisfied. Each step builds on the one before it.

What are the IFRS 15 criteria for identifying a contract?

The parties have approved the contract and are committed to it, each party's rights can be identified, payment terms can be identified, the contract has commercial substance, and collection of the consideration is probable. All must be met.

Does IFRS 15 apply to all revenue?

No. It applies to contracts with customers but excludes leases, insurance contracts, financial instruments and certain non-monetary exchanges. Check scope before you apply the steps.

How is IFRS 15 examined in SBR?

It is examined through written scenarios where you apply the steps to unusual facts, then calculate revenue and explain the treatment. You may also need to discuss ethics or aggressive reporting around timing.