By Zainab Rampurawala | Published: Aug 29, 2025

📖 Introduction

Revenue recognition is one of the most critical areas of financial reporting. Misstating revenue can significantly impact investor decisions and attract regulatory scrutiny. To bring consistency and comparability across industries and jurisdictions, the International Accounting Standards Board (IASB) introduced IFRS 15 – Revenue from Contracts with Customers. This standard introduces a 5-step model that entities must follow when recognizing revenue.

🔹 Step 1: Identify the Contract with a Customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations. For a contract to exist under IFRS 15, it must be approved by both parties, have clear payment terms, and the transaction must be commercially viable.

Example: A software company signs a 12-month service contract with a client. This agreement constitutes a valid contract under IFRS 15.

🔹 Step 2: Identify the Performance Obligations

Performance obligations are promises in a contract to transfer goods or services. Each distinct good or service must be identified separately.

Example: A mobile operator selling a phone bundled with a 1-year service plan has two distinct performance obligations: (1) the phone, and (2) the service plan.

🔹 Step 3: Determine the Transaction Price

The transaction price is the amount the company expects to be entitled to in exchange for fulfilling its obligations. It includes fixed amounts, variable considerations (like bonuses/penalties), and discounts.

Example: A contractor agrees to build a road for AED 10 million with a performance bonus of AED 500,000 if completed early. The bonus is considered part of the transaction price if it is highly probable to be earned.

🔹 Step 4: Allocate the Transaction Price to Performance Obligations

When multiple performance obligations exist, the transaction price must be allocated based on the relative stand-alone selling prices of each obligation.

Example: The mobile operator allocates part of the total package price to the phone and part to the service plan, based on their individual market prices.

🔹 Step 5: Recognize Revenue When (or As) Performance Obligations Are Satisfied

Revenue is recognized either over time or at a point in time, depending on when control of the good or service passes to the customer.

Example: The phone revenue is recognized at the point of sale, while the service revenue is recognized over 12 months.

✅ Key Takeaways

  • IFRS 15 standardizes how companies recognize revenue across industries.
  • Businesses must carefully assess contracts, obligations, and pricing to ensure compliance.
  • The 5-step model improves transparency and helps investors better understand revenue streams.
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