IFRS 15 (i): the five-step model

Revenue is the top line of the income statement and the number most often pushed too hard. A builder invoices in advance, a software firm sells a licence with three years of support, a telecoms company gives away a phone with a contract. When should each of them count the money as revenue?

International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers, answers with one model that applies to every industry: revenue is recognised when control of goods or services passes to the customer, at the amount the company expects to be entitled to.

This topic covers the core principle and the five steps: identifying the contract, identifying the separate performance obligations, determining the transaction price, allocating it, and recognising revenue when or as each obligation is satisfied, including over-time recognition and measuring progress. The next topic covers variable consideration, financing, contract costs, presentation and special arrangements such as agents, returns, licences and consignment.

May 2026 Question 1(b) used IFRS 15 in an ethics scenario about recognising a whole contract up front.

Key terms in plain English

Syllabus check

IFRS 15 is named in the syllabus as a standard on performance reporting. This topic covers:

• B1(b) applying IFRS 15 to the preparation of the statements;
• B1(a) how different recognition bases affect reported performance;
• the ethical angle of recognising revenue early (Area A, item 2, and Area D, item 1).

CAMA 2020 and revenue

The Companies and Allied Matters Act 2020 (CAMA 2020) does not set revenue rules. It requires statements that follow IFRS.

The core principle

A contract places one or more performance obligations on the seller. IFRS 15 requires an entity to recognise revenue (a) in a manner that depicts the transfer of goods or services to customers and (b) at an amount that reflects the consideration to which it expects to be entitled. Goods and services sold are often called “deliverables”.

Revenue recognition and invoicing are separate activities: an invoice may coincide with revenue, but often the timing differs.

Step 1: identify the contract

A contract is an agreement that creates enforceable rights and obligations. It can be written, verbal or implied (a retail sale is an implied contract). A contract does not exist if each party can end a wholly unperformed contract without compensating the other.

Combining contracts. Two or more contracts with the same customer (or related parties) entered into at or near the same time are combined if they were negotiated as a package with one commercial objective, if the price in one depends on the other, or if the goods or services are a single performance obligation.

The five criteria. The model applies only when:

1. all parties have approved the contract and are committed to perform;
2. each party’s rights regarding the goods or services can be identified;
3. the payment terms can be identified;
4. the contract has commercial substance (it is expected to change the risk, timing or amount of future cash flows); and
5. it is probable that the entity will collect the consideration it is entitled to.

If collection is not probable, there is no contract under IFRS 15 at that point. Cash received is held as a liability until the criteria are met or the contract ends.

Step 2: identify the performance obligations

A performance obligation is a promise to transfer (a) a distinct good or service (or bundle) or (b) a series of distinct goods or services that are substantially the same and have the same pattern of transfer. Obligations may also arise from customary business practice, published policies or statements that create a valid expectation.

A good or service is distinct if both these tests are met:

1. the customer can benefit from it on its own or with readily available resources; and
2. the promise to transfer it is separately identifiable from other promises in the contract.

If a promise is not distinct, combine it with others until the bundle is distinct, which may mean a single obligation for the whole contract. A promise is not separately identifiable where the seller provides a significant service of integrating the items into one combined output, or the items modify each other significantly, or they are highly interdependent.

Step 3: determine the transaction price

The transaction price is the amount the entity reasonably expects to be entitled to, excluding amounts collected for third parties such as value added tax. It includes fixed amounts and may include variable consideration, non-cash consideration and amounts payable to the customer. Where payment is more than a year away from delivery, the time value of money may need to be reflected.

These adjustments are covered in the next topic. Read the contract together with customary business practice: if a company always grants a discount, the price it is really entitled to is lower.

Step 4: allocate the transaction price

The price is allocated to the performance obligations on a relative stand-alone selling price basis, fixed at contract start.

1. Find the stand-alone selling price (SSP). Use the observable price if the item is sold separately; otherwise estimate it by the adjusted market assessment approach, the expected cost plus margin approach, or, only where an SSP is highly variable or uncertain, the residual approach.
2. Allocate in proportion: each SSP divided by the total of SSPs, multiplied by the transaction price.
3. Allocate a discount to specific items only if each item is regularly sold separately, a bundle of some items is regularly sold at a discount. The contract discount is about the same as that bundle discount. Otherwise spread the discount over all obligations in proportion to SSP.
4. Allocate variable consideration to one obligation only if it relates specifically to the entity’s efforts on that obligation and the result is consistent with the allocation objective.

Step 5: recognise revenue when or as obligations are satisfied

Revenue is recognised when the entity satisfies a performance obligation by transferring control of the good or service. The amount is the price allocated to that obligation. Control exists when the customer can direct the use of the asset and obtain substantially all of its remaining benefits.

Over time or at a point in time

Revenue is recognised over time if any one of these is met:

Otherwise revenue is recognised at a point in time, when control passes. Indicators, none decisive alone:

• the entity has a present right to payment
• the customer has legal title
• physical possession has passed
• the customer has the significant risks and rewards of ownership
• the customer has accepted the asset

Measuring progress for over-time obligations

• Output methods use the value delivered to date: surveys of work performed, appraisals of results, milestones reached, time elapsed, units produced or delivered.
• Input methods use effort used to date compared with total expected effort: labour hours, machine hours, costs incurred (cost-to-cost), and time elapsed where effort is level.

Use the method that best depicts the transfer and apply it consistently. Where an outcome cannot yet be measured reliably but costs are recoverable, recognise revenue only to the extent of costs incurred.

Adjusting input methods. Leave out costs that do not show progress: wasted materials, rework and inefficiency not priced in the contract, and costs that are not proportionate to progress (for example, costs of materials bought but not yet used, which are limited to cost). Revenue is calculated on a cumulative basis: total revenue to date less revenue already recognised gives the amount for the period.

Forecasts are reviewed regularly, and a revision is a change in estimate.

The rules in more depth

Why control and not risk or title

Legal title can pass while the seller keeps control (for example, a sale with a right to buy back), and control can pass before title. Control asks who can use the asset and enjoy its benefits, which is the economic substance.

Why distinct goods are separated

If a company sells a phone and a two-year network service together, the phone is delivered on day one and the service over two years. Showing both as one lump would put revenue in the wrong periods.

Why collectability is a gate

If the seller does not expect to be paid, the transaction is not yet a real sale. Recognising revenue anyway would overstate performance and fill the statement of financial position with doubtful receivables.

Why a percentage of completion is cumulative

Estimates change. Calculating the total entitled to date, and booking only the difference from last year, keeps the cumulative figure right without restating earlier years.

Worked examples

1. Contract and obligations. One contract, two distinct obligations: handset and network service.
2. Transaction price:
   24 × ₦5,000 = ₦120,000.
3. SSPs: handset ₦53,100.
   Service 24 × ₦2,500 = ₦60,000.
   Total ₦113,100.
4. Allocation:
   handset ₦120,000 × 53,100 ÷ 113,100 = ₦56,340.
   Service ₦120,000 × 60,000 ÷ 113,100 = ₦63,660.
5. Recognition: handset revenue of ₦56,340 at delivery (debit receivable).
   Service revenue of ₦63,660 ÷ 24 = ₦2,652.50 each month.
   Each ₦5,000 receipt clears ₦2,652.50 of service revenue and ₦2,347.50 of the handset receivable.
6. Check:
   over 24 months cash ₦120,000 = revenue ₦56,340 + ₦63,660.

1. Year 1:
   1,500 ÷ 2,500 = 60%.
   Cumulative revenue = 60% × ₦3,200,000 = ₦1,920,000.
   Revenue recognised = ₦1,920,000.
2. Year 2:
   2,000 ÷ 2,500 = 80%.
   Cumulative revenue = ₦2,560,000.
   Revenue for year 2 = ₦2,560,000 − ₦1,920,000 = ₦640,000.
3. Cost of sales: ₦1,500,000 in year 1 and ₦500,000 in year 2.
4. If ₦100,000 of year 1 costs had been wasted rework not priced in the contract, efficient costs would be ₦1,400,000 and total efficient costs ₦2,400,000, giving 58.33% and revenue of ₦1,866,667.
5. CAMA 2020. Records of work done support the progress claim (s. 374(1)) and the statements must follow IFRS 15 (s. 378).

How to score full marks

• Walk through the five steps in order even if the question seems to be about one. Marks are given per step.
• Test “distinct” in two parts: capable of being distinct and separately identifiable. State the result for each promise.
• Allocate on relative SSP and show the ratios. Check that the allocations add up to the transaction price.
• Decide over time or point in time by the three criteria, and name the evidence of control for point in time.
• For cost-to-cost, calculate cumulative revenue and then the increment. Remove waste.
• In ethics questions, state the IFRS 15 rule that the pressure breaks: for a milestone contract, revenue follows milestones, not the signature or the cash.

Common mistakes in the exam

• Recognising revenue on invoicing or cash receipt.
• Treating a bundle as one obligation without testing whether each part is distinct.
• Allocating on cost, not stand-alone selling price.
• Forgetting that the contract does not exist if collection is not probable.
• Recognising the full year’s percentage in year 2 instead of the increment.
• Including wasted costs in the cost-to-cost measure.
• Saying legal title passing always means revenue.

Quick revision

• Core principle: depict transfer of goods or services, at the amount expected to be entitled to.
• Five steps: contract, obligations, price, allocate, recognise.
• Contract criteria: approved, rights, payment terms, commercial substance, probable collection.
• Distinct: can benefit and separately identifiable.
• Allocate on relative SSP. Discount to specific items only on strict conditions.
• Over time: simultaneous benefit, customer controls the asset, no alternative use plus right to payment. Otherwise a point in time.
• Progress: output or input methods. Cumulative. Exclude waste.
• CAMA 2020: ss. 374(1), 377(1), 378, 405, 406.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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