IFRS 15 Revenue: Transaction Price, Variable Consideration, Financing and Allocation

Once a contract and its performance obligations are identified, two questions remain before revenue can be recorded: how much is the entity entitled to, and how much of that belongs to each obligation. The first is the transaction price, which may include amounts that vary with future events and may need adjusting for the time value of money.

The second is the allocation, which uses the prices at which the entity sells each item separately. This topic covers steps 3 and 4 of the International Financial Reporting Standard (IFRS) 15 model. The next topic covers step 5, when revenue is recognised, and the specific cases.

In the diets reviewed for this page, May Diet, 2022, Question 5(a) asked students to compare stand-alone selling price with transaction price (part of 5 marks), and May Diet, 2025, Question 6(e) asked for an explanation of steps 3 to 5 of the model (5 marks). Read the five-step model, contracts and performance obligations first.

Step 3: the transaction price

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services, excluding amounts collected on behalf of third parties, such as sales taxes. It is set from the contract terms and the entity’s customary practices. It assumes the goods or services are transferred as promised and that the contract will not be cancelled, renewed or modified.

It is adjusted if the entity’s practice has created a valid expectation that it will enforce its rights for only part of the price. Four things can change the amount: variable consideration, the time value of money, non-cash consideration and amounts payable to the customer.

Variable consideration

Consideration may vary because of discounts, price concessions, incentives, performance bonuses, penalties or similar items. It also varies if it depends on a future event, such as a right to return a product or a fixed bonus for meeting a milestone. The variability may be stated in the contract.

It also exists where the customer has a valid expectation, from the entity’s customary practices or statements, that it will accept less than the stated price, or where the facts show the entity intends to grant a concession.

Estimating the amount

The entity estimates the variable amount using whichever of two methods better predicts the consideration, and applies that method consistently through the contract.

• Expected value: the sum of probability-weighted amounts in a range of possible outcomes. It suits an entity with a large number of similar contracts.
• Most likely amount: the single most likely outcome. It suits a contract with only two possible outcomes, such as a bonus that is either earned or not.

For example, a contractor may earn a bonus of ₦100,000 with a 70% chance and ₦40,000 with a 30% chance. The expected value is 0.7 × ₦100,000 + 0.3 × ₦40,000 = ₦82,000, and the most likely amount is ₦100,000. With a large portfolio the expected value would be used.

The constraint

An estimate is not automatically included. Variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal of the cumulative revenue recognised will not occur when the uncertainty is resolved. In plain terms, include the variable amount only when the entity is very confident it will keep it. The estimate and the constraint are reassessed at each reporting date.

Refund liabilities

If the entity expects to refund some or all of the consideration, it recognises a refund liability, measured at the consideration received (or receivable) that it does not expect to be entitled to, and updates it at each reporting date. An entity sells 500 units at ₦2,000 each and allows returns within 30 days. From experience it expects 480 units not to be returned. At the sale: Dr Cash ₦1,000,000, Cr Revenue ₦960,000 (480 × ₦2,000), Cr Refund liability ₦40,000 (20 × ₦2,000).

Allocating variable consideration

A variable amount is allocated entirely to one performance obligation only if both conditions are met: the variable payment relates specifically to the entity’s efforts to satisfy that obligation, and the allocation is consistent with the allocation objective. Otherwise it is spread with the rest of the price.

Royalties on intellectual property

Revenue from a sales-based or usage-based royalty promised for a licence of intellectual property is recognised only when the later of two events occurs: the related sale or usage happens, and the performance obligation to which the royalty relates has been satisfied.

Financing and non-cash consideration

If the timing of payments gives the contract a significant financing component, the transaction price is adjusted for the time value of money, so that revenue reflects the cash price the customer would have paid when the goods or services were transferred. No adjustment is needed if the gap between transfer and payment is expected to be one year or less.

The discount rate is the one that would be used in a separate financing transaction between the entity and the customer at inception, which reflects the credit characteristics of the customer and any security. The effect of financing, interest revenue or interest expense, is shown separately from revenue from contracts with customers.

An entity sells a machine on 1 January 20X5 for ₦6,000,000 payable on 31 December 20X6, two years later, and the appropriate rate is 8%. Revenue at transfer is the present value, ₦6,000,000 ÷ 1.08² = ₦5,144,033 (Dr Receivable, Cr Revenue). Interest income for 20X5 is ₦5,144,033 × 8% = ₦411,523, so the receivable at 31 December 20X5 is ₦5,555,556. Interest for 20X6 is ₦444,444, bringing the receivable to ₦6,000,000, which the customer pays.

Non-cash consideration is measured at its fair value at contract inception. If that cannot be estimated reasonably, the entity measures it indirectly using the stand-alone selling price of the goods or services promised. Amounts the entity pays to the customer, such as rebates, reduce the transaction price unless they are payment for a distinct good or service received from the customer.

Step 4: allocate the transaction price

The objective is to allocate the transaction price to each performance obligation in an amount that depicts the consideration the entity expects to be entitled to for transferring the promised goods or services. The price is allocated in proportion to the stand-alone selling prices determined at inception. A stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.

It differs from the transaction price, which is the total the customer pays under the contract.

For example, a phone company sells a handset (stand-alone price ₦90,000) with 24 months of service (stand-alone price ₦48,000 for the 24 months) in one contract for ₦120,000. The stand-alone total is ₦138,000, so the handset is allocated ₦120,000 × 90/138 = ₦78,261 and the service ₦120,000 × 48/138 = ₦41,739. Revenue for the handset is recognised on delivery, and the service amount over the 24 months.

Allocating a discount

When the stand-alone prices add up to more than the price, the customer is getting a discount. It is spread over all the obligations in proportion to stand-alone prices, unless all three of these conditions are met, in which case it is allocated entirely to one or more (but not all) obligations:

1. each distinct good or service (or bundle) is regularly sold on a stand-alone basis;
2. a bundle of some of those goods or services is regularly sold at a discount to their stand-alone prices; and
3. the discount in that bundle is substantially the same as the discount in the contract.

Suppose products A, B and C have stand-alone prices of ₦100, ₦200 and ₦300 and are sold together for ₦500. B and C are regularly sold as a pair for ₦400 (a discount of ₦100 on ₦500), which equals the discount in the contract. The whole discount goes to B and C: B is allocated ₦200 − (₦100 × 200/500) = ₦160 and C ₦300 − (₦100 × 300/500) = ₦240, with A at ₦100.

If the three are sold together for ₦480 with no such evidence, the discount of ₦120 is spread across all three in proportion (price ÷ stand-alone total = 0.8): A ₦80, B ₦160, C ₦240.

The ideas in more depth

Why the constraint exists

Without a constraint, an entity could estimate a large bonus, record it as revenue at once, and reverse it later. The constraint makes revenue reliable: only the amount that is very unlikely to be taken back is recognised now.

Why allocation uses stand-alone prices

A bundle price hides how much is paid for each part. Stand-alone prices reveal the relative value of the parts, so revenue for a handset delivered today is not understated or overstated because the service is cheap or dear.

Sources and references

• IFRS 15 Revenue from Contracts with Customers: transaction price, variable consideration and the constraint, significant financing component, non-cash consideration, and allocation of the transaction price.

These points are stated as at 5 November 2026.

Worked examples

1. Stand-alone total.
   ₦90,000 + ₦240,000 = ₦330,000.
2. Handset.
   ₦280,000 × 90/330 = ₦76,364, at a point in time on delivery.
3. Service.
   ₦280,000 × 240/330 = ₦203,636, over 12 months.
4. 20X8.
   Handset ₦76,364 + 3/12 × ₦203,636 (₦50,909) = ₦127,273.
5. 20X9.
   9/12 × ₦203,636 = ₦152,727.
   Total ₦280,000.

1. Expected returns.
   5% × 500 = 25 units, so 475 units are expected to stay sold.
2. Revenue.
   475 × ₦2,000 = ₦950,000.
3. Refund liability.
   25 × ₦2,000 = ₦50,000, a current liability.
4. Cash. ₦1,000,000, which equals ₦950,000 + ₦50,000.

1. Revenue.
   ₦6,000,000 ÷ 1.08² = ₦5,144,033.
2. Interest, year 1.
   ₦5,144,033 × 8% = ₦411,523.
3. Interest, year 2.
   (₦5,144,033 + ₦411,523) × 8% = ₦444,444.
4. Check.
   ₦5,144,033 + ₦411,523 + ₦444,444 = ₦6,000,000.

How to answer in the exam

• Distinguish the two prices. Stand-alone selling price is the separate price of one item; transaction price is the total consideration under the contract. Add a short example of each.
• Variable consideration. Name the method, apply it, then apply the constraint before including it.
• Financing. State the one-year test, discount to present value and show interest separately.
• Allocation. Write the stand-alone prices in a table, compute each share, then check the total equals the price.

Common mistakes in the exam

• Allocating the price equally, or in the order of delivery, instead of by stand-alone prices.
• Including variable consideration without applying the constraint.
• Forgetting the refund liability when a right of return exists.
• Discounting when the payment is within one year, or showing the interest as revenue.
• Including sales taxes in the transaction price.
• Allocating a discount to one obligation without the three conditions.

Quick revision

• Transaction price: expected entitlement, excluding third-party amounts.
• Variable consideration: expected value or most likely amount; constraint; refund liability.
• Financing: adjust if over one year; interest separate. Non-cash: fair value.
• Allocate in proportion to stand-alone selling prices; discount to specific obligations only with evidence.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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