There are five simple steps aimed at reducing ambiguity around the timing and amount relating to the recognition of revenue.
The five steps are below
- Identifying the contract.
- Identifying the performance obligations in the contract.
- Determining the contract price.
- Allocating the transaction price.
- Recognising revenue when a performance obligation is satisfied.
A contract with customer will fall under the IFRS 15 if it has following below conditions;
- The contract is approved by all the parties to the contract
2. The payment terms and each party rights related to each party should be identified or transferred
3. Contract has commercial substance
4. There are probable chances the consideration to party for which it is entitle for exchange of services or goods should be collected.
5. Any modification to the contract can be done anytime by the mutual consent of all the parties to the contract.
Identifying the performance obligations in the contract
At start of contract the entity should asses the performance obligations of contract such as transfer of goods and services. An item of goods or services which are different and the bundle of items which are same and have same way of transfer to the customer.
Factors of consideration not separately identifiable of transfer of goods and services are not limited to;
The entity provides a service of integrating the goods or services with other promised in the contract
The goods or services can be significantly customised to goods and services in the contract
The goods or services are highly related or dependent
Determined the transaction price
The transaction amount is the price which the entity will receive according to the contract in exchange of goods and services.