The IFRS 15 five-step model with examples

The five steps are easy to list and harder to apply. The best way to learn them is to take one real contract through all five. This guide uses a mobile phone plan, which tests every step: two promises, one price, and revenue that arrives at different times.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

The IFRS 15 five-step model is: 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. In this guide's example, a CU 720 phone plan is split into CU 288 of handset revenue on day one and CU 432 of service revenue, CU 18 a month, by allocating the price in proportion to stand-alone selling prices.

At a glance

Contract
24 months at CU 30
Promises
Handset and service
Price
CU 720
Handset revenue
CU 288, on day one
Service revenue
CU 18 a month
Excel
Revenue allocation calculator
The IFRS 15 five-step model with examplesContract: 24 months at CU 30; Promises: Handset and service; Price: CU 720; Handset revenue: CU 288, on day one; Service revenue: CU 18 a month; Excel: Revenue allocation calculator.KEY FACTS AT A GLANCEThe IFRS 15 five-step model with examplesContract24 months at CU 30PromisesHandset and servicePriceCU 720Handset revenueCU 288, on day oneService revenueCU 18 a monthExcelRevenue allocationcalculatorChecked against official sourcesTax BakersThe IFRS 15 five-step model with examplesContract: 24 months at CU 30; Promises: Handset and service; Price: CU 720; Handset revenue: CU 288, on day one; Service revenue: CU 18 a month; Excel: Revenue allocation calculator.KEY FACTS AT A GLANCEThe IFRS 15 five-step model withexamplesContract24 months at CU 30PromisesHandset and servicePriceCU 720Handset revenueCU 288, on day oneService revenueCU 18 a monthExcelRevenue allocation calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What does the contract say?

A customer signs a 24-month plan for CU 30 a month and receives a handset on day one. The operator sells the same handset on its own for CU 400 and the same service without a handset for CU 25 a month, CU 600 over 24 months.

The five steps, applied to a phone planThe five steps, applied to a phone plan1Identify thecontract24-month plan,CU 30 a month2Find theobligationsHandset andnetwork service3Set thepriceCU 720 forthe contract4Allocatethe priceHandset 288Service 4325Recogniserevenue288 on day one18 each month
One contract taken through all five steps of IFRS 15.

Step 1: Is there a contract?

A contract exists when the parties have approved it, each party's rights and the payment terms can be identified, it has commercial substance, and collection of the amount the company is entitled to is probable (IFRS 15.9). The signed plan meets all of these.

Step 2: What has been promised?

The handset and the service are each distinct: the customer could use the handset with another network, and the operator sells the service without handsets. So there are two performance obligations. See identifying performance obligations.

Step 3: What is the transaction price?

The price is CU 30 x 24 = CU 720. There is no variable element and, because the operator collects the handset's value over the contract term, it would consider whether a significant financing component exists; here it is assumed not to be significant. See variable consideration for prices that can change.

Step 4: How is the price allocated?

ObligationStand-alone selling priceShareAllocated price
HandsetCU 40040%CU 288
Service, 24 monthsCU 60060%CU 432
TotalCU 1000100%CU 720

The customer pays CU 720 for goods worth CU 1000 on their own, so the discount of CU 280 is shared across both obligations in proportion to their stand-alone prices. See allocating the transaction price.

Step 5: When is revenue recognised?

The handset's control passes on day one, so CU 288 is recognised then. The service is provided evenly over 24 months, so CU 432 / 24 = CU 18 is recognised each month.

WhenEntryCU
Day oneDr Contract asset, Cr Revenue (handset)288
Each monthDr Receivable 30; Cr Revenue (service) 18; Cr Contract asset 1230

The contract asset of CU 288 is reduced by CU 12 a month and reaches nil after 24 months (12 x 24 = 288), when the customer has paid for the handset in full through the monthly charges.

Can you try it with your own numbers?

The Revenue allocation calculator (Excel) allocates any contract price across up to eight obligations and produces the month-by-month revenue schedule. It opens with this phone plan already filled in.

What goes wrong at each step?

  • Step 1: treating a signed order as a contract when collection is doubtful, or missing that two contracts signed together should be combined.
  • Step 2: splitting promises that are really inputs to one combined output, missing a material right such as loyalty points, or reporting goods supplied by another party at the gross amount without checking whether you are principal or agent.
  • Step 3: ignoring rebates and refunds, or a significant financing component when payment is spread well beyond delivery.
  • Step 4: using list prices instead of stand-alone selling prices, or giving the whole discount to one item.
  • Step 5: recognising revenue when cash arrives instead of when control passes. For the US version, see the ASC 606 five-step model. Costs follow their own rules; see contract costs.

To practise the entries for each step, use debits and credits for each standard.

What do the five steps look like together?

StepQuestionAnswer in this example
1Is there a contract?Yes, a signed 24-month plan
2What has been promised?A handset and 24 months of service
3What is the price?CU 720
4How is it split?Handset CU 288, service CU 432
5When is revenue recognised?Handset on day one; service evenly over 24 months

Need help applying the standards?

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Questions people ask

What are the five steps of IFRS 15?

Identify the contract, identify the performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue when each obligation is satisfied.

How is the price split between a handset and a service plan?

In proportion to their stand-alone selling prices, so any discount is shared across both.

Why is there a contract asset in a phone bundle?

Handset revenue is recognised on day one, but the customer pays for it through future monthly charges.

Does the five-step model also apply under US GAAP?

Yes. ASC 606 uses the same five steps.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 15IFRS 15 revenue from contracts with customers explainedIFRS 15Allocating the transaction price using stand-alone selling pricesIFRS 15Identifying performance obligations under IFRS 15

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This guide is general information. It is not tax or legal advice for your situation.