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The five-step model

THE International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) issued their converged standard on revenue recognition in May 2014. The standard is intended to increase financial statement comparability across companies and industries and significantly reduce the complexity in revenue recognition. The principles in the standard will be applied using a five-step model summarised below:

  • Identify the contract with the customer. Contracts may be written, verbal or implied by customary business practices, but must be enforceable and have commercial substance. The model applies to each contract with a customer once it is probable the entity will collect the consideration to which it will be entitled.
  • Identify the separate performance obligations in the contract. Once the contract has been identified, an entity will need to evaluate the terms and customary business practices to identify which promised goods or services, should be accounted for as separate performance obligations.
  • Determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled.
  • Allocate the transaction price. An entity must allocate the transaction price to each separate performance obligation.
  • Recognise revenue on satisfaction of performance obligation. An entity satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time.