Applying the ASC 606 / IFRS 15 Five-Step Model
Use this whenever a question asks when — and how much — revenue a company may record. ASC 606 (US GAAP) and IFRS 15 (international) converge on one principle: recognise revenue to depict the transfer of promised goods or services in the amount the entity expects to be entitled to. Both implement it through the same five steps. Mnemonic: Contract → Promises → Price → Split → Deliver.
- Identify the contract. Confirm an agreement with enforceable rights and obligations — including that collection is probable. If it is not probable you'll be paid, there is no contract under Step 1, and therefore no revenue, even if you have delivered.
- Identify the performance obligations. List each distinct promise to transfer a good or service. A promise is distinct if the customer can benefit from it on its own and it is separately identifiable in the contract.
- Determine the transaction price. The consideration the entity expects to be entitled to, adjusting for Variable Consideration (discounts, bonuses, concessions — estimated and constrained), significant financing, and non-cash consideration.
- Allocate the price to each obligation. Split the transaction price across the performance obligations in proportion to their Standalone Selling Price (SSP).
- Recognise revenue as control transfers. Book revenue for each obligation as Transfer of Control occurs — either at a point in time or over time.
Common pitfalls
- Collectibility (Step 1) is the gate. A sale to a financially shaky customer can fail Step 1 even though both sides "agreed" — recognise revenue only as cash is received or once collection becomes probable.
- Payment ≠ delivery. Cash received before control transfers is Deferred Revenue (a liability), not revenue; a conditional right to consideration before billing is a contract asset (Income Receivable).
Worked example
Session 8's collectibility case: a sale is made to a customer where collection is not probable. Step 1 criterion 5 (collectibility) fails → no contract, no revenue yet; recognise revenue only as cash is received, or once collectibility becomes probable. See Session 8 - Revenue Recognition for the full five-step worked walkthrough (exercises 9–13 in Session 9 - Recap apply it end-to-end).