Step 1: Identify the contract with a customer

A contract exists when: (a) the parties have approved it and are committed, (b) each party's rights can be identified, (c) payment terms can be identified, (d) the contract has commercial substance, and (e) it is probable the entity will collect the consideration. Contracts can be written, oral, or implied by customary business practices.

Step 2: Identify the performance obligations in the contract

A performance obligation is a promise to transfer a distinct good or service (or a bundle of goods/services) to the customer. A good or service is distinct if:

The customer can benefit from it on its own or with readily available resources, AND
It is separately identifiable from other promises in the contract (not highly interrelated or significantly modified by other goods/services in the contract)

Example: a contract to sell a laptop and provide a 2-year support service → two performance obligations (the laptop is distinct; the service is distinct).

Step 3: Determine the transaction price

The transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring goods/services. Consider:

Variable consideration: Estimated using the expected value method (probability-weighted average) or the most likely amount method. Subject to a constraint: include variable consideration only to the extent it is highly probable that a significant reversal will not occur.
Significant financing component: If payment timing differs significantly from delivery, adjust for the time value of money (unless the period is one year or less — practical expedient).
Non-cash consideration: Measured at fair value.
Consideration payable to a customer: Usually reduces the transaction price (e.g., coupons, rebates).

Step 4: Allocate the transaction price to performance obligations

If there are multiple performance obligations, allocate the total transaction price to each in proportion to their relative stand-alone selling prices. If a stand-alone selling price is not directly observable, estimate it.

Step 5: Recognise revenue when (or as) each performance obligation is satisfied

A performance obligation is satisfied when (or as) the customer obtains control of the promised good or service. Control can transfer:

At a point in time: Revenue recognised at the moment control transfers (e.g., delivery of goods). Indicators: entity has a present right to payment, customer has legal title, physical possession has transferred, customer has significant risks and rewards, customer has accepted the asset.
Over time: Revenue recognised progressively as the performance obligation is satisfied. This applies when:
- The customer simultaneously receives and consumes the benefits (e.g., cleaning services), OR
- The entity's performance creates or enhances an asset that the customer controls as it is created (e.g., constructing a building on customer's land), OR
- The entity's performance does not create an asset with alternative use to the entity AND the entity has an enforceable right to payment for performance completed to date

For over-time recognition, measure progress using input methods (e.g., costs incurred relative to total expected costs) or output methods (e.g., units delivered, milestones reached).

Accounting