What is the fourth step in the IFRS 15 five-step model?

What is the fourth step in the IFRS 15 five-step model?

• A. Allocate the transaction price
• B. Determine the transaction price
• C. Identify the contract
• D. Recognise revenue when performance obligations are satisfied

Answer: (A)

The key idea is distributing the contract’s promised consideration among the distinct promises (performance obligations) before you recognize revenue. After you’ve identified the contract, determined what you must deliver, and set the total transaction price, you allocate that price to each performance obligation based on their stand-alone selling prices (or reasonable estimates if those prices aren’t directly observable). This allocation is essential because revenue is recognized when each obligation is satisfied, so you need to assign the appropriate portion of the transaction price to each obligation upfront. The step that does this allocation is the fourth one. The remaining steps are identifying the contract, determining the price, and then recognizing revenue when the obligations are fulfilled.

The key idea is distributing the contract’s promised consideration among the distinct promises (performance obligations) before you recognize revenue. After you’ve identified the contract, determined what you must deliver, and set the total transaction price, you allocate that price to each performance obligation based on their stand-alone selling prices (or reasonable estimates if those prices aren’t directly observable). This allocation is essential because revenue is recognized when each obligation is satisfied, so you need to assign the appropriate portion of the transaction price to each obligation upfront. The step that does this allocation is the fourth one. The remaining steps are identifying the contract, determining the price, and then recognizing revenue when the obligations are fulfilled.