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

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

• A. Identify contract with the customer
• B. Determine the transaction price
• C. Allocate the transaction price
• D. Recognise revenue when a performance obligation is satisfied

Answer: (A)

Identifying the contract with the customer is the starting point because revenue recognition under IFRS 15 only applies once there is a legally enforceable agreement that creates rights and obligations for both parties. This contract sets the basis for everything that follows: what the entity must deliver, what it will receive in return, and when those rights and obligations arise. After confirming a contract exists, you then move on to identify the performance obligations, determine the transaction price, allocate that price to the obligations, and recognize revenue as those obligations are satisfied. Without a valid contract, there is nothing to deliver or bill for, so the later steps can’t properly proceed.

Identifying the contract with the customer is the starting point because revenue recognition under IFRS 15 only applies once there is a legally enforceable agreement that creates rights and obligations for both parties. This contract sets the basis for everything that follows: what the entity must deliver, what it will receive in return, and when those rights and obligations arise. After confirming a contract exists, you then move on to identify the performance obligations, determine the transaction price, allocate that price to the obligations, and recognize revenue as those obligations are satisfied. Without a valid contract, there is nothing to deliver or bill for, so the later steps can’t properly proceed.