Five-step model
The five-step model is the core of ASC 606, IFRS 15 and Ind AS 115: identify the contract; identify the performance obligations; determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when, or as, each obligation is satisfied.
Standard references
- ASC 606606-10-05-4
- IFRS 15paragraph IN7
- Ind AS 115same five-step structure as IFRS 15
Worked example
Illustrative: a signed two-year contract for $120,000 covering a subscription and an onboarding project.
- Step 1: signed, enforceable, collectible — a contract exists.
- Step 2: two performance obligations — subscription (series) and onboarding (distinct service).
- Step 3: transaction price $120,000 fixed.
- Step 4: SSPs $100,000 and $25,000; relative allocation $96,000 and $24,000.
- Step 5: subscription $96,000 / 24 = $4,000 a month; onboarding $24,000 as hours are delivered.
Result: Two schedules that together recognise exactly $120,000.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Skipping step 1 checks such as enforceability and collectibility.
- Doing step 4 on list prices instead of SSPs.
- Running step 5 off the invoice schedule.