IFRS 15: the five-step revenue recognition model
IFRS 15 replaced a set of industry-specific rules with one model, and the model has one governing idea: revenue follows control, not cash and not the invoice. Most errors in practice are not disagreements about that idea. They are failures to unbundle a contract, or to allocate the price by standalone selling price rather than by whatever the invoice happens to say.
The five steps
| Step | Question it answers | Where it goes wrong |
|---|---|---|
| 1. Identify the contract | Is there an enforceable arrangement with commercial substance? | Collectability assessed too loosely; related contracts not combined |
| 2. Identify performance obligations | What distinct things have I promised? | Treating a bundle as one obligation |
| 3. Determine the transaction price | What consideration do I expect to be entitled to? | Ignoring variable consideration and the constraint |
| 4. Allocate the price | How much belongs to each obligation? | Allocating by invoice or list price instead of standalone selling price |
| 5. Recognise revenue | When does control transfer? | Defaulting to over time, or to delivery, without testing |
Step 1 — identify the contract
A contract exists for IFRS 15 when the parties have approved it, each party's rights and payment terms are identifiable, it has commercial substance, and it is probable that the entity will collect the consideration to which it will be entitled. That last criterion is a gate, not a footnote: if collection is not probable at inception, there is no contract to account for, however signed the paperwork.
Two mechanics attach here:
- Combining contracts. Two or more contracts entered into at or near the same time with the same customer are combined where they are negotiated as a package with a single commercial objective, where the price of one depends on the other, or where the goods promised are a single performance obligation. Selling hardware at a loss under one contract and services at a premium under another does not survive this test.
- Modifications. A modification is a separate contract only where it adds distinct goods or services and the price reflects their standalone selling price. Otherwise it is either a termination-and-replacement, accounted for prospectively, or a cumulative catch-up against the original contract. Getting this wrong is the most common restatement trigger in long-term contracting.
Across five industries
Contract identification, combination and modification.
| Industry | How the point applies |
|---|---|
| Telecom | A 24-month postpaid contract is enforceable from activation; a prepaid top-up creates a contract at the point of top-up. Where a device instalment agreement and the airtime agreement are signed together, they are combined — the price of one plainly depends on the other. Collectability is a live judgement on high-churn segments. |
| Construction & real estate | Phases let under separate agreements to the same developer, negotiated as a package with one commercial objective, are combined. Variation orders are the recurring modification question: distinct scope at standalone price is a new contract, otherwise a cumulative catch-up. |
| Software & SaaS | A master agreement plus order forms is usually one contract. A mid-term upgrade from a lower to a higher tier at a blended price is a modification, not a new contract, because the price does not reflect standalone selling price. |
| Banking & financial services | Interest is IFRS 9, not IFRS 15. The contract analysis bites on fee arrangements — arrangement fees, custody, asset management — where an umbrella mandate plus fee schedule forms the contract. |
| Retail & e-commerce | The contract is typically the individual sale, formed at the point of purchase. Collectability is rarely the issue; combining matters for negotiated annual supply agreements with rebate ladders. |
We handle the computation, the minimum-tax comparison, statutory accounts and the annual filings together.
Avail our corporate tax servicesStep 2 — identify the performance obligations
A promised good or service is a separate performance obligation if it is distinct, which requires two things simultaneously:
- Capable of being distinct — the customer can benefit from it on its own or with resources readily available.
- Distinct within the context of the contract — the promise is separately identifiable from the other promises. It is not where the entity provides a significant integration service, where the item significantly modifies or customises another, or where the items are highly interdependent or interrelated.
The second condition is the one that decides construction and system-integration contracts. A contractor supplying steel, labour and design to build one bridge has promised a bridge, not three things. Meanwhile a telecom operator selling a handset with a 24-month airtime plan has promised two things, because the customer can benefit from the handset independently.
Across five industries
Where the obligations divide.
| Industry | How the point applies |
|---|---|
| Telecom | Handset and airtime are two obligations — the customer benefits from the handset independently. SIM and activation are generally not distinct: they confer no separate benefit, so an activation fee is an advance payment for future service, not revenue on day one. Device insurance and third-party content may each be distinct. |
| Construction & real estate | Design, materials, labour and commissioning on one integrated build are a single obligation, because the entity provides a significant integration service and the inputs are highly interdependent. Separate obligations arise for genuinely severable scopes such as a distinct fit-out or a post-handover maintenance period. |
| Software & SaaS | Typically the subscription, the implementation service and premium support. Implementation is distinct only where a third party could perform it; where it significantly customises the platform, it is not distinct and merges with the subscription. |
| Banking & financial services | Account maintenance, transaction processing and advisory services are often distinct. Fees integral to the effective interest rate of a loan fall out of IFRS 15 entirely and into IFRS 9. |
| Retail & e-commerce | The goods, plus any loyalty points that confer a material right the customer would not otherwise receive. Extended warranties sold separately are distinct; assurance-type warranties are not, and stay in IAS 37. |
Step 3 — determine the transaction price
| Element | Treatment |
|---|---|
| Variable consideration | Estimate by expected value or most likely amount, then apply the constraint |
| Constraint on variable consideration | Include only to the extent it is highly probable that a significant reversal will not occur |
| Significant financing component | Adjust for the time value of money; practical expedient where the period between transfer and payment is one year or less |
| Non-cash consideration | Measure at fair value |
| Consideration payable to a customer | Reduction of the transaction price, unless it is payment for a distinct good or service |
Across five industries
Variable consideration and financing components.
| Industry | How the point applies |
|---|---|
| Telecom | Variable elements include out-of-bundle usage, early termination charges, and retention credits. A 24-month device instalment plan can contain a significant financing component where the implied rate is material — the one-year practical expedient does not reach a 24-month plan. |
| Construction & real estate | Claims, variations, incentive payments and liquidated damages are all variable consideration. Liquidated damages reduce the price and are the most commonly under-recognised item, because commercial teams treat them as contingent until levied. |
| Software & SaaS | Usage-based and sales-based royalties have their own exception: recognise as the usage or sale occurs, rather than estimating and constraining. Service-level credits are variable consideration reducing the price. |
| Banking & financial services | Performance fees on managed funds are textbook constrained consideration — highly susceptible to market movement, so rarely recognised before the measurement date crystallises. |
| Retail & e-commerce | Volume rebates, settlement discounts and expected returns are estimated by expected value across a large population. Slotting and listing fees paid to a retailer are consideration payable to a customer, reducing revenue unless they buy a distinct service. |
Worked: variable consideration and the constraint
A contractor agrees a fixed fee of Rs 40,000,000 plus a Rs 6,000,000 bonus for early completion. It assesses a 70% likelihood of earning the bonus.
| Method | Computation | Transaction price |
|---|---|---|
| Expected value | 40,000,000 + (0.70 × 6,000,000) | Rs 44,200,000 |
| Most likely amount | 40,000,000 + 6,000,000 | Rs 46,000,000 |
Where the outcome is binary — the bonus is earned or it is not — the most likely amount is the better estimate, so Rs 46,000,000. But the constraint is then applied separately: include the Rs 6,000,000 only if it is highly probable that including it will not later cause a significant revenue reversal. A 70% assessment will rarely clear "highly probable", so the practical answer is usually Rs 40,000,000 now with the bonus recognised as the uncertainty resolves. Estimate first, constrain second — running the two together is how over-recognition happens.
Step 4 — allocate the transaction price
Allocation is by relative standalone selling price at contract inception. Where an item has no observable standalone price, estimate it — adjusted market assessment, expected cost plus a margin, or a residual approach used only where the price is highly variable or uncertain.
Worked: a bundled handset and airtime plan
A customer signs a 24-month plan at Rs 3,000 a month and receives a handset at no upfront charge. Total consideration is Rs 72,000. Standalone selling prices are Rs 30,000 for the handset and Rs 2,500 a month for airtime (Rs 60,000 over 24 months).
| Obligation | Standalone price | Share | Allocated |
|---|---|---|---|
| Handset | Rs 30,000 | 33.3% | Rs 24,000 |
| Airtime, 24 months | Rs 60,000 | 66.7% | Rs 48,000 |
| Total | Rs 90,000 | 100% | Rs 72,000 |
So Rs 24,000 of revenue is recognised on handset delivery even though the customer paid nothing upfront, with a corresponding contract asset. Airtime revenue is Rs 2,000 a month, not the Rs 3,000 billed — the Rs 1,000 monthly difference unwinds the contract asset.
Note what the naive treatment does: recognising Rs 3,000 a month and nothing for the handset defers Rs 24,000 of revenue that has been earned, and reports a device cost with no matching revenue. The bundle discount of Rs 18,000 is allocated proportionately across both obligations, not assigned entirely to the handset.
Across five industries
Allocating by standalone selling price.
| Industry | How the point applies |
|---|---|
| Telecom | The defining allocation in the sector. A subsidised handset takes its standalone selling price share, so revenue is recognised on delivery against a contract asset that unwinds over the tariff. The bundle discount spreads across device and service — it is not assigned wholly to the handset. |
| Construction & real estate | Where the build is a single obligation, there is nothing to allocate. Allocation reappears where a separate maintenance period or fit-out exists, and where a developer bundles a car parking bay or furniture package with a unit. |
| Software & SaaS | Standalone selling prices are frequently unobservable because list prices are heavily and variably discounted — the case where a residual approach is permitted. Multi-year prepaid deals need the discount spread across periods, not loaded into year one. |
| Banking & financial services | Packaged accounts bundling an overdraft facility, insurance and travel benefits require allocation across the distinct elements at their standalone prices. |
| Retail & e-commerce | Loyalty points take an allocated share of the original sale, deferred until redeemed or until they expire, with the estimate reflecting expected redemption rates rather than points issued. |
Step 5 — recognise revenue as control transfers
Revenue is recognised over time if any one of three criteria is met:
- The customer simultaneously receives and consumes the benefits as the entity performs;
- The entity's performance creates or enhances an asset the customer controls as it is created; or
- 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.
Fail all three and revenue is recognised at a point in time, assessed against indicators of control: the customer has the significant risks and rewards, has accepted the asset, has physical possession, has legal title, and the entity has a present right to payment.
| Measure of progress | Basis | Caution |
|---|---|---|
| Output method | Units delivered, milestones, surveys of performance | Milestones may not track actual transfer |
| Input method | Costs incurred, labour hours, machine hours | Exclude inefficiencies and uninstalled materials |
The uninstalled-materials point is worth stating plainly: where an entity uses a cost-based input method and procures materials well ahead of installation, including that cost overstates progress. The usual answer is to recognise revenue at the cost of those materials with zero margin until they are installed.
Across five industries
Over time or at a point in time.
| Industry | How the point applies |
|---|---|
| Telecom | Handset: point in time, on delivery. Airtime and data: over time as the service is provided. For an unlimited bundle, straight-line generally reflects the pattern; for a fixed data allowance consumed unevenly, a usage-based measure may be more faithful — and the choice materially changes the monthly profile. |
| Construction & real estate | Usually over time under the third criterion: no alternative use plus an enforceable right to payment for work completed. Off-plan residential sales in some jurisdictions fail the enforceable-right test and revert to a point in time at handover, which is a legal question before it is an accounting one. |
| Software & SaaS | A term licence granting a right to use the software as it exists is a point in time. SaaS, and any licence granting a right to access evolving IP, is over time. Perpetual licence plus mandatory annual support is commonly split across both patterns. |
| Banking & financial services | Transaction fees at a point in time; account servicing and asset management fees over time as the service is rendered. |
| Retail & e-commerce | At a point in time, but which point matters for e-commerce: control may pass on despatch or on delivery depending on shipping terms, and that decides whether a sale on 30 June falls in this year or next. |
Principal or agent — gross or net
This decides whether reported revenue is the whole transaction or only the commission, and it is the single largest presentational question for platforms, marketplaces and distributors. The test is control of the specified good or service before transfer to the customer. Indicators of principal status:
- Primary responsibility for fulfilling the promise;
- Inventory risk before or after transfer; and
- Discretion in establishing the price.
A marketplace with Rs 500,000,000 of gross merchandise value and a 12% commission reports revenue of Rs 500,000,000 as principal, or Rs 60,000,000 as agent. Same cash, same profit, an eightfold difference in reported revenue — which is why this conclusion needs documenting rather than assuming.
Across five industries
Control before transfer decides gross or net.
| Industry | How the point applies |
|---|---|
| Telecom | Airtime sold through distributors: the operator remains principal to the subscriber and the distributor margin is a cost, not a netting of revenue. Third-party content and value-added services resold on the network are frequently agent arrangements, where only the operator’s retained margin is revenue. |
| Construction & real estate | A main contractor controls the subcontracted work before it transfers and is principal on the whole. A development manager acting for a landowner for a fee is an agent, and reports only the fee. |
| Software & SaaS | Reselling third-party licences turns on whether the reseller controls the licence before transfer. App-store and marketplace models are the archetypal agency question and the answer drives headline revenue by multiples. |
| Banking & financial services | Distributing a third-party insurance or fund product is normally agency — commission only. Where the bank sets the price and bears fulfilment responsibility, principal treatment can follow. |
| Retail & e-commerce | The clearest split in the corpus: own-inventory sales are gross; marketplace facilitation on third-party inventory is net. A platform running both models must report each on its own basis rather than blending. |
Contract costs
| Cost | Treatment |
|---|---|
| Incremental costs of obtaining a contract (e.g. a sales commission that would not have been incurred otherwise) | Capitalise; practical expedient to expense where the amortisation period is one year or less |
| Costs to fulfil a contract | Capitalise where they relate directly to the contract, generate or enhance resources used to satisfy it, and are expected to be recovered |
| General and administrative costs, wasted materials, costs of satisfied obligations | Expense as incurred |
Capitalised costs are amortised on a basis consistent with the transfer of the goods or services, and tested for impairment against remaining consideration less remaining costs.
Across five industries
Capitalise, or expense.
| Industry | How the point applies |
|---|---|
| Telecom | Dealer and channel commissions on subscriber acquisition are incremental costs of obtaining a contract: capitalise and amortise over the expected customer relationship, including anticipated renewals, which is typically longer than the 24-month contract term. |
| Construction & real estate | Bid and tender costs are capitalised only where incremental and recoverable; costs of unsuccessful bids are expensed. Mobilisation and site set-up are costs to fulfil. |
| Software & SaaS | Sales commissions on multi-year subscriptions are the most-litigated application in the sector, because the amortisation period must reflect expected renewals rather than the initial term. |
| Banking & financial services | Costs of originating a loan are IFRS 9 effective-interest items, not IFRS 15 contract costs. Costs of winning an asset management mandate are within IFRS 15. |
| Retail & e-commerce | Customer acquisition cost is usually advertising, which is expensed — it is not incremental to a specific contract. The one-year practical expedient covers most genuinely incremental retail commissions. |
Presentation — three balances people confuse
| Balance | Arises when | Conditional on |
|---|---|---|
| Receivable | An unconditional right to consideration exists | Only the passage of time |
| Contract asset | Performance precedes the right to payment | Further performance |
| Contract liability | Payment or a due amount precedes performance | — |
The distinction between a receivable and a contract asset is not cosmetic: a contract asset carries performance risk as well as credit risk, and the expected credit loss assessment under IFRS 9 applies to both.
Across five industries
Receivable, contract asset, contract liability.
| Industry | How the point applies |
|---|---|
| Telecom | A contract asset from the subsidised handset, unwinding across the tariff. A contract liability for prepaid balances, unused data allowances and annually billed plans. Both are usually material and move in opposite directions. |
| Construction & real estate | Unbilled work in progress is a contract asset. Retentions are a receivable only once the right is unconditional; while contingent on defect rectification they remain a contract asset. Advances received are a contract liability. |
| Software & SaaS | Annually invoiced subscriptions create a large contract liability, usually the biggest balance-sheet item disclosed. A contract asset arises where a ramped fee structure means performance precedes billing. |
| Banking & financial services | Fees invoiced in advance for services yet to be rendered are contract liabilities; the distinction from deposits matters to both users and regulators. |
| Retail & e-commerce | Gift cards and unredeemed loyalty points are contract liabilities. Cash collected before despatch is a contract liability, not revenue, however short the interval. |
Licences, and unexercised rights
For a licence of intellectual property, the question is whether the customer has a right to use the IP as it exists at grant — revenue at a point in time — or a right to access IP that the entity continues to update or support, which is a series of obligations satisfied over time.
Breakage is the related issue for prepaid products — vouchers, prepaid airtime, loyalty points. Where an entity receives consideration for a right the customer may never exercise, it recognises the unexercised portion as revenue when the likelihood of exercise becomes remote — or, where it expects to be entitled to a breakage amount, in proportion to the pattern of rights exercised. Recognising all breakage on expiry rather than proportionately is a timing error, and it is material for any business with a large prepaid base.
Across five industries
Licences and breakage.
| Industry | How the point applies |
|---|---|
| Telecom | Breakage on unused prepaid airtime and expired data bundles is the sector’s largest single revenue judgement. Where the operator expects entitlement, recognise in proportion to the pattern of rights exercised rather than in a lump on expiry — the difference is a timing shift across reporting periods, and on a large prepaid base it is material to every quarter. |
| Construction & real estate | Licences are peripheral, but forfeited customer deposits on cancelled off-plan sales raise the same unexercised-rights question. |
| Software & SaaS | The core distinction: right to use IP as it exists at grant is point in time; right to access IP the vendor continues to update is over time. Most modern licensing is access, because the vendor ships continuous updates. |
| Banking & financial services | Unused overdraft or facility arrangements, and dormant fee-bearing balances, need an unexercised-rights analysis. |
| Retail & e-commerce | Gift card breakage and loyalty point expiry are the direct analogues of telecom prepaid breakage, with the same proportional-recognition requirement and the same audit scrutiny of the redemption estimate. |
Disclosure
- Disaggregation of revenue into categories that show how economic factors affect it;
- Opening and closing balances of receivables, contract assets and contract liabilities, and revenue recognised from opening contract liabilities;
- Performance obligations — timing of satisfaction, payment terms, warranties and returns;
- The transaction price allocated to remaining performance obligations, and when it is expected to be recognised;
- Judgements on timing, transaction price and allocation; and
- Assets recognised for costs to obtain or fulfil contracts.
In Pakistan these sit within financial statements prepared under the Companies Act 2017 and the IFRS Accounting Standards as notified, so the disclosure package is the enforceable output, not just the recognition pattern.
Where this goes wrong most often
- Not unbundling. One invoice is not evidence of one performance obligation.
- Allocating by invoice value. Allocation is by standalone selling price, so a bundle discount spreads proportionately.
- Estimating and constraining in one move. Estimate variable consideration, then apply the constraint separately.
- Defaulting to over time. The three criteria are tested, not assumed — and criterion three needs an enforceable right to payment for work done.
- Cost-based progress including uninstalled materials. Overstates completion.
- Gross reporting without a control analysis. Principal versus agent changes revenue by multiples.
- Treating contract assets as receivables. Different risk, different disclosure.
- Recognising all breakage at expiry instead of in proportion to the exercise pattern.
- Expensing commissions that should be capitalised and amortised.
- Accounting for modifications as if every change order were a new contract.
Related: IFRS 18 and the new income statement, which framework applies in Pakistan, preparing financial statements and deferred revenue mechanics.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
- IFRS Accounting Standards — full list (IFRS Foundation)
- IFRS for SMEs and applicable frameworks (ICAP)
- Companies Act 2017 (SECP)
Questions people also ask
Does IFRS 15 change when I invoice or collect cash?
No. It changes when revenue is recognised. Invoicing and collection determine whether you hold a receivable, a contract asset or a contract liability, but revenue follows the transfer of control. A contract can produce revenue before any invoice is raised, and an invoice can produce no revenue at all.
How do I allocate a bundle discount?
Proportionately across the performance obligations by relative standalone selling price, unless there is observable evidence that the discount relates to specific obligations only. Assigning the whole discount to the item you gave away free is the common error, and it defers revenue that has already been earned.
When is the most likely amount better than expected value for variable consideration?
Where the outcome is binary — a completion bonus is earned or it is not. Expected value suits a range of possible outcomes, such as volume rebates across many transactions. Whichever you use, apply the constraint separately afterwards and include the variable amount only where a significant revenue reversal is highly improbable.
What is the difference between a contract asset and a receivable?
A receivable is an unconditional right to consideration, conditional only on the passage of time. A contract asset arises where performance has run ahead of the right to payment, so it is still conditional on further performance. The contract asset therefore carries performance risk as well as credit risk, and the two are disclosed separately.
How should unused prepaid airtime or vouchers be treated?
As breakage. Where you expect to be entitled to an amount for rights the customer will never exercise, recognise it in proportion to the pattern of rights actually exercised. Only where you do not expect entitlement do you wait until the likelihood of exercise becomes remote. Recognising everything on expiry misstates the timing.
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