Can someone walk me through the IFRS 15 / ASC 606 five-step revenue recognition model?

The five-step model under IFRS 15 / ASC 606 is identical under both frameworks (a rare convergence!). Here's the systematic approach:

Worked Example:

Silverline Technologies signs a $2.4M contract with Meridian Healthcare to:

• Deliver custom ERP software (standalone price: $1.8M)
• Provide 2 years of maintenance/support (standalone price: $900K, or $450K/year)
• Total standalone prices: $2.7M

Step 1: Identify the contract

Written agreement, both parties approved, payment terms clear, commercial substance, collectibility probable. Contract exists.

Step 2: Identify performance obligations

Two distinct obligations:

1. Software delivery (can function on its own)
2. Maintenance services (separately identifiable, customer benefits independently)

Step 3: Determine transaction price

Total = $2.4M (no variable consideration, no financing component)

Step 4: Allocate based on relative standalone selling prices

Step 5: Recognize when satisfied

• Software: Delivered at a point in time (upon installation and acceptance) → $1.6M recognized at delivery
• Maintenance: Satisfied over time (ratably over 24 months) → $400K per year ($33,333/month)

Common exam traps:

1. Variable consideration: If the contract includes performance bonuses or penalties, estimate using expected value or most likely amount and include in transaction price (subject to constraint)
2. Significant financing component: If payment is deferred >12 months, adjust for time value of money
3. Contract modifications: New goods at standalone price = separate contract; otherwise modify existing allocation

Practice multi-element arrangements with our CFA Level II question bank on AcadiFi.