IFRS 15 Steps 1 and 2: The Two Decisions Everyone Rushes

Steps one and two of IFRS 15 are the ones most people rush. They feel like preliminaries before the real work of pricing and allocation begins. They are not. They determine what the rest of the model is measuring, and an error in either does not surface until it has already distorted several reporting periods.

Step one asks whether a contract exists at all. IFRS 15 sets five criteria and treats them as a gate rather than a checklist to score. Four out of five is a fail. That surprises people. It means an arrangement can be signed, invoiced and partly delivered and still sit outside the revenue model, with any cash received parked on the balance sheet as a liability while you reassess at each reporting date. Which liability it is, and the narrow exception that lets you recognise that cash instead, is the part that gets tested.

Step one also quietly governs two situations that arrive constantly in practice. Contracts entered into at or near the same time with the same customer may have to be combined and accounted for as one. Modifications carry their own treatment depending on what was added and at what price.

Step two asks what you have actually promised. The governing concept is distinctness and it has two parts that must both pass. The first part is usually straightforward. The second, whether a promise is separately identifiable from the others in the contract, is where the judgement lives, and it is the reason a licence that runs perfectly well on its own can still fail to be a separate performance obligation. Promises can also be implicit, created by customary business practice or a published policy, which means the contract document is not the full list of what you owe.

One trap is worth naming. Many candidates carry an election about shipping and handling into an IFRS answer. That election belongs to US GAAP. Under IFRS the timing of control transfer does the work instead, and the difference is not cosmetic.

Our lesson works through the five criteria, the two-part distinctness test and a bundled contract analysed promise by promise, plus a mapping of professional services promises onto the obligations they collapse into. Built for actuarial students and finance professionals who need their IFRS 15 performance obligations analysis to hold up under scrutiny.

Start steps 1 and 2 in the Amatle Institute member library.