Five-Step Model
The five-step model is the core framework of ASC 606 and IFRS 15. It defines the sequence in which companies determine when and how much revenue to recognize from contracts with customers.
Revenue Recognition
The Five Steps
1. Identify the contract with the customer – an agreement that creates enforceable rights and obligations.
2. Identify the performance obligations – the distinct goods or services promised in the contract.
3. Determine the transaction price – the consideration the company expects to be entitled to, including variable amounts.
4. Allocate the transaction price to the performance obligations, based on relative standalone selling prices.
5. Recognize revenue when (or as) each performance obligation is satisfied – at a point in time or over time.
Explanation
The model applies to all contracts with customers within the scope of the standards. Each step involves judgment, and decisions in earlier steps directly affect later ones. For example, how performance obligations are identified determines how the price is allocated.
Why It Matters
In SAP, each step translates into system design: contract combination, performance obligation types, pricing data, SSP determination, and fulfillment events. SAP Revenue Accounting and Reporting (RAR) is built around this model.
Related Terms
ASC 606 · IFRS 15 · Performance Obligation · Transaction Price · Standalone Selling Price · Contract Combination · Collectibility
Related Articles
• The 5-Step Model of IFRS 15 / ASC 606 Explained for SAP Teams
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