Under IFRS 15, what is the third step of the revenue recognition model?

Under IFRS 15, the third step of the revenue recognition model is to determine the transaction price.

The transaction price is the amount of consideration an entity expects to be entitled to receive in exchange for transferring promised goods or services to a customer. It excludes amounts collected for other parties, such as some sales taxes, and may require significant judgment.

IFRS 15’s five-step model begins by identifying the contract, then identifying performance obligations. Step three determines the consideration before step four allocates that price to the performance obligations and step five recognizes revenue as those obligations are satisfied.

Determining the price can involve variable consideration, discounts, refunds, bonuses, penalties, financing components, or non-cash consideration. IFRS 15 was issued by the International Accounting Standards Board in 2014 and became effective for annual periods beginning on or after January 1, 2018. The common mistake is placing “allocate transaction price” third; allocation is step four.