Full explanation
Overview
Picture this. You pick up a brand-new phone at a Lumina Mobile store — and you walk out without paying a single cent. It's free.
But that night, in Lumina's books, something strange happens — they record money earned… on the phone they just gave away. How? How can "free" turn into money? Stick with me — and by the end, you'll know exactly how. The tool that cracks it is IFRS 15: one model, five simple questions, for any sale on earth.
IAS 18 & IAS 11 vs IFRS 15
First — why did this even change? For decades, two old standards ran revenue. IAS 18 for goods and services. IAS 11 for construction. Two rule books, often pulling different ways.
IFRS 15 swept them into one. And the heart of it is a single shift: the old question was, have the risks and rewards passed? The new question is simpler — has control passed to the customer?
That one change ripples through everything — goods, services, construction, bundles — all judged the same way now.
And look at the last row. Under the old rules, our "free" phone often showed zero revenue up front. Under IFRS 15 — two hundred and forty euros, on day one. Hold that number. By the end, you'll see exactly where it comes from.
What IFRS 15 covers — and what it doesn't
But before we dive in — where does IFRS 15 actually rule? Its kingdom is simple: any contract with a customer to deliver goods or services. Sales, subscriptions, construction, licences, bundles — all of it.
But not everything. Leases belong to IFRS 16. Financial instruments to IFRS 9. Insurance to IFRS 17. The test is easy: if it's a customer buying your product or service, IFRS 15 is your rulebook.
Part one. The five-step model — the engine behind every single answer.
Revenue in five steps
So how do we get there? Five steps. Think of them as five questions you ask of any deal on earth.
One. Is there a contract?
Two. What exactly did we promise?
Three. What's the total price?
Four. How do we split that price across our promises?
And five. When do we actually count the revenue?
Five questions. Let's put them to our phone plan, one at a time.
A contract, and two distinct promises
Step one of five — is there a contract? It has to be enforceable, with clear payment terms, and we're reasonably sure we'll be paid. Our 24-month plan? Easily yes.
Step two — what did we promise? Here's the key: look for promises that stand on their own. The phone works on any network — that's one promise. The monthly service — that's another.
So two separate promises. And splitting a deal into its real promises… is exactly what the old rules kept getting wrong.
What's a "performance obligation"?
Quick pause on that phrase, because the whole standard hangs off it. A "performance obligation" sounds technical. It just means a distinct promise — something you hand over that the customer can use on its own.
Our phone plan? Two promises — the phone, and the service. Two performance obligations. That's all it means. Keep that picture — everything builds on it.
The "free" phone isn't free
Step three — the price. Thirty euros a month, twenty-four months. Seven hundred and twenty euros, in total. Easy.
Step four is where it gets clever. We split that seven-twenty across our two promises — but not by what the contract calls them. The phone says "free." We ignore that.
Instead, we split by what each would sell for on its own. Phone alone — three hundred. Service alone — six hundred. Nine hundred together.
So the phone's slice is seven-twenty, times three hundred over nine hundred… Two hundred and forty euros. There it is — our mystery number.
The "free" phone was never free in the accounts. It carries two hundred and forty euros of revenue. Half the mystery solved. Now — when do we count it?
Revenue earned before it's billed
Step five — timing. When does revenue count? The phone? The instant it's in the customer's hands. Control has passed. That's day one.
The service is different — it's used up month by month — so its revenue spreads across the twenty-four months.
Which means… on day one, we've earned two hundred and forty euros on the phone — but the customer hasn't paid a cent yet. They pay monthly.
So we park it as a contract asset: debit contract asset two-forty, credit revenue two-forty. And there's our answer — that's how a "free" phone makes money on day one. Mystery solved.
But revenue is only half of it. Here's the matching half: that handset cost the company two hundred euros. It moves to cost of sales now — recognised right beside the revenue it earned.
What's a "contract asset"?
One more plain-English moment. A "contract asset" is simply revenue you've earned but haven't billed yet — you've handed something over, the cash is still coming.
It's not a receivable. A receivable is money you're plainly owed, just waiting on time. A contract asset still depends on you doing more — like delivering the rest of the service. Small distinction, big deal to auditors.
Same sale, very different profit timing
So what's the profit on day one? Under the old rules, the phone was free — no revenue — yet its two hundred euro cost still landed. The result: a two hundred euro loss, on a sale that was genuinely profitable.
Under IFRS 15, two hundred and forty euros of revenue meets its two hundred euro cost — a clean forty euro profit, the moment the phone is delivered. The total profit over the contract is the same; now it simply lands at the right time.
Part two. One model — now watch it crack open any industry on earth.
Same five steps, different timing
Here's the beautiful part: those same five questions crack any deal. Take software. A one-year cloud subscription — twelve hundred euros. Used continuously, so revenue spreads: a hundred a month.
But sell that software as a perpetual licence, and control passes on delivery — all twelve hundred, at once. Same question five, opposite answer.
Construction — a ten-million project, no alternative use, with a right to be paid as you build. That earns revenue over time, by progress.
Forty percent done at year-end? Four million recognised — even with the building unfinished. One model. Telecom, software, construction — three answers, same five questions.
Same sale — what the statements now show
We've cracked the deal. But where does any of this show up, for someone reading the accounts? Before, you'd see one lonely line: revenue, seven hundred and twenty. That's it.
Under IFRS 15, the same sale tells a richer story. Revenue splits — devices two-forty, services four-eighty. And the balance sheet now carries that contract asset of two-forty.
And a note spells out what's still to come — four hundred and eighty euros of service revenue, over the next two years. The reader finally sees the shape of the revenue, not just a number.
Loyalty points? Just a performance obligation.
Remember those old interpretations? They didn't vanish — they're folded into the five steps. Loyalty points — the old IFRIC 13 — are now just another promise: set some price aside, count it when the points are redeemed.
Real-estate sales, IFRIC 15 — now a question of when control passes. Transfers from customers, and barter advertising — IFRIC 18 and SIC-31 — handled as non-cash payment.
One framework now answers what used to need four separate rulebooks. Simpler.
Part three. The judgement calls — where the tidy model meets the messy real world.
Where revenue gets tricky
Three judgement calls you'll meet in the real world. One — variable consideration: discounts, bonuses. Estimate it, but only count what's highly likely to stick. That's the brake.
Two — a big gap between delivery and payment? There's a financing element hiding in there; you strip out the interest.
Three — principal, or agent? Control the good before it sells, you're the principal — report the full amount. Just arrange it, you're an agent — report only your cut. Get that wrong, and revenue balloons.
Modifications & warranties
But the real world throws more at you. First — a contract modification. Halfway through, the customer wants to add scope. Is that a brand-new contract, or a reshuffle of the old one? Get it wrong, and revenue lands in the wrong year.
And warranties. A basic "we'll fix defects" promise is just a cost you provide for. But sell an extended warranty, and you've made a separate promise — a slice of the price, earned across the cover period.
Returns & paying your own customer
Sell with a right of return? Don't book revenue you expect to walk back out the door. You park a refund liability — and carry the goods you'll get back as a return asset.
And here's a sneaky one. When you pay the customer — shelf fees, rebates — that usually isn't an expense. It comes straight off your revenue. Pay to sit on the shelf, and your top line shrinks.
The cost side of the contract
Even your costs follow the revenue. The commission you pay to win a two-year contract? You don't burn it on day one — you spread it over the life of the deal, matched to the revenue it earns.
Same for the cost of setting up to deliver the promise. Capitalise it, then release it as you perform. At last, costs and revenue moving in step.
Measuring progress & licences
And when revenue is earned over time — how fast? Two ways to measure progress. By output — milestones hit, units delivered. Or by input — costs spent, hours worked. Same finish line, different speedometer.
And licences split the very same way. A right to access IP that keeps evolving — a brand you keep supporting — earns over time. A right to use IP frozen as it is today earns at a single point. Access, versus use — that one word sets the timing.
Same model, everyday business
Once you see the pattern, you see it everywhere. A gift card — cash now, but revenue only when it's spent, plus a slice for the cards never used.
Loyalty points? A promise saved for later — earned only when they're redeemed.
An airline takes your money today, but books the revenue the day you actually fly.
A streaming subscription spreads across every month you keep watching.
Different industries… identical five questions. That's the power of one model.
The big impact — and your readiness checklist
So who felt this most? Telecoms and tech — bundles and licences, unpicked and re-priced. Construction — re-testing over-time versus on-completion. Retail — loyalty and gift cards. Pharma and media — licences and milestones.
Getting ready means: map each revenue stream through the five questions. Find the real promises. Set standalone prices. Decide the timing. Fix the systems — spreadsheets crack at scale. And write down every judgement, because the auditor will ask.
The official verdict: it works
One more thing, bang up to date. In September 2024, the global standard-setter finished its official review of IFRS 15 — and the verdict? It's working as intended. The five-step model was singled out as a robust way to handle even the messiest deals, with no overhaul needed. And because IFRS 15 was built hand-in-hand with US GAAP, the very same five questions run revenue on both sides of the Atlantic. It's been mandatory since the first of January 2018 — and it's here to stay.
Part four. What all of this means for you — the person reading the numbers to make a call.
Reading revenue for a decision
Last stop — you, reading the accounts to make a call. Before, you got one figure: revenue, seven-twenty. Compare it to a rival? Hard. Recurring, or one-off? No idea. Future sales? Invisible.
Now the same accounts answer all three. Revenue splits into devices and recurring service — so you compare like-for-like, and see what repeats.
And a rising contract-liability balance — paid, not yet earned — is a backlog of revenue still to come. A forward signal you simply never had before.
The free phone, solved
So let's bring it all home. One mystery — how does a free phone earn money on day one?
Five questions cracked it. A contract. Two promises. A seven-twenty price. Split three hundred over nine hundred. Recognised as control passes.
And the answer — two hundred and forty euros of day-one revenue, parked as a contract asset. That is the whole of IFRS 15, in one breath.
Same total profit, revised timing
But zoom out to the whole two-year contract, and here's the real headline. The total profit you earn is identical either way — two hundred and eighty euros. What IFRS 15 changes is how you get there.
Under the old rules, a heavy loss on day one, then a slow climb. Under IFRS 15, a steady profit from day one onward. Same destination — but a far truer picture of the business at every point in between.
So let's pull it together. Every sale, in any industry, comes down to five questions — the contract, the promises, the price, how you split it, and when control passes to the customer.
The judgement calls that move the numbers
That's how a free phone earns two hundred and forty euros on day one. In real life, focus on three things especially: variable pricing, principal versus agent, and the timing of licences.
Master those five questions, and no set of accounts can hide its story from you. That's the whole of IFRS 15. Next time — IFRS 16, and how leases finally landed on the balance sheet. See you there.