Step 1: Identify the contract with the customer
Step 2: Identify the performance Obligations within the contract
Step 3: Determine the transaction price
Step4: Allocate the transaction price to the performance obligation in the contract
Step 5: identify the revenue when (or as) the performance obligation is being satisfied.
A simple example which elaborates this standard:
The customer just walks into the shop, buys newspapers for 3 rupee and chocolate bar for 1 rupee, pays you and walks out.
Strictly applying this model:
- The contract: It is the customer’s acceptance of shop’s terms in line with the applicable laws.
- The performance obligations: The newspapers and chocolate bar.
- The transaction price: 4 rupee (3+1)
- The allocation of transaction price to the individual performance obligations: rupee 3 to newspapers and rupee 1 to chocolate bar.
- Recognition of revenue AT the point of time: At the time of purchase, because the customers takes newspapers and chocolate bar.