What is the first step in the IFRS 15 revenue recognition model?

The first step in the IFRS 15 revenue recognition model is to identify the contract with a customer. This foundational step is critical because revenue can only be recognized when there is a legally enforceable agreement between the seller and the buyer. The contract must meet specific criteria, which include the agreement's commercial substance, the ability to identify the rights of each party regarding the goods or services to be transferred, and the payment terms.

Identifying the contract is essential because it establishes the basis for recognizing revenue. All subsequent steps in the revenue recognition process, such as identifying performance obligations, determining the transaction price, and allocating that transaction price, depend on the existence of a valid contract. Without a contract, the seller cannot proceed with recognizing revenue according to the IFRS 15 framework. This clear sequencing helps ensure that revenue is accurately reflected in financial statements when it is earned, aligning with the core principle of recognizing revenue as goods or services are transferred to customers.