AASB 15 Revenue from Contracts with Customers is the Australian accounting standard that requires entities to recognise revenue using a single five-step model — identify the contract, identify the performance obligations, determine the transaction price, allocate that price to each obligation, and recognise revenue as each obligation is satisfied. It was issued by the Australian Accounting Standards Board in December 2014, took effect for for-profit entities from 1 January 2018 (1 January 2019 for not-for-profits), and replaced both AASB 118 Revenue and AASB 111 Construction Contracts. This guide explains all five steps with worked examples, the key differences from the old standard, the tricky areas Australian accounting students lose marks on (variable consideration, principal vs agent, AASB 1058 interaction), and a citation-ready FAQ.
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What is AASB 15?
AASB 15 Revenue from Contracts with Customers is the Australian Accounting Standards Board’s revenue standard, equivalent to the International Accounting Standards Board’s IFRS 15. It applies to every contract with a customer except those covered by other standards (leases under AASB 16, financial instruments under AASB 9, insurance under AASB 17, and certain non-monetary exchanges). Its core principle is that an entity must recognise revenue to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
Why it matters: before AASB 15, revenue rules were spread across two standards (AASB 118 for general revenue, AASB 111 for construction) and a patchwork of industry interpretations. The result was inconsistent revenue recognition across industries — software vendors, telcos, real-estate developers, and construction firms all reported similar transactions differently. AASB 15 replaced that with one principles-based model, so revenue from a SaaS subscription, a long-term build contract, a bundled phone-plus-plan deal, and a retail sale are all assessed against the same five steps.
The AASB 15 five-step model
The five-step model is the heart of AASB 15. You work through each step in order; the answer at one step often determines the answer at the next. The table below summarises what each step asks and the key question it answers.
| Step | What it does | Key question |
|---|---|---|
| 1. Identify the contract | Confirm there is a valid contract with a customer that meets the standard’s criteria. | Is there a contract that AASB 15 applies to? |
| 2. Identify performance obligations | Break the contract into distinct goods or services the entity has promised. | What exactly have we promised to deliver? |
| 3. Determine the transaction price | Calculate the total consideration the entity expects to receive. | How much do we expect to be paid? |
| 4. Allocate the transaction price | Split the total price across the performance obligations. | How much of the price belongs to each promise? |
| 5. Recognise revenue | Recognise revenue as (or when) each obligation is satisfied. | When is each promise fulfilled? |
Step 1 — Identify the contract
A contract is an agreement between two or more parties that creates enforceable rights and obligations. AASB 15 applies only when all five contract criteria are met: the parties have approved the contract and are committed to performing their obligations; the entity can identify each party’s rights regarding the goods or services to be transferred; the entity can identify the payment terms; the contract has commercial substance (the entity’s future cash flows are expected to change); and it is probable that the entity will collect the consideration it is entitled to. If any of these fails — for example, when collection is doubtful — the standard’s revenue model is not applied until the criteria are met.
Step 2 — Identify the performance obligations
A performance obligation is a promise to transfer to the customer either a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer. A good or service is distinct when two things are true: the customer can benefit from it on its own or together with other readily available resources, AND the entity’s promise to transfer it is separately identifiable from the other promises in the contract. Bundled offerings are the classic test — a software licence sold with a year of mandatory support is often two performance obligations; a software licence sold with integration services that are inseparable from the licence may be a single obligation.
Step 3 — Determine the transaction price
The transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring the promised goods or services, excluding amounts collected on behalf of third parties (such as GST). It includes any variable consideration (discounts, rebates, refunds, performance bonuses, royalties), any significant financing component (when payment timing differs materially from transfer), the fair value of non-cash consideration, and adjustments for any consideration payable to the customer. Variable consideration is estimated using either the expected-value method (probability-weighted sum) or the most-likely-amount method, and is constrained — you only include the amount it is highly probable a significant reversal of revenue will not occur. That constraint is one of the standard’s most-tested concepts.
Step 4 — Allocate the transaction price
Once the transaction price is set, allocate it to each performance obligation in proportion to their standalone selling prices — the price at which the entity would sell each promised good or service separately. Where standalone selling prices are not directly observable, AASB 15 allows three estimation methods: adjusted market assessment (what would a customer pay?), expected cost plus a margin, or a residual approach (only in limited circumstances). Discounts and variable consideration are usually allocated proportionally across all obligations, unless the contract evidence shows they relate to specific obligations only.
Step 5 — Recognise revenue
Revenue is recognised when (or as) the entity satisfies each performance obligation by transferring control of the promised good or service to the customer. AASB 15 distinguishes point in time recognition from over time recognition. An obligation is satisfied over time if any one of three criteria is met: the customer simultaneously receives and consumes the benefits as the entity performs (typical for services); the entity’s performance creates or enhances an asset the customer controls (typical for long-term construction on the customer’s land); or the entity’s performance does not create an asset with alternative use AND the entity has an enforceable right to payment for performance completed to date. If none of these three criteria apply, the obligation is satisfied at a single point in time — usually when control transfers (delivery, acceptance, legal title, physical possession, customer’s right to direct use).
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A worked example: a SaaS contract with implementation services
A clearer way to lock in the model is to apply it to a realistic Australian scenario. Suppose CloudCo, a SaaS provider, signs a 2-year contract with a customer for: (a) a software subscription (priced separately at $24,000/year), (b) implementation/setup services (standalone price $6,000), and (c) a performance bonus of $4,000 if the customer’s first-year usage exceeds 1,000 users. Total upfront fee: $54,000 paid at contract inception; bonus payable at end of year 1 if earned.
| Step | Application to CloudCo |
|---|---|
| 1. Contract | Signed agreement with approved scope, identifiable rights, defined payment terms, commercial substance, and likely collection — AASB 15 applies. |
| 2. Performance obligations | Two: (i) the 2-year subscription (a series of distinct services delivered over time) and (ii) the implementation service (distinct because the customer could use the software with another implementer). |
| 3. Transaction price | Fixed $54,000 + variable bonus. CloudCo estimates a 70% probability of earning the bonus and concludes it is highly probable revenue will not reverse; the constrained estimate is $4,000. Transaction price = $58,000. |
| 4. Allocate | Standalone prices: subscription $48,000 (2 × $24,000), implementation $6,000 — total $54,000. Allocate the $58,000 in 48:6 ratio → subscription $51,556; implementation $6,444. |
| 5. Recognise | Implementation: point in time, on completion. Subscription: over time across 24 months as the customer consumes the benefit. |
Notice how the variable-consideration constraint in Step 3 changed the answer at Step 4, and how the “over time vs point in time” distinction in Step 5 changes when the cash hits the income statement vs the contract-liability balance. That chain of dependencies is exactly what assignments test.
AASB 15 vs the old AASB 118: what changed
If your earlier accounting units used AASB 118 and AASB 111, the differences matter. AASB 15 is a single principles-based model applied identically to goods, services, and construction. AASB 118 used different criteria for goods (risks and rewards transferred) versus services (stage of completion) and AASB 111 had its own percentage-of-completion rules for construction. The key changes:
| Area | AASB 118 / 111 (old) | AASB 15 (current) |
|---|---|---|
| Trigger for recognition | Transfer of risks and rewards | Transfer of control of the good or service |
| Bundled deals | Limited guidance on splitting | Explicit performance-obligation identification with “distinct” tests |
| Variable consideration | Generally deferred until resolved | Estimated and constrained, included in transaction price |
| Long-term contracts | Separate construction standard (AASB 111) | Same five-step model; over-time recognition where criteria are met |
| Disclosure | Limited | Significantly expanded (disaggregation, contract balances, judgements) |
The shift from “risks and rewards” to “control” is the single most-tested change. Control means the ability to direct the use of, and obtain substantially all the remaining benefits from, the asset — including the ability to prevent others from doing so.
Tricky areas Australian accounting students lose marks on
Variable consideration and the constraint
Estimating variable consideration is mechanical (expected value or most likely amount), but applying the constraint is judgement-heavy. You only include variable amounts to the extent it is highly probable a significant reversal of revenue will not occur if the estimate later changes. Factors that increase the risk of reversal — long horizon, lots of factors outside the entity’s control, broad range of possible outcomes, limited prior experience — push the constrained estimate down. Show the marker your judgement explicitly: state the estimation method, list the constraining factors, and justify the amount included.
Principal vs agent
Whether an entity is a principal (recognises the gross consideration as revenue) or an agent (recognises only the net commission) depends on whether the entity controls the specified good or service before transfer. Indicators that an entity is a principal include: primary responsibility for fulfilment, inventory risk, and discretion in setting prices. Marketplace and platform businesses often fail these tests — they are agents recognising commission, not principals recognising the full price. Getting this wrong inflates or understates revenue by orders of magnitude.
Over time vs point in time
Over-time recognition needs only ONE of the three criteria to be met; many assignment scenarios trigger the “performance creates or enhances an asset the customer controls” criterion (e.g. construction on the customer’s land). Where over-time applies, measure progress using either an output method (units delivered, milestones, surveys of work performed) or an input method (costs incurred, labour hours), chosen to faithfully depict the transfer of control.
AASB 15 + AASB 1058 — the NFP interaction
Not-for-profits commonly receive income that is not from a contract with a customer (donations, untied government grants, bequests). AASB 15 does not cover that income; AASB 1058 Income of Not-for-Profit Entities does. The practical rule for NFPs: first ask whether the inflow is from a contract with a customer in the AASB 15 sense (enforceable rights and obligations, sufficiently specific performance obligations). If yes, AASB 15 applies; if no, AASB 1058 applies. Australian university and charity assignments routinely test this triage, so always frame an NFP revenue question with the AASB 15 vs AASB 1058 decision up front.
Disclosure essentials
AASB 15’s disclosure requirements are extensive compared to AASB 118. The minimum disclosures users should be aware of are: a disaggregation of revenue into categories that depict how economic factors affect revenue (geography, product line, timing); information about contract balances (opening and closing receivables, contract assets, contract liabilities, and explanations of significant changes); information about performance obligations (when typically satisfied, significant payment terms, returns/refund policies); the transaction price allocated to remaining performance obligations; and the significant judgements made (timing of satisfaction, transaction-price determination, allocation method).
Common AASB 15 mistakes in assignments
- Treating each invoice as a separate contract. The contract is the legal agreement, not the billing cadence; revenue recognition timing follows the contract, not the invoices.
- Failing to identify performance obligations. Either over-bundling (treating a multi-element deal as one obligation) or over-splitting. Apply the “distinct” tests carefully.
- Ignoring the variable-consideration constraint. Including the full expected bonus without justifying that a significant reversal is unlikely.
- Defaulting to point-in-time. Failing to check whether any of the three over-time criteria are met — especially for long-term builds and ongoing services.
- Confusing principal and agent for marketplace, reseller, and intermediary scenarios.
- Missing the AASB 1058 question for NFP entities.
- Citing AASB 118 or AASB 111 when answering current-period questions — both have been superseded.
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Frequently asked questions
What are the 5 steps of AASB 15 revenue recognition?
The five steps of AASB 15 revenue recognition are: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognise revenue when (or as) each performance obligation is satisfied. The steps are sequential, and the answer at each step often determines the answer at the next.
When did AASB 15 come into effect in Australia?
AASB 15 came into effect for annual reporting periods beginning on or after 1 January 2018 for for-profit entities and 1 January 2019 for not-for-profit entities. It was issued by the Australian Accounting Standards Board in December 2014 to align with IFRS 15 and replaced both AASB 118 Revenue and AASB 111 Construction Contracts.
What is the difference between AASB 15 and IFRS 15?
The difference between AASB 15 and IFRS 15 is essentially jurisdictional: AASB 15 is the Australian Accounting Standards Board’s adoption of IFRS 15 (the International Accounting Standards Board’s standard), and their requirements are substantively identical. The Australian version adds appendix references relevant to Australian law and includes parallel provisions for not-for-profit entities, but the five-step recognition model is the same.
What is a performance obligation under AASB 15?
A performance obligation under AASB 15 is a promise to transfer to a customer either a distinct good or service, or a series of distinct goods or services that are substantially the same. A good or service is “distinct” when the customer can benefit from it on its own (or with readily available resources) AND the entity’s promise to transfer it is separately identifiable from other promises in the contract. Identifying performance obligations is Step 2 of the five-step model.
How is variable consideration treated under AASB 15?
Variable consideration under AASB 15 — such as discounts, rebates, refunds, performance bonuses, and royalties — is estimated using either the expected-value method or the most-likely-amount method, then included in the transaction price subject to the constraint: an entity includes the estimate only to the extent it is highly probable a significant reversal of revenue will not occur. This constraint is one of the standard’s most-tested judgement areas.
What is the difference between point-in-time and over-time recognition?
The difference between point-in-time and over-time recognition under AASB 15 is when revenue is recognised. Over-time recognition applies if any one of three criteria is met (customer consumes benefits as the entity performs, performance creates or enhances an asset the customer controls, or no alternative use plus an enforceable right to payment for work to date). If none of the three is met, the performance obligation is satisfied at a single point in time — typically when control of the good or service transfers to the customer.
Does AASB 15 apply to not-for-profit entities?
AASB 15 applies to not-for-profit entities only when they have a contract with a customer in the AASB 15 sense (enforceable rights and obligations with sufficiently specific performance obligations). Income that does not arise from such a contract — donations, untied grants, bequests — is covered by AASB 1058 Income of Not-for-Profit Entities instead. NFP assignments therefore start with an AASB 15 vs AASB 1058 triage before applying the recognition model.
How do I cite AASB 15 in an assignment?
To cite AASB 15 in an assignment, refer to the standard by its full title and paragraph number, for example: AASB 15 Revenue from Contracts with Customers, paragraph 31. Most Australian accounting units use APA 7 referencing for the surrounding text; see our APA 7 referencing guide for in-text citation and reference-list rules. Always cite the current standard (AASB 15), not the superseded AASB 118 or AASB 111.
What replaced AASB 118 and AASB 111?
AASB 118 Revenue and AASB 111 Construction Contracts were both replaced by AASB 15 Revenue from Contracts with Customers. AASB 15 unified the two previous standards into a single five-step model that applies identically to goods, services, and construction, so the previous separation between revenue and construction-contract accounting no longer exists in Australian standards.
