1.Identify the contract(s) with a customer: This first step involves identifying an agreement with a customer that creates enforceable rights and obligations. For example, a software company entering into a contract with a client to deliver a custom software solution.

2.Identify the performance obligations in the contract: The entity identifies as performance obligations all the distinct promises to transfer goods or services to the customer. For instance, a telecom company that provides a bundled package of a mobile phone and monthly data plan has two distinct performance obligations: the handset and the data service.

3.Determine the transaction price: The transaction price is the amount of consideration an entity expects to receive in exchange for transferring goods or services. For instance, a car dealership might sell a vehicle for a fixed price of $20,000 (transaction price).

4.Allocate the transaction price to the performance obligations in the contract: If a contract has multiple performance obligations, an entity allocates the transaction price to each performance obligation based on the relative standalone selling price. For example, a construction company may enter a contract to construct a building and provide subsequent maintenance services. If the standalone price of the construction is $500,000 and the maintenance is $50,000, the company would allocate these amounts to the two performance obligations.

5.Recognize revenue when (or as) the entity satisfies a performance obligation: Revenue is recognized when control of the good or service transfers to the customer, which can occur over time or at a point in time. For example, a consulting firm would recognize revenue over time as it provides monthly services, whereas a retailer would recognize revenue at the point in time when it sells a product to a customer.