(2) Identify Separate Performance Obligations

Multiple performance obligations?

 Highly dependent/interrelated with other promises in the contract
o 1 performance obligation – accounted as one
o Otherwise, multiple performance obligations – accounted separately
Illustrative Example 2
(3) Determine Transaction Price
Transaction Price
- Amount of consideration a company expects to receive from a customer
- Must consider:
o Fixed amount
o Variable consideration – penalties/incentives that may be imposed on transaction price
just in case you incur delay in project/or finish it at an earlier date
o Time value of money
o Non-cash consideration
o Reductions to original consideration
Variable consideration – price dependent on future event/s
Transaction Price
 Expected value – may be appropriate for large number of outcomes
 Most likely amount – for 2 possible outcomes
Variable consideration recognition conditions
1. Reasonably assured company will be entitled to the amount
2. Have experience with similar contracts
a. Able to estimate cumulative amount of revenue
b. Do not expect a significant reversal of revenue previously recognized
Time value of money
 When contract involves a significant financing component
 For practicality, no need to reflect time value of money if time period for payment < 1 year (pero
pwede pa rin gawin
Reductions to original consideration
 Discounts
 Volume rebates
 Coupons
 Free products/services
(4) Allocate the Transaction Price to Performance Obligations
3 ways to allocate transaction price
1. Adjusted market assessment approach
e.g. markers  look for market price, then adjust market price based on your conditions
2. Estimated cost plus margin approach
3. Residual approach  what we did in customer loyalty program
Allocation should be based on relative fair values
(5) Recognize Revenue
When is performance obligation satisfied?
Customer obtains CONTROL of the good/service
(1) Right of Return
Customer gets
 Full or partial refund
 Credit than can be applied against amounts owed
 Another product in exchange
(2) Repurchase Agreements
- Financing transaction (option to repurchase is with the seller) or revenue (buyer) (WHAT WE
STUDIED BEFORE)
- NOW: Obligation or right to repurchase amount
o >=Selling price – financing
o < Selling price – revenue
(3) Bill and Hold Sales
PROBLEM: inflate sales artificially
All of the ff. should be met for transfer of control to buyer
1. Reason for bill and hold sales must be substantive
2. Product must be identified separately as belonging to customer
3. Product must be ready for physical transfer to customer
4. Seller cannot have the ability to use the product or direct it to another customer
(4) Principal-Agent Relationships
Revenue of agent = commissions
(5) Warranties
2 types
1. Assurance – warranty that product meets agreed-upon specifications in the contract when
product is sold
2. Service – warranty that product will be serviced for free for a certain period of time
o Separate performance obligation
o Usually beyond the assurance warranty
(6) Non-Refundable Upfront Fees
Payment before delivery of product or performance of service
- Not revenue until product/service is delivered/performed
(7) Contract Assets
2 types
- Unconditional rights – company has satisfied performance obligation
 We reflect the actual account (e.g. AR)
- Conditional rights – company must satisfy another performance obligation before company can
bill customer
 When you deliver product X, contract asset since conditional
(8) Contract Liabilities – flipside of contract assets
(9) Costs to Fulfil Contract * clarify first
(10) Collectibility – not a consideration in recognizing revenue

On Construction Contracts
Revenue Recognition Over Time
Over a period of time
 - Customer controls asset as it is created or enhanced
- Co. does not have alternative use for asset created
PLUS any of the three:
Customer receives benefits

Criteria met
- Outcome

IAS 11 vs IFRS 15 – essentially same treatment

POC Issue
POC based on engineer’s estimates
- Revenues – based on engineer’s estimates
- Costs – Based on actual costs incurred
Sources of Revenue
1.
Performance Obligations
 Right to open a business
 Use of trade name or other intellectual property of the franchisor
 Continuing services, such as marketing help, training and in some cases supplying inventory and
inventory management
Franchise Fees