ADVANCED FINANCIAL ACCOUNTING & REPORTING

IFRS/PFRS 15 – Revenue from Contracts with Customers1

It establishes FIVE STEP MODEL that will apply to revenue earned from a contract with a customer
regardless of type of revenue transaction or industry.
 On or before January 1, 2017 – PFRS
 December 15, 2016 – US GAAP
 Early adoption is permitted under IFRS but not for public entities reporting under US GAAP
 Transition either:
a. FULL Retrospective approach
b. MODIFIED Retrospective Approach

Objective of revenue recognition under IFRS 15

Recognize revenue to depict the transfer of goods or services to customers in amount that reflects the
consideration that the company receives, or expects to receive, in exchange for these goods or services.

IFRS 15 is NOT applicable to:

 PAS 17 – Leases
 PFRS 9 – Financial Instruments and other contractual rights
 PFRS 10 – Consolidated Financial Statements
 PFRS 11 – Joint Arrangements
 PAS 27 – Separate Financial Statements
 PAS 28 – Investment in Associate
 PFRS 4 – Insurance Contracts

Partial application:

A. If OTHER STANDARDS specify how to separate and/or initially measure one or more parts of
the contract:
1. Apply the separation and/or measurement requirements in those standards.
2. Transaction Price (TP) is then reduced by amounts initially measured under other
standards.

B. If NO OTHER STANDARDS:
1. Apply PFRS 15

Five Step Model Framework (COPAR)

1. Identify Contracts with the Customer
2. Indentifying Performance Obligation
3. Determine Transaction Price (TP)
4. Allocate Transaction Price
5. Recognize Revenue when (or as) the entity satisfies performance obligation

1. INDENTIFYING THE CONTRACTS WITH CUSTOMER

Conditions:
 Approved Contract by parties
 Rights of each party in goods or services can be identified
 Terms of payment in goods or services can be identified
 Contract has commercial substance
 Probable collection of the consideration to which entity is entitled to in exchange of goods or

1 Ivan Yannick S. Bagayao, AFAR Quick Notes 2018 edition, Dayag’s Notes on IFRS 15, Foreign author texts
 services.

NOTE: If not yet met all – Re-assess the contract; If met all – the contract is within the scope of
PFRS 15

2. IDENTIFYING PERFORMANCE OBLIGATION

A. Goods and Services are distinct: (SEPARATE PERFORMANCE)
 The customer can benefit from the goods or services on its own
 The entity’s promise to transfer goods or services can be SEPARATELY
identifiable from other promise to the customers.

B. A series of distinct goods or services that is transferred to the customer in the SAME
pattern of transfer to a customer: (SINGLE PERFORMANCE)
 Each distinct goods or services in series is consecutively transferred to a
customer would be a Performance Obligation (PO) satisfied OVER TIME
 A single method of measuring progress would be used towards complete
satisfaction of Performance Obligation to transfer distinct goods or services in
the series to customer.

** A performance obligation is a promise in a contract with a customer to transfer a good or service

to the customer.

3. DETERMINE THE TRANSACTION PRICE

 Considers past customary business practices
 The transaction price is the amount of consideration (for example, payment) to which an
entity expects to be entitled in exchange for transferring promised goods or services to o
customer, excluding amounts collected on behalf of third parties.
 The transaction price (TP) includes:
 An estimate of any variable consideration using either the: (Better predicts Entity’s
Entitlement)
a. PROBABILITY WEIGHTED EXPECTED VALUE
b. MOST LIKELY AMOUNT
 The effect of the time value of money if there is financing components in contract.
 The Fair Value or any Non-cash consideration

For Variable Consideration:

EXPECTED VALUE MOST LIKELY AMOUNT

Consider the sum of
probability weighted
amounts for the range of
possible outcome
This is appropriate estimate
if the entity has large
number of contract with
similar characteristic
Only consider the single
most likely amount from
the range of possible
consideration amounts.
It is appropriate to use
this estimate if the
contract has only few
possible outcome
 4. ALLOCATE THE TRANSACTION PRICE TO PERFORMANCE OBLIGATION (PO)
 For a contract that has more than one performance obligation, an entity should allocate the
transaction price to each performance obligation in on amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange for satisfying each
performance obligation.
 Applicable when contract has multiple PO
The allocation bases:
1. Relative stand-alone selling price
2. If relative stand-alone price is NOT OBSERVABLE, entity must estimate using:
 ADJUSTED MARKET ASSESSMENT APPROACH (MV-Approach)
 EXPECTED COST PLUS MARGIN APPROACH (Cost-Plus Approach)
 RESIDUAL APPROACH (Only in limited instance)

5. RECOGNIZE REVENUE AS THE ENTITY SATISFIES PERFORMANCE OBLIGATION

 REVENUE is recognized as CONTROL is passed either:

I. Over Time
II. At the Point in Time

 CONTROL – is the ability to direct the use of and obtain substantially all the remaining benefits
of an asset. Possession of thing and enjoyment of right in the concept of an owner.

A. OVER TIME

The following are criteria’s of recognizing revenue OVER TIME:

 The customer simultaneously RECEIVES and CONSUMES all the benefits provided by
the entity.
 The entity CREATES or ENHANCES the value of asset controlled by the customer.
 The performance obligation does not create an asset with alternative use to the entity
and the entity has an ENFORCEABLE RIGHT to payment for the performance
completed to date.

NOTE: ONE criterion met is sufficient to recognize revenue Over Time. However, if none of the above
criteria is present in the problem, recognize the revenue AT POINT IN TIME

B. AT POINT IN TIME
Revenue is recognized when control is passed at the point in time. It includes but not
limited to:
 The entity has the present right to payment for asset
 The customer has:
i. Physical possession of asset
ii. Accepted the asset
iii. Legal title to asset
iv. Significant risk and reward related to ownership of asset
How to determine the passage of control to customer?

Does the customer

simultaneously receive and YES
consume the benefits provided Recognize Revenue OVER TIME
by the entity’s performance?
NO

Does entity’s performance

creates or enhances an asset YES
that the customer control as the Recognize Revenue OVER TIME
asset is created or enhanced?
NO

Does entity’s performance not

create an asset an alternative
use to the entity and the entity YES
has an enforceable right to Recognize Revenue OVER TIME
payment (for performance
completed to date)
NO

Recognize Revenue AT THE

POINT IN TIME

Illustrative Problem:
On January 10, 2018, XYZ Company enters into a contract to deliver product A and B to Mr. David for
P200,000. The contract requires that product A to be delivered first and states that payment for the
delivery of product A is conditional on the delivery of product B. the relative stand-alone selling price
of products A and B are P40,000 and P60,000 respectively. The consideration of P200,000 is due only
after the entity has transferred both products A and B.

Requirements: Apply the five step model provided by PFRS 15

1. Identifying contracts with the customer:

In this case, all the criteria in determining the existing contract with the customer are present
such as the following:

 Approved contract by parties:

[Contract to deliver or sale of products A and B]

 Rights of each party in goods or services can be identified:

[Mr. David has rights to receive products A and B]

 Terms of payment of goods or services can be identified:

[Payment in full due only after XYZ transferred both products A and B]
  Contract has Commercial Substance:
[It has commercial substance because the delivery by XYZ Company of products A and
B results in the payment of the contract price by Mr. David]

 Probable collection of the consideration to which entity is entitled to in exchange

of goods or services:
[Yes, there is probability of collection of consideration which is after delivery of both
product(s) A and B]

2. Identifying Performance Obligation:

The promise to deliver products A and B by XYZ as performance obligations. There is
series of performance obligation in this case and the performance of one is dependent
on the other. Hence, there are two performance obligation such as delivery or transfer of
products A and delivery of product B

3. Determine Transaction Price:

The transaction price of P200,000 is clearly determinable in this case. The said contract
price shall be allocated in the next step using relative stand alone prices.

4. Allocate Transaction Price:

The transaction price of P200,000 shall be allocated based on the relative stand alone price of
A and B. thus, the following allocation:

Product A Product B Total

Relative Stand alone price 40,000.00 60,000.00 100,000.00

Ratio based on Stand alone price 40% 60%

Transaction Price 200,000.00 200,000.00

multiply by ratio 40% 60%
Allocated Transaction Price 80,000.00 120,000.00

5. Recognize revenue when (or as) the entity satisfies performance obligation:
The revenue is to recognized At Point in Time. Since the customer, Mr. David, has
physical possession of assets due to acceptance of assets delivered and that XYZ has
the present right to payment for the delivery of assets, there is passing of control at
point in time. Hence, revenue shall be recognized.

Supplemental questions:
1. Based on the above situation, what is the entry in the books of XYZ Company to record the
satisfaction of the performance to deliver product A to Mr. David?
a. Receivable 80,000
Revenue 80,000
b. Contract Asset80,000
Revenue 80,000
c. Receivable 200,000
Revenue 200,000
d. Contract Asset40,000
Revenue 40,000
 Suggested answer: (B)
The entity recognizes revenue as when CONTROL of the product transfers to the customer. In
this case, Product A has been delivered to Mr. David and such act gives to the recognition of
revenue. However, right to collect payment of Product A depends on the delivery of product B.
hence, this conditional right to consideration results to setting up of contract asset account
instead of receivable account.

2. What is the entry in the books of XYZ upon performance of the obligation to deliver Product B
and to recognize unconditional right to consideration?
a. Receivable 120,000
Revenue 120,000
b. Contract Asset120,00
Revenue 120,000
c. Receivable 200,000
Contract Asset80,000
Revenue 120,000
d. Receivable 200,000
Revenue 200,000

Suggested answer: (C)

The entity recognizes revenue as when CONTROL of the product transfers to the customer. In
this case, Product B has been delivered to Mr. David and such act gives rise to the recognition
of revenue.

The delivery of product B gives rise to the unconditional right of XYZ Company to the
consideration. Hence, this unconditional right to consideration results to setting up of
receivable account amounting to P200,000.

Since the revenue of P80,000 has already been recognized when product A was delivered, only
the balance of P120,000 shall be recognized as revenue upon delivery of product B.

Lastly, the contract asset account amounting to P80,000 for the delivery of product A will be
credited due to the unconditional right to consideration and setting up of receivable account.
 Drills & Exercises on PFRS 15
1. Which of the following is not one of the steps for recognizing revenue?
a. Identify the performance obligations of the contract.
b. Identify the contract with the customer.
c. Estimate the total transaction price of the contract based on the sum of the
stand-alone selling prices of the goods and services in the contract.
d. Allocate the transaction price to the performance obligations.

The third step is "Determine the transaction price", which is not necessarily based on
the sum of the stand-alone selling prices of goods and services in the contract.

2. Which of the following is true about revenue recognition under IFRS 15?
a. The realization principle guides the IFRS.
b. Construction contracts are typically broken into the various separate goods and
services that are included in them for purposes of revenue recognition.
c. The time value of money is considered when estimating all transaction prices.
d. Collectibility of the receivable is considered when determining whether revenue
can be recognized.

A contract only exists for purposes of revenue recognition if the seller believes it's
probable that it will collect the amount it's entitled to receive under the contract.

3. Which of the following is not one of the characteristics of a contract for purposes of revenue
recognition?
a. Rights
b. Reasonable profit margin
c. Approval
d. Commercial substance

The reasonableness of the contract's profit margin is not one of the characteristics of a
contract.

4. Which of the following is not an indicator that control of a good has passed from the seller to
the buyer?
a. Buyer has an unconditional obligation to pay.
b. Buyer has legal title.
c. Buyer has scheduled delivery.
d. Buyer has assumed the risk and rewards of ownership.

Whether the buyer has scheduled delivery is not an indicator of passage of control.
Delivery, such that the customer has physical possession, is a control indicator.

5. Which of the following is an indicator that revenue for a service can be recognized over time?
a. The seller is enhancing an asset that the buyer controls as the service is
performed.
b. The seller is providing continuous effort to the buyer.
c. The seller can estimate the percent of work completed.
d. The sales price is fixed and determinable.

The seller enhancing an asset that the buyer controls as work is performed, such as a
seller performing work on a buyer's building, is one of the indicators that revenue can
be recognized over time.
6. Which of the following is not an indicator that revenue for a service can be recognized over
time?
a. The customer owns the asset as the seller is constructing it.
b. The seller is providing continuous effort to the buyer.
c. The asset being constructed has no alternative use to the seller, and the seller has the
right to payment for progress to date even if the customer cancels the contract.
d. The seller has significant experience with the customer and anticipates
fulfillment of the contract.

The seller's significant experience with the customer does not necessarily indicate that
revenue should be recognized over time.

7. Which of the following is consistent with goods and services being distinct for purposes of
identifying separate performance obligations?
a. The seller regularly sells the good or service separately.
b. The buyer could use the good or service on its own.
c. The buyer could use the good or service in combination with goods or services the buyer
could obtain elsewhere.
d. All of the above.

All of the answers are consistent with the good or service being capable of being
distinct and separately identifiable.

8. Which of the following is a separate performance obligation?

a. An extended warranty.
b. A prepayment.
c. A right of return.
d. An option for the customer to purchase additional products under the same terms.

An extended warranty is capable of being distinct and separately identifiable, given

that it is sold separately.

9. Which of the following is an acceptable way to estimate uncertain consideration?

a. Most likely amount to be received.
b. Minimum amount considered likely to be received.
c. Expected value of the amount to be received.
d. Both a and c are acceptable.

The minimum amount that is likely to be received is not an acceptable way to estimate
uncertain consideration.

10. Lewis is selling a product with some of the transaction price depending on the outcome of a
future event. There is a 75% chance that the event will result in $100,000 of consideration to
Lewis, and a 25% chance that the event will result in $40,000 of consideration to Lewis. Which
of the following is not an appropriate estimate of the amount of uncertain consideration for
purposes of Lewis estimating the transaction price?
a. ₱100,000
b. ₱85,000
c. ₱70,000
d. All choices are appropriate estimates

₱85,000 = 75% × ₱100,000 + 25% × $40,000, which is answer b. The most likely
amount is ₱100,000, which is answer a. ₱70,000, answer c, is not an acceptable
estimate.
11. Assume a prepayment is made six months in advance of delivery of a product. The seller is
likely to do which of the following with respect to the time value of money over the life of the
contract?
a. Recognize interest expense.
b. Recognize interest revenue.
c. Ignore the time value of money.
d. None of the above.

Six months is less than one year, so the seller can assume that the financing
component of the contract is not significant.

12. Bad debts:

a. Must be recognized as an expense.
b. Must be recognized as a contra-revenue.
c. Are only concerns in the case of installment sales.
d. Reduce the transaction price that is allocated to separate performance obligations.

Bad debt expense must be accrued each period.

13. Allocation of the transaction price to performance obligations:

a. Is based on relative standalone selling prices.
b. Cannot be based on estimated selling prices.
c. May not use the residual method when selling prices are uncertain.
d. Is not allowed when bad debts are material.

Allocation is based on the proportion of each standalone selling price to the sum of the
standalone selling prices.

14. Winchell wrote a contract that involves two performance obligations. Product A has a stand-
alone selling price of ₱50, and product B has a stand-alone selling price of ₱100. The price for
the combined product is ₱120. How much of the transaction price would be allocated to the
performance obligation for delivering product A?
a. ₱50
b. ₱40
c. ₱30
d. ₱20

(₱50 ÷ (₱100 + 50)) × ₱120 = ₱40.

15. Winchell wrote a contract that involves two separate performance obligations. Winchell cannot
estimate the stand-alone selling price of product A. Product B has a stand-alone selling price of
₱100. The price for the combined product is ₱120. How much of the transaction price would be
allocated to the performance obligation for delivering product A?
a. ₱50
b. ₱40
c. ₱30
d. ₱20

Winchell would use the residual method. ₱120 – 100 = ₱20.

16. Which of the following is not an indicator that the seller may need to constrain recognition of
variable consideration?
a. Uncertainty will not resolve until far into the future.
b. Based on much experience with the customer, the seller anticipates a more-than-
remote chance that the receivable will prove uncollectible.
c. The seller lacks experience selling similar products.
d. Uncertain amounts are susceptible to important factors beyond the seller's control.

A more-than-remote chance of uncollectible accounts is not an indicator that

recognition of variable consideration should be constrained.

17. For profitable long-term contracts, income is recognized in each year when revenue is
recognized:

a. Option a
b. Option b
c. Option c
d. Option d

Revenue is only recognized each year if revenue qualifies for recognition over time.

18. When accounting for a long-term construction contract for which revenue is recognized over
time according to the percentage of completion, gross profit is recognized in any year is debited
to:
a. Construction in progress.
b. Billings on construction contract
c. Deferred income
d. Accounts receivable

The entry is a debit to construction in progress (CIP) for gross profit, a debit to cost of
construction for construction costs, and a credit to revenue.

19. Hollywood Construction Company recognizes revenue over time according to percentage of
completion for its long-term construction contracts. During 2016, Hollywood began work on a
₱3,000,000 fixed-fee construction contract, which was completed in 2019. The accounting
records disclosed the following data at year-end:
Cumulative Estimated cost
contract costs to complete at
incurred end of year
2016 ₱ 200,000 ₱ 1,800,000
2017 1,100,000 1,100,000
2018 2,000,000 400,000

For the 2018 year, Hollywood should have recognized gross profit on this contract of:
a. ₱100,000
b. ₱500,000
c. ₱266,667
d. ₱225,000
 As of year-end 2017, revenue recognized to date is (₱1,100,000 ÷ (₱1,100,000 +
1,100,000)) × ₱3,000,000 = ₱1,500,000, and cost of construction recognized to date is
₱1,100,000, so gross profit recognized to date is ₱400,000. As of year-end 2018,
revenue recognized to date is (₱2,000,000 ÷ (₱2,000,000 + 400,000)) × ₱3,000,000 =
₱2,500,000, and cost of construction recognized to date is ₱2,000,000, so gross profit
recognized to date is ₱500,000. Therefore, gross profit recognized in 2018 should be
₱500,000 – 400,000 = ₱100,000.

20. Sandlewood Construction Inc. recognizes revenue over time according to percentage of
completion for its long-term construction contracts. In 2016, Sandlewood began work on a
₱10,000,000 construction contract, which was completed in 2017. The accounting records
disclosed the following data at the end of 2016:

Costs incurred ₱ 5,400,000

Estimated cost to complete 3,600,000
Progress billings 4,100,000
Cash collections 3,200,000

How much gross profit should Sandlewood have recognized in 2016?

a. ₱ 700,000
b. ₱ 1,000,000
c. ₱ 600,000
d. ₱ 0

As of year-end 2016, revenue recognized to date is (₱5,400,000 ÷ (₱5,400,000 +

3,600,000)) × ₱10,000,000 = ₱6,000,000, and cost of construction recognized to date is
₱5,400,000, so gross profit recognized to date is ₱600,000.

21. Based on the same data in question 20, in addition to accounts receivable, what would appear
in the 2016 balance sheet related to the construction accounts?
a. A current asset of ₱1,300,000
b. A current liability of ₱900,000
c. A current asset of ₱900,000
d. A current asset of ₱1,900,000

Construction in progress (CIP) would include cost + gross profit, or ₱5,400,000 +

600,000 = ₱6,000,000. The balance sheet would show a current asset for CIP – progress
billings, or ₱6,000,000 – ₱4,100,000 = ₱1,900,000.

22. The Simpson Construction Company recognizes revenue over time according to percentage of
completion for its long-term construction contracts. In 2016, Simpson began work on a
construction contract. Information on this contract at the end of 2016 is as follows:

Costs incurred during the year ₱ 1,500,000

Estimated cost to complete 6,000,000
Gross profit recognized in 2016 250,000

What is the contract price (total revenue) on this contract?

a. ₱7,000,000
b. ₱8,750,000
c. ₱7,500,000
d. ₱9,000,000
 (Progress complete × contract price = revenue) – Cost = Gross profit. Therefore
((₱1,500,000 ÷ (₱1,500,000 + 6,000,000)) × contract price) - ₱1,500,000 = ₱250,000.
Therefore, contract price = ₱8,750,000.

23. Under the realization principle, revenue is recognized as earned when there is reasonable
certainty as to the collectibility of the asset to be received and:
a. The sales price has been collected.
b. The earnings process is virtually complete.
c. Production is completed.
d. A purchase order has been received.

The realization principle requires that the earnings process be virtually complete
before revenue recognition can occur.

24. Under IFRS, revenue for the sale of goods is recognized when the seller has transferred to the
buyer:
a. A signed invoice.
b. The risks and rewards of ownership.
c. Compelling evidence that substantive installation has occurred.
d. None of the above.

IFRS focuses on transfer of risks and rewards of ownership to determine the timing of
revenue recognition.

25. Western Appliance Company, which began business on January 1, 2016, appropriately uses
the installment sales method of accounting. The following data are available for 2016:

Installment sales ₱ 350,000

Cash collection on installment sales 150,000
Gross profit on sales 40%

The gross profit on installment sales for 2016 should be:

Realized Deferred
a. ₱ 60,000 ₱ 80,000
b. 80,000 60,000
c. 140,000 80,000
d. 140,000 60,000

Gross profit realized is 40% × ₱150,000 = ₱60,000. Gross profit deferred is 40% ×
(₱350,000 – ₱150,000) = ₱80,000.

26. The Pattison Company began operations on January 2, 2016, and appropriately uses the
installment sales method of accounting. The following data are available for 2016 and 2017:
27.
2016 2017
Installment sales ₱ 600,000 ₱ 750,000
Cash collections from:
2016 sales 200,000 250,000
2017 sales 300,000
Gross profit on sales 30% 40%
 The deferred gross profit that would appear in the 2017 Statement of Financial Position is:
a. ₱180,000
b. ₱200,000
c. ₱285,000
d. ₱225,000

Gross profit deferred is 30% × (₱600,000 – (₱200,000 + ₱250,000)) + 40% × (₱750,000 –

300,000) = ₱225,000.

28. When accounting for a long-term construction contract under IFRS, if the percentage-of-
completion method is not appropriate, the seller should account for revenue using:
a. The cost recovery method.
b. The completed contract method
c. Either the cost recovery method or the completed contract method
d. Neither the cost recovery method or the completed contract method

The cost recovery method rather than the completed contract method is used under
IFRS when the seller cannot use the percentage-of-completion method.

29. When IFRS uses the cost recovery method to account for a long-term contract,
a. Revenue typically is recognized in excess of costs incurred early in the life of the
contract.
b. Costs in excess of revenue are typically recognized early in the life of the contract.
c. Revenue equal to costs are typically recognized early in the life of the contract.
d. Revenue is based on contract completion, not on costs, early in the life of the contract

Under the cost recovery method, the seller does not recognize any gross profit until all
costs have been recovered.

30. For profitable long-term contracts, income is recognized in each year under the:
a. Completed contract method: No; Percentage-of-completion method: No
b. Completed contract method: Yes; Percentage-of-completion method: No
c. Completed contract method: Yes; Percentage-of-completion method: Yes
d. Completed contract method: No; Percentage-of-completion method: Yes

31. Which of the following is an indicator that the seller is an agent with respect to a transaction?
a. The seller is primarily responsible for providing the product or service to the customer.
b. The seller lacks discretion in setting prices and identifying suppliers.
c. The seller owns inventory prior to a customer ordering it and after a customer returns it.
d. The seller holds the risk of nonpayment by customers.