UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL,
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 33: PFRS 15 Revenue from contracts with customers
Financial Accounting
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Introduction
PFRS 15 is the new global framework for revenue
recognition. Entities that sell products and services in a
bundle or multiple deliverable or those engaged in major
projects could see significant change in the timing of
revenue recognition. Entities likely to be affected by this
new revenue standard include those engaged in telecom,
software, engineering construction and real estate
For other industries it will be business as usual as in the
case of sale of merchandise in the ordinary course of
business. Revenue is income in the ordinary course of
business activities. Income is increase in economic benefit
during the accounting period in the form of an inflow or
enhancement of asset or decrease in liability that results in
an increase in equity other than contribution from equity
participants. PFRS 15 applies to all contracts with
customers except
a. Leases under PFRS 16
b. Insurance contract under PFRS 17
c. Financial instruments under PFRS 9
Core principle
The core principle of the new revenue standard can be
divided into two
1. An entity should recognize revenue in a manner that
depicts the pattern of transfer of good or service to a
customer
2. The amount recognized as revenue should reflect the
consideration to which the entity expects to be entitled
in exchange for good or service. Depending on whether
certain criteria are met revenue is recognized
a. At a point in time or at particular date when control
of the good or service is transferred to the
customer
b. Over time or over a certain period in a manner that
depicts the entity’s performance
Five step model
An entity that recognizes revenue in accordance with the
core principle should apply the following five step model
1. Identify the contract with the customer
2. Identify the performance obligation in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance
obligations in the contract
5. Recognize revenue when or as the entity satisfies a
performance obligation
Step 1 Identify a contract
A contract is an agreement between two or more parties
that creates enforceable rights and obligations in a contract.
Enforceable of the rights and obligations in a contract is a
matter of law. Contracts can be written oral or implied by
an entity’s customary business practice
Contract criteria
EDMUND E. HILARIO, CPA, MBA
1stSEMESTER 2019 – 2020
A contract with a customer must meet all of the following
criteria
a. The parties to the contract have approved the contract
in writing orally or in accordance with customary
business practice’
b. The rights and obligations of the parties in the contract
can be identified
c. The payment terms in the contract can be identified
d. The contract has commercial substance meaning the
entity’s cash flows are expected to change significantly
as a result of the contract
e. The collection of the consideration is probable
Generally contracts should be accounted for separately
In some cases contracts should be combined as one if any
of the following is satisfied
a. The contracts are treated as a single package
b. The consideration in one contract depends on the good
or service of another contract
c. The goods or services in the contract relate to a single
performance obligation
Step 2 Identify the performance obligation
A performance obligation is a promise to deliver a good or
service in a contract with customer. A promise constitutes a
performance obligation if the promised good or service is
distinct. A promised good or service is distinct if it meets
both of the following criteria
a. The customer can benefit from the good or service
b. The entity’s promise to transfer the good or service to
the customer is separately identifiable from other
promises in the contract
Distinct good or service
1. Sale of finished goods produced by a manufacturer
2. Sale of merchandise inventory by a retailer
3. Constructing manufacturing or developing asset on
behalf of customer as in long term construction contract
4. Granting license or franchise
5. Performing a contractually agreed upon task for a
customer as in bookkeeping service or payroll
processing service
Step 3 Determine the transaction price
The transaction price is the amount of consideration in a
contract to which an entity expects to be entitled in
exchange for transferring good or service to a customer.
The transaction price is adjusted for discount rebate price
concession return performance bonus penalty and other
similar item. In determining the transaction price
consideration must be given to past business practice and
published policy
a. Variable consideration
b. Time value of money
c. Noncash consideration
d. Consideration payable to a customer
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL,
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 33: PFRS 15 Revenue from contracts with customers
Financial Accounting
===============================================================================================
Variable consideration
Variable consideration is included in the transaction price
when it is highly probable that a significant reversal of
revenue or decrease in revenue will not occur. For example
an entity has a contract to sell through a distributor. The
distributor has a right to return if it cannot sell the product
and the entity recognizes revenue when the distributor
resells the product to ultimate customers. Under PFRS 15
the entity can recognize revenue when goods are sold to the
distributor based on the number of units sold less the units
expected to be returned
Time value of money
If the contract has a significant financing component the
consideration should be adjusted for time value of money.
Revenue is measured based on the cash selling price. The
difference between the total consideration and cash selling
price is accounted for as interest income. However if the
contract period is less than one year the entity can
disregard time value of money
Noncash consideration
Noncash consideration is measured at fair value. If the fair
value cannot be reasonably estimated the stand alone
selling of the promised good or service is used
Consideration payable to the customer
The entity needs to determine if consideration payable to
the customer may result in a reduction of the transaction
price. Example include vouchers coupons and volume
rebate
Step 4 Allocate of the transaction price
The transaction price is allocated to each performance
obligation on the basis of relative stand-alone selling price
of each good or service. Stand-alone selling price is the
price that the entity would sell a promised food or service
separately to a customer
Determining stand-alone selling price
The best evidence of the stand-alone selling price is an
observable price of a good or service when sold on a
standalone basis or when sold separately. If the stand
alone selling price is not directly observable the entity must
estimate such price by using the following methods
a. Adjusted market assessment approach
b. Expected cost plus margin approach
c. Residual approach
The adjusted market assessment approach means that
entity may refer to prices from competitors for similar good
or service adjusted for specific cost and margin. The
expected cost plus margin approach means the entity may
forecast expected cost to satisfy the performance obligation
adjusted for an appropriate margin or profit. The residual
approach may be used only when either the selling price of
the good or service is highly variable or is uncertain
EDMUND E. HILARIO, CPA, MBA
1stSEMESTER 2019 – 2020
Under the residual approach the stand alone selling price is
the difference between the total transaction price and the
sum of the observable stand-alone selling prices of other
goods or services in the contract
Step 5 Recognition of revenue
As entity shall recognize revenue when or as it satisfies a
performance obligation by transferring control of a good or
service to a customer. Simply stated revenue should be
recognized when an entity transfers control of the good or
service to a customer. The amount of revenue is the
amount allocated to the performance obligation. Control of
an asset refers to the ability to direct the use of the asset
and obtain substantially all of the benefits from the asset.
Revenue can be recognized either at point in time or over
time.
Revenue recognition at a point in time
The following factors would indicate revenue recognition at
a point in time
a. The entity has the right to receive payment for the
asset and for which the customer is obliged to pay
b. The customer has legal title to the asset
c. The entity has transferred physical possession of the
asset to the customer
d. The customer has the significant risks and rewards of
ownership of the asset
e. The customer has accepted the asset
Revenue recognition over time
Revenue is recognized over time when any of the following
is satisfied
a. The customer simultaneously receives and consumes
the benefits provided by the entity’s performance as
the entity performs
For example routine or recurring payroll processing
services
b. The entity’s performance creates or enhances an asset
that the customer controls as the asset on a customer
site
c. The entity’s performance does not create an asset with
an alternative use to the entity and the entity has an
enforceable right to receive payment for performance
completed to date
For example constructing a specialized asset that only
the customer can use or constructing an asset in
accordance with customer order
Sale of goods
When goods are sold in the ordinary course of business
revenue is recognized unquestionably st the point of sale.
The reason is that it is at the point of sale that the entity
has transferred to the customer the significant risk and
reward of ownership of the asset. Stated differently legal
title passes to the customer at the point of sale.
Incidentally the point of sale is usually the point if delivery
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL,
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 33: PFRS 15 Revenue from contracts with customers EDMUND E. HILARIO, CPA, MBA
Financial Accounting 1stSEMESTER 2019 – 2020
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which may be actual or constructive. Legally it is delivery If a customer buys goods or services the entity grants the
that transfers title or ownership from the seller to buyer customer award credits often described as “points”. The
entity can redeem the “points” by distributing to the
Sale with a right return customer free or discounted goods or services
PFRS 15 paragraph B21 provides that an entity shall
recognize the following with respect to a sale with right of A customer loyalty program operates in a variety of ways.
return Customers may be required to accumulate a specified
a. Revenue equal to the total sale price less than sale minimum number of a ward credits or “points” before they
price of the expected return can be redeemed
b. Refund liability equal to the sale price of the expected
Measurement
return
An entity shall account for the award credits as a
c. A recover asset and the corresponding reduction of cost
“separately component of the initial sale transaction”. In
of goods sold equal to the cost of the expected return
other words the granting of award credits is effectively
Consignment arrangement accounted for as a “future delivery of goods or services”
Consignment is a method of marketing goods in which the
PFRS 15 paragraph 74 provides that an entity shall allocate
entity called the consignor transfers physical possession of
the transaction price to each performance obligation
certain goods to a dealer or distributor called the consignee
identified in a contract on a relative stand-alone selling price
that sells the goods on behalf of the consignor. The
basis. In other words the fair value of the consideration
consignor shall not recognize revenue upon delivery of the
received with respect to the initial sale shall be allocated
goods to the consignee until the goods are sold by the
between the award credits and the sale based on relative
consignee. The reason is that the product is controlled by
stand-alone selling price. The stand-alone selling price is
the consignor and the consignee does not have an
the price at which an entity would sell a promised good or
unconditional obligation to pay for the product. When
service separately to a customer
consigned goods are sold by the consignee a report called
account sales is given to the consignor together with a cash Recognition
remittance for the amount of sales minus commission and The consideration allocated to the award credits is initially
other expenses chargeable against the consignor recognized as deferred revenue and subsequently
recognized as revenue when the award credits are
Bill and hold arrangement
redeemed. The amount of revenue recognized shall be
Bill and hold arrangement is a contract under which an
based on the number of award credits that have been
entity bills a customer for a product but the entity retains
redeemed relative to the total number expected to be
possession of the product. For example a customer may
redeemed
request an entity to enter into such contract because of lack
of space for the product or because of delays in the The estimated redemption rate is assessed each period.
customer’s production schedule Change in the total nm=umber expected to be redeemed do
not affect the total consideration for the award credits.
Depending in the terms of the contract revenue shall be
Instead the changes in the total number of award credits
recognized when the customer obtains control or takes title
expected to be redeemed shall be reflected in the amount of
of the product even though the product remains in an
revenue recognized in the current and future periods. In
entity’s physical possession. All of the following criteria
other words the calculation of the revenue to be recognized
must be met for the recognition of revenue in a bill and hold
in any one period is made on a “cumulative basis” in order
arrangement
to reflect the changes in estimate
a. The customer has requested for the arrangement
b. The product must be identified separately as belonging
to the customer
c. The product must be ready for physical transfer to the
customer anytime
d. The entity cannot have the ability to use the product or
to direct it to another customer

Customer loyalty program

Many entities use a customer loyalty program to build brand
loyalty retain their valuable customer and of course increase
sales volume. The customer loyalty program is generally
designed to reward customers fir past purchases and to
provide them with incentives to make further purchase