PFRS 15 FIVE STEP MODEL

PHILIPPINE FINANCIAL REPORTING STANDARD 15

PFRS 15 establishes FIVE STEP MODEL to be applied 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 PFRS but not for public
entities reporting under US GAAP
• Transition either
a. FULL Retrospective Approach
b. Modified Retrospective Approach

NOT applicable to;

• IAS 17 - Leases
• IAS 9 - Financial Instruments and other contractual rights
• IFRS 10 - Consolidated Financial Statements
• IFRS 11- Joint Arrangements
• IAS 27 - Separate Financial Statements
• IAS 28 - Investment in Assoc. and Joint Venture
• IFRS4 - 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 SIM requirements
2. Transaction Price (TP) is then reduced by amounts
initially measured under other standards.

B. If No OTHER STANDARDS:
1. Apply PFRS 15
LEARNING OUTCOMES:

After reading this module, the learner should be able to:

1. Refresh students with PFRS 15

2. Discuss the Five Step Model Framework
3. Illustrate the Five Step model of recognizing revenue

TIME:

The time allotted for this module is ONE AND A HALF (1.5) hours.

LEARNER DESCRIPTION

The participants in this module are Third Year BSA Students

MODULE CONTENTS:

A. FIVE STEP MODEL FRAMEWORK (C-O-P-A-R)

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

STEP 1: IDENTIFYING THE CONTRACTS WITH CUSTOMER

Conditions:
• Approved Contract by parties
• Rights of each party in goods or services (G/S) can be identified
• Terms of Payment in goods or services (G/S) can be identified
• Contract has Commercial Substance
• Probable collection of the Consideration to which Entity Is Entitled to m
exchange of goods or services

NOTE: If not all conditions are met - reassess the contract;

If all conditions are met - the contract is within scope of PFRS 15

STEP 2: IDENTIFYING PERFORMANCE OBLIGATION

A. Goods and Services that are distinct: (SEPARATE PERFORMANCE)
• The customer can benefit from the good or services on its own
• The Entity’s promise to transfer G/S can be SEPARATELY identifiable
from other promises 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 good or service in series is consecutively transferred to a
customer would be a Performance Obligation (PO) satisfied overtime
• A single method of measuring progress would be used towards
complete satisfaction of Performance Obligation to transfer each distinct
G/S the series to the customer.

STEP 3: DETERMINE THE TRANSACTION PRICE

Considers past customary business practices. The transaction price (TP) includes:
• An estimate of any Variable Consideration (VC) using either the:
(Better predicts Entity’s Entitlement)
o PROBABILITY WEIGHTED EXPECTED VALUE
o MOST LIKELY AMOUNT
• The effect of the Time Value of Money if there are financing
components in contract
• The Fair Value of Any non-cash consideration

For Variable Consideration

EXPECTED VALUE MOST LIKELY AMOUNT

Consider the sum of probability Only consider the single amount

weighted amounts for the range of from the range of possible
possible outcome consideration amounts.

This is appropriate estimate if the entity It is appropriate to use this

has large number of contract with estimate if the contact has only few
similar characteristics possible outcomes.

STEP 4: ALLOCATE THE TRANSACTION PRICE TO 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, the entity must estimate
using
a. ADJUSTED MARKET ASSESSMENT APPROACH (MV-
Approach)
b. EXPECTED COST PLUS MARGIN APPROACH (Cost Plus
Approach)
c. RESIDUAL APPROACH (only in limited instance)

STEP 5 RECOGNIZE REVENUE AS THE ENTITY SATISFIES PERFORMANCE

OBLIGATION
 REVENUE is recognized as CONTROL is passed either;
A. Over Time:
Following Criteria:
• the customer simultaneously RECEIVES and
CONSUMES all the benefits provided by the entity
• The Entity CREATES or ENHANCE the value of asset
controlled by the Customer
• The PO 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

*ONE Criteria 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:
o The entity has the present right to payment for the
asset.
o The customer has:
1. Physical Possession of Asset
2. Accepted the Asset
3. Legal title to asset
4. Significant Risk and Reward related to
ownership of asset

• CONTROL is the ability to direct the use of and obtain substantially all the
remaining benefits of an asset.
* Possession of things and enjoyment of rights in the concept of an Owner.

HOW TO DETERMINE PASSAGE OF CONTROL TO CUSTOMERS?

If Recognize
Does the customer simultaneously receive and consume
YES Revenue OVER
the benefits provided by the entity’s performance?
→ TIME

If NO
↓

Does the entity performance creates or enhances an asset If Recognize

that the customer controls as the asset is created or YES Revenue OVER
enhanced? → TIME

If NO
↓
 Does entity's performance not create an asset with an
If Recognize
alternative use to the entity and the entity has an
YES Revenue OVER
enforceable right to payment(for performance completed to
→ TIME
date)

If NO
↓

Recognize Revenue AT POINT IN TIME

ILLUSTRATION
On April 20, 2020, XYZ Company entered into a contract to deliver product BB and
CC to Mr. Orison for P 200,000. The contract requires that product BB to be delivered
first and states that payment for the delivery of product BB is conditional on the delivery
of product CC. The relative standalone selling prices of products BB and CC are P40,
000 and P60, 000, respectively. The consideration of P200, 000 is due only after the entity
has transferred both Products BB and CC.

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 delivery or sale of products BB
and CC]
• Rights of each party in Goods Services can be Identified: [Mr. Orison has
rights to receive product BB and CC]
• Terms of Payment in Goods or Services can be identified: [Payment in full
due only after XYZ transferred both products BB and CC]
• Contract has Commercial Substance: [it has commercial substance because
the delivery by XYZ Company of products BB and CC results in the payment
of the ' contract price by Mr. Orison]
• 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 BB and CC.]

2. Identifying Performance Obligation

The promise to deliver Products BB and CC by XYZ as performance obligations.
There is a series of performance obligations in this case and the performance of one is
dependent on the other. Hence, there are two performance obligations such as delivery
or transfer of Product BB and delivery of Product CC.

3. Determine Transaction Price

The transaction price of P 200,000 is clearly determinable in this case. The said
contract price shall be allocated in the next step using relative standalone prices.
4. Allocate Transaction Price
The transaction price of P200000 shall be allocated based on the relative stand-
alone price of BB and CC. Thus, the following allocation:
Product BB Product CC

Relative Stand Alone Price 40,000 60,000

Ration based on SAP 40% 60%

Transaction Price x Ratio 200,000 x 40% 200,000 x 60%

Allocate Transaction Price 80,000 120,000

5. Recognize Revenue when or as the entity satisfies performance obligation

The revenue is to be recognized At Point in Time. Since the customer, Mr. Orison,
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.

ONLINE READING MATERIALS:

• Read the complete details of PFRS 15 at
https://www.iasplus.com/en/standards/ifrs/ifrs15

ONLINE VIDEO LINKS AND MATERIALS:

• Watch the online video lecture of the course instructor uploaded at NEO LMS
and to the class shared Google drive (if applicable).

LESSON REFERENCES:
Deloitte (2020). IFRS 15 — Revenue from Contracts with Customers. IASPlus.com.
Retrieved from https://www.iasplus.com/en/standards/ifrs/ifrs15
Millan, Zeus Vernon B. (2020). Accounting for Special Transactions. CHAPTER 8:
Accounting for Franchise Operations - Franchisor. Bandolin Enterprise. #21
Paramount Vill., Sto. Tomas, Baguio City