KINGFISHER SCHOOL OF BUSINESS

AND FINANCE

ACCTG 10
ONLINE CLASS
Topic: “Class Orientation &
PFRS 15 – Revenue from
Contract with Customers”
John Leo D. Ambuyoc, CPA
Instructor
Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

Acctg 10 Online Class Guidelines

• Student must join Acctg 10 course in Canvas.
• Student must use Complete Name in Canvas.
• Student must add their real & current picture as profile
in Canvas Account
• Questions and other concerns must be sent through
email during school hours only.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

Acctg 10 Grading System

Performance Task – 5%
Quizzes - 15%
Prelim - 15%
Midterm - 25%
Finals - 40%

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

PFRS 15 sets the principles to apply when reporting about, the nature, the
amount, the timing, and the uncertainty of revenue and cash flows from a
contract with a customer.

The main aim of PFRS 15 is to recognize revenue in a way that shows the
transfer of goods/services to customers in an amount reflecting the
expected consideration (payment) in return for those goods or services.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

5 – STEP MODEL FOR REVENUE RECOGNITION

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

A
Identify the Identify the Determine Allocate the Recognize
contract performance the transaction revenue
with obligations in transaction price to the when (or as)
a customer the contract. price. performance the entity
obligations in satisfies a
the contract. performance
obligation..

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 1 - Identify the contract with a customer

A contract exists for purposes of revenue recognition only if all of the
following criteria are met:

1. Parties to the contract has approved it and are committed to perform;

2. Each party’s rights to the goods/services transferred are identified;
3. The payment terms are identified;
4. The contract has a commercial substance; and
5. It is probable that an entity will collect the consideration

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

How to account for the consideration received from a contract

that does the requirement?
• Recognized as liability

• Recognized as revenue;
❑ No remaining performance obligation and all, or
substantially all, of the consideration promised by the
customer has been received by the entity and is
nonrefundable; or
❑ Contract is terminated and is non-refundable.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 1 - Identify the contract with a customer

Revenue cannot be recognized until a contract exists.

A contract does not exist if;
• Neither the seller nor the customer has performed any obligations
under the contract, and
• Both the seller and the customer can terminate the contract

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 2 - Identifying performance obligations

Performance obligation is promise in a contract to provide a product or
services to a customer.

Separate contracts into common parts that can be viewed on a stand alone
basis
Distinct (Separable):

1. Not highly dependent on, or interrelated with other goods or services

2. Customer can benefit from the goods or services.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 3 - Identifying performance obligations

Transaction price – (transaction price does not include amounts collected
for third parties)

• Time value of money – contract involves a significant financing component

• Non-cash consideration – measured at Fair Value

• Consideration paid or payable to customers – these elements reduce the

consideration received and revenue to be recognized (discounts, coupons,
free products, or services) (payment is not for distinct goods or services)

• Variable consideration – price is dependent of future events

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 3 - Identifying performance obligations

Variable Consideration (Cont.)
❑ Seller should include the uncertain amount in the transaction price by
estimating the variable consideration
❖ Expected Value – calculated as the sum of each possible amount
multiplied by its probability (used when several outcomes are
possible)

❖ Most likely amount – the single most likely amount in a range of

possible consideration outcomes. (used when only two outcomes
are possible)

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 3 - Identifying performance obligations

Variable Consideration (Cont.)
Sanjeev enters into a contract offering variable consideration. The
contract pays him P1,000/month for six months of continuous consulting
services. In addition, there is a 60% chance that the contract will pay an
additional P2,000 and 40% chance that contract will pay an additional
P3,000 depending on the outcome of consulting services. Sanjeev
conclude that this contract qualifies for revenue recognition over time.

❖ Assume Sanjeev estimates variable consideration as the most likely

amount.
Transaction Price = P1,000 x 6 mos. + P2,000 = P8,000
Revenue/month = P8,000 / 6 mos. = P1,333

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 3 - Identifying performance obligations

Variable Consideration (Cont.)
Sanjeev enters into a contract offering variable consideration. The
contract pays him P1,000/month for six months of continuous consulting
services. In addition, there is a 60% chance that the contract will pay an
additional P2,000 and 40% chance that contract will pay an additional
P3,000 depending on the outcome of consulting services. Sanjeev
conclude that this contract qualifies for revenue recognition over time.

❖ Assume Sanjeev estimates variable consideration as the expected value.

Transaction Price = (P1,000 x 6 mos.) + (P2,000x60% )+ (P3,000x40%) = P8,400

Revenue/month = P8,400 / 6 mos. = P1,400

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 4 - Allocate the Transaction Price to Separate

Performance Obligation
Transaction price is allocated to each performance obligation identified in the
contract based on their relative stand alone prices of the distinct goods or
services promised to be transferred.

Ways to allocate transaction price:

❑ Adjusted Market Assessment Approach – determine how goods
or services will be sold and estimate the price those customers
are willing to pay

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

Adjusted Market Assessment Approach (Cont.)

SONY sells a big screen TV package consisting of 60-inch plasma TV, a
universal remote, and onsite installation of SONY staff. SONY concludes that
the TV, remote and installation services are separate performance
obligation. SONY sells the 60-inch TV separately for P17,000 and sells the
remote separately for P1,000 and offer the installation separately for 2,000.
The entire package sells for P19,000. SONY does not sell the installation
separately.
TV: P19,000 x 85% = P16,150
Remote: P19,000 x 5% =P 950
Installation: P19,000 x 10% = P 1,900

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues
STEP 4 - Allocate the Transaction Price to Separate Performance
Obligation (Cont.)
Ways to allocate transaction price:

❑Estimated cost plus margin approach – project the estimated costs of

satisfying a performance obligation and add an normal profit

❑Residual Approach – a company estimates the standalone sales price by

reference to total transaction price less the sum of the observable
standalone selling prices the goods or services made in the contract

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

SONY sells a big screen TV package consisting of 60-inch plasma TV, a

universal remote, and onsite installation of SONY staff. SONY concludes that
the TV, remote and installation services are separate performance
obligation. SONY sells the 60-inch TV separately for P17,500 and sells the
remote separately for P1,000 and offer the entire package for P19,000.
SONY does not sell the installation separately. SONY is aware that other
similar vendor charge P1,500 for installation service. SONY also estimates
that it incurs approximately P1,000 of compensation and other cost for the
installation. SONY typically charges customer 40% above cost on similar
sales.
❖Estimated cost plus margin
Stand alone price of installation P1,000 + P400 = P1,400.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

SONY sells a big screen TV package consisting of 60-inch plasma TV, a

universal remote, and onsite installation of SONY staff. SONY concludes that
the TV, remote and installation services are separate performance
obligation. SONY sells the 60-inch TV separately for P17,500 and sells the
remote separately for P1,000 and offer the entire package for P19,000.
SONY does not sell the installation separately. SONY is aware that other
similar vendor charge P1,500 for installation service. SONY also estimates
that it incurs approximately P1,000 of compensation and other cost for the
installation. SONY typically charges customer 40% above cost on similar
sales.
❖Residual Approach
P19,000 – (P17,500 + P1,000) = P500.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 5 – Recognize Revenue when (or as) the entity satifies a performance
obligation
❑Revenue is recognized when entity satisfies a performance obligation
❖ Single Point in Time
❖ Overtime
1. customer consumes the benefit of the sellers work as it is
performed, or
2. The customer controls the asset as it is created, or
3. The seller is creating an asset that has no alternative use the seller.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

 Revenue Recognition: Contract with Customers – 5 Step Process &
Other Issues

STEP 5 – Recognize Revenue when (or as) the entity satifies a performance
obligation

Example: Sanjeev enters into a contract offering variable consideration.

The contract pays him P1,000/month for six months of continuous
consulting services. In addition, there is a 60% chance that the contract
will pay an additional P2,000 and 40% chance that contract will pay an
additional P3,000 depending on the outcome of consulting services.
Sanjeev conclude that this contract qualifies for revenue recognition over
time.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1