PFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS

Focus Notes by Group 4

PFRS 15 applies to all contracts with customers, except:

a) Leases under PFRS 16
b) Insurance contracts under PFRS 17
c) Financial instruments under PFRS 9

CORE PRINCIPLES UNDER PFRS 15

Entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled.

Revenue is recognized:
a) At a point in time - at a particular date when control of good or service is transferred to the
customer
b) Over time - over a certain period in a manner that depicts the entity’s performance

5-STEP MODEL OF PFRS 15

Step 1: Identify the contract with the customer

➔ The contract is with a customer and the collectability of the consideration is probable.
➔ General Rule: Contracts are accounted for separately.
➔ Contracts should be combined if any of the ff. are satisfied:
a) Contracts are treated as a single package
b) 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
➔ Contract modifications:
● Separate contract if the modification results in additional goods or services that are
distinct and the modified contract price reflects stand-alone selling prices of those
additional goods or services.
● As if the modification is a termination of the existing contract and the creation of a new
contract if the additional goods or services are distinct but the modified contract price
does not reflect the stand-alone selling prices of the additional goods or services.
● As if the modification is a part of the existing contract if the additional goods or services
are not distinct.

Step 2: Identify the performance obligations in the contract

➔ Each promise to deliver a distinct good or service in the contract is treated as a separate
performance obligation.
➔ A promised good or service is distinct if:
a) The customer can benefit from the good or service AND
b) The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract
Step 3: Determine the transaction price
➔ Transaction price - amount of consideration in a contract to which the entity expects to be
entitled in exchange for transferring a good or service.

What can affect transaction price?

a) 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.
b) Time Value of Money (Significant Financing Component)
● When determining the transaction price, the promised consideration is discounted
if the timing of the agreed payments provides the customer or the entity with a
significant benefit of financing the transfer of goods or services.
● If there's significant financing component, the consideration should be
adjusted for time value of money. Revenue is measured on the cash selling price.
However, if the contract period is less than one year, the entity can disregard time
value of money.
● A contract does not have a significant financing component if:
- The customer paid in advance and the transfer of the goods or services is at the
customer’s discretion.
- The consideration is variable and contingent on a future event that is beyond the
customer’s or the entity’s control; or
- The difference between the promised consideration and the cash selling price
arises from reasons other than financing.

c) Noncash Consideration
● The non-cash consideration is measured at fair value
● If fair value is not available, at the selling price of the good or service promised
in exchange for the consideration

d) Consideration Payable to a Customer

● The entity needs to determine if consideration payable to the customer may result
in a reduction of the transaction price.

Changes in the transaction price

A subsequent change in the:
● Transaction prices arising from other than a contract modification, shall be allocated to
the performance obligations based on the relative stand-alone prices of the distinct goods
at contract inception.
● Transaction prices shall be allocated to all of the performance obligations in the contract
unless it is clear it relates only to a specific part of the contract.
● Stand-alone selling prices are ignored.
 A change in the transaction price after a contract modification is accounted:
● If the change in the transaction price is attributable to variable consideration that existed
before a modification that was accounted for as a termination of the original contract and
the creation of a new contract, the change in the transaction price is allocated to the
performance obligations in the original contract (before modification)
● In all other cases in which the modification is not accounted for as a separate contract, the
change in the transaction price is allocated to the unsatisfied performance obligation in
the modified contract.

Step 4: Allocate the transaction price to the performance obligations

➔ Transaction price allocated is based on the relative stand-alone prices.
➔ Stand-alone selling price - price that the entity would sell a promised good or service separately
to a customer

How to determine stand-alone selling price?

- Observable price of a good or service when sold on a stand-alone basis or when sold
separately
- If not directly observable, entity must estimate the price using:
a) Adjusted market assessment approach - refer to prices from competitors for
similar good or service adjusted for specific cost and margin
b) Expected cost plus margin approach - forecast expected cost to satisfy the
performance obligation adjusted for an appropriate margin or profit
c) Residual approach - use only when either the selling price of the good or service
is highly variable or uncertain

Step 5: Recognize revenue when (or as) a performance obligation is satisfied

➔ Revenue is recognized when entity transfers control of the good or service to the customer
➔ Amount of revenue is the amount allocated to the performance obligation

Performance obligations satisfied 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

Performance obligations satisfied over time

a) The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs,
b) The entity’s performance creates or enhances an asset (for example, work in progress)
that the customer controls as the asset is created or enhanced or
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 payment for performance completed to date
How to measure progress towards completion?
- In determining the appropriate method for measuring progress, an entity shall consider
the nature of the good or service that the entity promised to transfer to the customer.
- When applying a method for measuring progress, an entity shall exclude any goods or
services for which the entity does not transfer control to a customer. Conversely, an entity
shall include any goods or services for which the entity does transfer control to a
customer when satisfying that performance obligation

Input method
- Recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a
performance obligation (for example, resources consumed, labour hours expended, costs
incurred, time elapsed or machine hours used) relative to the total expected inputs to the
satisfaction of that performance obligation.

- If the entity’s efforts or inputs are expended evenly throughout the performance
period, it may be appropriate for the entity to recognise revenue on a straight-line
basis.

- Shortcoming: There may not be a direct relationship between an entity’s inputs and the
transfer of control of goods or services to a customer. Therefore, an entity shall exclude
from an input method the effects of any inputs that do not depict the entity’s performance
in transferring control of goods or services to the customer. For instance, when using a
cost-based input method, an adjustment to the measure of progress may be required in the
following circumstances:

(a) When a cost incurred does not contribute to an entity’s progress in satisfying the
performance obligation.

(b) When a cost incurred is not proportionate to the entity’s progress in satisfying the
performance obligation.

For example, a faithful depiction of an entity’s performance might be to recognise

revenue at an amount equal to the cost of a good used to satisfy a performance obligation
if the entity expects at contract inception that all of the following conditions would be
met:

(i) the good is not distinct;

(ii) the customer is expected to obtain control of the good significantly before receiving
services related to the good;

(iii) the cost of the transferred good is significant relative to the total expected costs to
completely satisfy the performance obligation; and

(iv) the entity procures the good from a third party and is not significantly involved in
designing and manufacturing the good

Output Methods
- Revenue recognition in output method is made on the basis of direct measurements to
the customer of the goods or services transferred to date relative to remaining goods
under the contract.
 - Examples of output methods are
1) Surveys of performance completed to date
2) Appraisals of results achieved
3) Milestones reached
4) Time elapsed
5) Units produced or units delivered
- Output method metrics used to measure progress are usually much more costly, and may
not be available at a moment’s notice.

- Application of output methods:

● The entity applies the output method only when it would be able to accurately
depict the performance with respect to the completion of the performance
obligation.
● A practical application would be when the right to consideration from a customer
pertains to an amount that directly corresponds to the value of the entity’s
performance to date.

- Disadvantages of Output methods

● Outputs used to measure progress may not be directly observable and the
information required to do so may require additional or undue costs.

- Changes in the measure of progress

● The primary goal of the output method is for the Accurate/precise depiction of
the right consideration with respect to the value of the performance satisfied to
date. Therefore, it is only reasonable to update the measure of progress as the
circumstances change overtime. This should be applied in accordance with the
PAS 8.

Uncertainty in the Collectability of Contract Revenue

● Contract Inception - If the uncertainty in the collectibility of contract revenue arises at
contact inception, the entity does not recognize any revenue from the contract.

Any consideration received is recognized as liability and recognized as a liability and

recognized as revenue only when either of the following has occurred:
a. The entity has no remaining obligation to transfer goods or services to the
customer and all, or substantially all, of the consideration has been received and
is non-refundable; or
b. The contract has been terminated and the consideration received is non-
refundable.

● Subsequent Period - If the uncertainty in the collectibility of contract revenue arises

subsequent to contract inception, the uncollectibility is accounted for as impairment of
trade receivable and/or contract asset.
 SALE OF GOODS

● Sold in the ordinary course of the business - revenue is recognized unquestionably at the
point of sale
● Legal title passes to the customer at the point of sale

SALE WITH A RIGHT TO RETURN

Entity shall recognize the following:

● Revenue equal to the total sale price less the sale price of the expected return
● Refund liability equal to the sale price of the expected return
● Recover asset and the corresponding reduction of cost of goods sold equal to the cost of
expected return

CONTRACT ASSETS AND CONTRACT LIABILITIES

Depending on which party has performed their obligations under the contract, the contract is presented in
the statement of financial position as a contract liability or contract asset. Unconditional right to
consideration is presented separately as a receivable.

Contract Liability
Is an entity’s obligation to transfer goods or services to a customer for which the entity has received
consideration (or amount due) from the customer.

A contract liability is recognized at the earlier of the date

a. The entity receives consideration before the good or service is handed over to the customer
b. The entity has an unconditional right to the consideration before the good or service is transferred
to the customer (non-cancellable contract means the consideration is assured since an advance
payment is required)

Contract Asset
Is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a
customer when that right is conditioned on something other than the passage of time.
➔ Usually recognized when the good or service is transferred to the customer prior to receipt of
consideration, or when the consideration becomes due

Receivable
Is an entity’s right to consideration that is unconditional. A right to consideration can only be considered
as unconditional if only the passage of time is required before payment of the consideration becomes due.
➔ Difference between the measurement of the receivable and the revenue recognized is presented as
an expense (impairment loss)
Cancellable Non-cancellable

No entry No entry

● If neither party has yet to perform their obligation, no entry

Cancellable Non-cancellable

No entry Receivable xxx

Contract Liability xxx

● Assuming a contract is non-cancellable, the entity has an unconditional right to consideration

because it requires payment when it is due. The entity is entitled to the consideration whether the
customer continues or cancels the contract.
● If the contract is cancellable, no entry since there is no unconditional right

Sample Journal Entries:

a. Incurrence of Cost
“Construction progress” is an account used to accumulate contract costs incurred and profits (less
losses) recognized to date
Traditional Accounting PFRS 15

Construction progress xxx Contract Costs xxx

Cash xxx Cash (or other accounts) xxx

b. Billing
“Progress billings” is an account used to record amounts billed for work performed on a contract
Traditional Accounting PFRS 15

Accounts Receivable xxx Receivable xxx

Progress billings xxx Contract Liability xxx

c. Collection

Traditional Accounting PFRS 15

Cash xxx Cash xxx

Accounts Receivable xxx Receivable xxx

d. Revenue Recognition

Traditional Accounting PFRS 15

Cost of Construction xxx Contract liability xxx

Construction in progress xxx Revenue xxx
Revenue xxx
Cost of construction xxx
Contract Costs xxx
Progress Billings

Total Progress Billings made

Downpayment xx

Subsequent Billing:

Billing on Balance xx

Deduction from downpayment (xx) xx

Total Progress Billing xx

Total Construction Revenue

Total Price xx

Multiply by: % of completion xx

Total Construction Revenue xx

Collections
Mobilization Fee xx

Collection from Progress Billing xx

Total Collections xx

Gross Profit Rate

Total Contract Price xx

Multiply by: Expected Gross Profit Rate xx

Expected Total Profit from the Contract xx

Multiply by: % of Completion xx

Profit for the year xx

Reconstruction of Contract Information

Total Contract Price xx

Multiply by: % of completion xx

Contract Revenue to date xx

 Contract Revenue in Prior Years (xx)

Contract Revenue for the year xx

Cost of Construction (xx)

Profit(loss) for the year xx

CONTRACT COSTS

Costs to obtain a contract

These are the incremental costs to obtain a contract or costs that would not have been incurred without an
effort to obtain a contract – for example, legal fees, sales commissions and similar.
● They are recognized as an asset if they are expected to be recovered (the exception is the
contract costs related to the contracts for less than 12 months).
● Costs that would have been incurred regardless of whether the contract was obtained are
recognized as expense, unless the costs are explicitly chargeable to the customer regardless of
whether the contract is obtained.
Amortization and Impairment
➔ Contract costs recognized as assets are amortized on a systematic basis that is consistent with the
transfer of the related goods or services to the customer
➔ Impairment loss is recognized to the extent that the carrying amount of the asset exceeds:
a) The remaining amount of consideration that the entity expects to receive in exchange for
the goods or services to which the asset relates; less
b) The costs that relate directly to providing those goods or services that have not been
recognized as expenses.
Costs to fulfill a contract
If these costs are within the scope of IAS 2, IAS 16, IAS 38, then they are treated in line with the
appropriate standard. If not, then they are capitalized only if the following are met:

a) The costs are directly related to a contract or specifically identifiable anticipated contract,
b) The costs generate or enhance resources that will be used to satisfying performance
obligations in the near future; AND
c) The costs are expected to be recovered.

CUSTOMER LOYALTY PROGRAM

● Designed to reward customers for past purchases and provide incentives to make further
purchases
● Award credits - “Points” granted to a customer who bought goods/services
● Entity can redeem “points” by distributing to the customer free or discounted goods or services.
Measurement
● Account for the awards as a “separate component of the initial sale transaction”. Basically, the
granting of award credits is effectively accounted for as a “future delivery of goods or services”
 ● Entity shall allocate the transaction price to each performance obligation identified in a contract
on a relative stand-alone selling price basis
● In other words, the fair value of the consideration received with respect to the initial sale
shall be allocated between the award credits and the sale based on relative stand-alone selling
price.
Recognition
● The consideration allocated to the award credits is initially recognized as deferred revenue and
subsequently recognized as revenue when the award credits are redeemed.
● The amount of revenue recognized shall be based on the number of award credits that have been
redeemed relative to the total number expected to be rewarded.