lOMoARcPSD|10933029

Reviewer PFRS 15 Revenue from Contracts with Customers

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 lOMoARcPSD|10933029

PFRS 15 Revenue from Contracts with Customers

Income vs. Revenue

The Conceptual Framework provides the following definitions:

Income – increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants. Income encompasses both
revenue and gains.

Revenue – income arising in the course of an entity’s ordinary activities.

Applicability of PFRS 15

PFRS 15 shall be applied to contracts wherein the counterparty is a customer.

• Contract – An agreement between two or more parties that creates enforceable
rights and obligations. A contract can be written, oral, or implied by an entity’s
customary business practice.
• Customer – A party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for consideration.

PFRS 15 shall not be applied to the following:

• Lease contracts (PAS 17 Leases);
• Insurance contracts (PFRS 4 Insurance Contracts);
• Financial instruments; and
• Non-monetary exchanges between entities in the same line of business to facilitate sales
to customers. For example, PFRS 15 is not applicable to a contract between two oil
companies that agree to exchange oil to fulfil customer demands in different locations
on a timely basis.

Core principle

An 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 in exchange for those goods or services.

Steps in the recognition of revenue

PFRS 15 requires the following steps in recognizing revenue:
• Step 1: Identify the contract with the customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Step 1: Identify the contract with the customer

REQUIREMENTS BEFORE A CONTRACT WITH A CUSTOMER IS ACCOUNTED FOR UNDER

PFRS 15:
• THE CONTRACT MUST BE APPROVED AND THE CONTRACTING PARTIES ARE
COMMITTED TO IT;
• RIGHTS AND PAYMENT TERMS ARE IDENTIFIABLE;
• THE CONTRACT HAS COMMERCIAL SUBSTANCE; AND
• THE CONSIDERATION IS PROBABLE OF COLLECTION. (THE CONTRACT DOES NOT
RESULT TO A CHANGE IN THE RISK, TIMING OR AMOUNT OF THE ENTITY’S
FUTURE CASH FLOWS)

No revenue is recognized if the contract does not meet the criteria above. Any consideration
received is recognized as liability.

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Step 2: Identify the performance obligations in the contract

Each promise in a contract to transfer a distinct good or service is treated as a separate

performance obligation.

Identifying distinct goods or services

A good or service is distinct if:
• the customer can bene𝑓it from it, either on its own or together with other
resources that are readily available to the customer (e.g., the good or service is
regularly sold separately); and
• the good or service is separately identi𝑓iable (i.e., not an input to a combined
output, does not significantly modify the other promises, or not highly interrelated
with the other promises).

A good or service that is not distinct shall be combined with the other promises in the
contract. Combined promises are treated as a single performance obligation.

Step 3: Determine the transaction price

• The entity shall determine the transaction price because this is the amount at which
revenue will be measured.
• Transaction price is “the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties (e.g., some sales taxes).” The
consideration may include fixed amounts, variable amounts, or both.

Step 4: Allocate the transaction price to the performance obligations

• The transaction price shall be allocated to each performance obligation identified in
a contract based on the relative stand-alone prices of the distinct goods or services
promised to be transferred.

• The stand-alone selling price is the price at which a promised good or service can be
sold separately to a customer.

Estimating the stand-alone selling price

If the stand-alone selling price is not directly observable, the entity shall estimate it using one
or a combination of the following methods:

• Adjusted market assessment approach – the entity evaluates the market in which
it sells goods or services and estimates the price that a customer in that market would
be willing to pay for those goods or services.
• Expected cost plus a margin approach – the entity forecasts its expected costs of
satisfying a performance obligation and then add an appropriate margin for that
good or service.
• Residual approach – the entity estimates the stand-alone selling price as the total
transaction price less the sum of the observable stand-alone selling prices of other
goods or services promised in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
• A performance obligation is satisfied when the control over a promised good or service
is transferred to the customer.
• Revenue is measured at the amount of the transaction price allocated to the
satisfied performance obligation.
• Performance obligations are classified into the following:
• Performance obligation that is satisfied over time
• Performance obligation that is satisfied at a point in time

Performance obligations satisfied over time

For a performance obligation that is satisfied over time, revenue is recognized over time AS
the entity progresses towards the complete satisfaction of the obligation.

A performance obligation is satisfied over time if one of the following criteria is met:
 • The customer simultaneously receives and consumes the benefits provided by
the entity’s performance as the entity performs.
• The entity’s performance creates or enhances an asset that the customer controls
as the asset is created or enhanced.
• 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.

Measuring progress towards complete satisfaction of a performance obligation

• For each performance obligation satisfied over time, an entity shall recognize
revenue over time by measuring the progress towards complete satisfaction of that
performance obligation.
• Examples of acceptable measurement methods:
• Output methods (e.g., surveys of work performed)
• Input methods (e.g., relationship between costs incurred to date and
total expected costs)

If efforts or inputs are expended evenly throughout the performance period, revenue may be
recognized on a straight-line basis.

Cost-recovery Approach
• If the outcome of a performance obligation cannot be reasonably measured,
revenue shall be recognized only to the extent of costs incurred that are
expected to be recovered.
Performance obligations satisfied at a point in time
• A performance obligation that is not satisfied over time is presumed to be satisfied at
a point in time.
• For a performance obligation that is satisfied at a point in time, revenue is recognized
WHEN the performance obligation is satisfied.

Contract costs

Contract costs include the following:

• Incremental costs of obtaining a contract – recognized as asset if they are
recoverable and avoidable. As a practical expedient, the costs are recognized as
expense if their expected amortization period is 1 year or less.
• Costs to fulfill a contract –if within the scope of PFRS 15, they are recognized as asset
if they are: (a) directly related to a contract, (b) generate or enhance resources, and
(c) recoverable.

Presentation
A contract where either party has performed is presented in the statement of financial
position as a contract liability, contract asset or receivable.
• Contract liability – is an entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or the amount is due) from
the customer.
• 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.
• Receivable – is an entity’s right to consideration that is unconditional.