Revenue From Contracts With Customers

PFRS 15: Revenue from Contracts with Customers
Effectivity Date: January 1, 2018
Learning Objectives:
1. State the five steps in the recognition of revenue
2. Describe how performance obligations are identified in a contract.
3. Describe how the transaction price is allocated to the performance obligations.
4. State the timing of revenue recognition and its measurement.
5. State the presentation of contracts with customers in the statement of of financial position.
Introduction
Overview
PFRS 15 provides the principles in reporting the nature, amount, timing and uncertainty of
revenue and cash flows arising from an entity’s contract with customers.
PFRS 15 is effective for annual periods beginning on or after January 1, 2018.
PFRS 15 applies 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 entities customary business
practice.
 Customer - is 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.
A counterparty to a contract is not a customer if he agrees to participate in the entity’s activities

wherein he shares the related risks and benefits (e.g., co-developing an asset) rather than to
obtain the output of the entity’s ordinary activities.
PFRS 15 applies to individual contracts with customers. However, as a practical expedient,

PFRS 15 may also be applied to a group of similar contracts; provided, the effects on the
financial statements would not differ materially when PFRS 15 is applied separately to each of
the contracts within the group.
An entity shall apply the principles set forth under PFRS 15 Revenue from Contracts with
Customer in accounting for revenues from contracts with customers, regardless of the nature of
the contract entered into with the customer, except for the following:
a. Lease contracts (PAS 17 Leases);
b. Insurance contracts (PFRS 4 Insurance Contracts);
c. Financial instruments, and
d. Non-monetary exchanges between entities in the same line of business to facilitate sales to
customers.
Core Principle under PFRS 15
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 to be entitled in
exchange for those goods or services.
Revenue Recognition
An entity applies the following steps when 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
Step 5: Recognize revenue when (or as) performance obligation is satisfied

A contract with a customer is accounted for only when all of the following criteria are met:
a. The contracting parties have approved the contract (in writing, orally, or impliedly from
customary business practices) and are committed to perform their respective obligations;
b. The entity can identify each party’s rights regarding the goods or services to be transferred;
c. The entity can identify the payment terms for the goods or services transferred;
d. The contract has commercial substance (I.e., the risk, timing or amount of the entity’s future
cash flows is expected to change as a result of the contract); and
e. The consideration in the contract is probable of collection. When assessing collectability,
the entity considers only the customer’s ability and intention to pay the consideration on due
date.
No revenue is recognized on a contract that does not meet the criteria above. Any
consideration received from such contract is 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.
The entity need not reassess the criteria above if they have been met on contract inception
unless there is an indication of a significant change in facts and circumstances, for example,
when the customer’s ability to pay subsequently deteriorates significantly.
If the criteria are not met on contract inception, the entity shall continue to assess the contract to
determine of the criteria are subsequently met.
PFRS 15 is applied over the duration of the contract (I.e., the contractual period) in which the
contracting parties have present enforceable rights and obligations.
A contract does not exists if each contracting party has the unilateral enforceable right to
terminate a wholly unperformed contract without compensating the other party. A contract is
wholly unperformed if the entity has not yet transferred any promised goods or service to the
customer and has not yet received or not yet entitled to receive any consideration.
Combination of contracts
Licensing
The provisions of PFRS 15 that directly relate to the accounting for franchises can be found on
the licensing section of PFRS 15 (PFRS 15.B52-B63). An entity shall apply the specific
principles in this section in conjunction with the general principles that are applicable to all types
of contracts with customers.
PFRS 15 defines a license as one that establishes a customer’s rights to the intellectual
property of an entity.
Examples of licenses of intellectual property:

1. Software and technology;
2. Motion pictures, music and other forms of media and entertainment;
3. Franchises; and
4. Patents, trademarks and copyrights.
Franchise
A franchise is a contractual arrangement under which the franchisor grants the franchisee the
right to sell certain products or services, to use certain trademarks or tradenames, or to perform
certain functions, usually within a designated geographical area.
We deal with franchises everyday: a Jollibee fast-food restaurant, a 7-11 convenience store, an
FM radio station, and a public utility vehicle are all examples of franchises.
Franchises are of two types:

1. Contractual arrangement between two private entities or individuals.
2. Contractual arrangement between a private entity or an individual and the government.
Between two private entities or individuals
The franchisor, having developed a unique concept or product, protects its concept or product
through a patent, copyright, or trademark or trade name. The franchisee acquires the right to
exploit the franchisor’s idea or product by signing a franchise agreement.
Between a private entity or an individual and the government
In another type of a franchise arrangement, a municipality (or other governmental body) allows
private entities to use public property in performing its services. Examples are: the use of
public waterways for a ferry service, use of public land for telephone or electric lines, use of
phonelines for cable TV, use of city streets for a bus line, or use of the airwaves for radio or TV
broadcasting. Such operating rights, obtained though agreements with governmental units or
agencies, are frequently referred to as licenses or permits.
Franchises and licenses may be for a definite period of time or for an indefinite period of time or
perpetual.
Specific Principles: (Licensing Section)
A contract to grant a license to a customer may include other promises to provide additional
goods or services to the customer, whether explicitly stated in the contract or implied by the
entity’s customary business practices. Just like with other types of contracts, the entity shall
apply the general principles in Step 2 above to identify each of the performance obligations in
the contract.
Promise to grant license is not distinct

 If the promise to grant license is not distinct from the other promises in the contract, all of
the promises are accounted for together as a single performance obligation.
The entity determines whether the single performance obligation will be satisfied overtime
or at a point in time using the general principles above.
Examples of licenses that are not distinct from other goods or services promised in the
contract include the following:
a. A license that forms a component of a tangible goods and that is integral to the
functionality of the good; and
b. A license that the customer can benefit from only in conjunction with a related service
(such as an online service provided by the entity that enables, by granting a license,
the customer to access content).
Promise to grant license is distinct

 If the promise to grant license is distinct from the other promises in the contract, the
promise to grant the license is treated as a separate performance obligation.
The entity determines whether the separate promise to grant the license will be satisfied
over time or at a point in time by determining whether the license provides the customer
with either:
a. A right to access the entities intellectual property as it exists throughout the license
period; or
b. A right to use the entity’s intellectual property as it exists at the point in time at which
the license is granted.
 If the customer has the right to access the intellectual property as it exists throughout the
license period, the performance obligation is satisfied over time. Therefore, the amount of
consideration allocated to the promise to grant the license is recognized as revenue over
the license period.
 If the customer has the right to use the intellectual property as it exists at the point in time at
which the license is granted, the performance obligation is satisfied at a point in time.
Therefore, revenue is recognized at the time when the license is provided.
Right to Access
The customer has the right to access the entity’s intellectual property as it exists throughout the
license period if the customer cannot direct the use of, and obtain substantially all of the
remaining benefits from, the license at the point in time at which the license is granted. This is
the case if the intellectual property to which the customer has rights changes throughout the
license period.
The intellectual property changes throughout the license period if:

a. The entity continuous to be involved with its intellectual property; and
b. The entity undertakes activities that significantly affect the intellectual property to which the
customer has rights.
The customer has the right to access the entity’s intellectual property if all of the following
criteria are met:
a. The contract requires, or the customer reasonably expects, that the entity will undertake
activities that significantly affect the intellectual property to which the customer has rights.
b. The grants granted by the license directly expose the customer to any positive or negative
effects of the entity’s activities identified in (a) above; and
c. Those activities do not result in the transfer of a good or a service to the customer as those
activities occur.
Although not determinative, the existence of a share economic interest (for example, a sales-
based royalty) between the entity and the customer related to the intellectual property to which
the customer has rights may also indicate that the customer could reasonably expect that the
entity will undertake such activities.
If the customer has the right to access the intellectual property, the promise to grant a license is
a performance obligation satisfied over time because the customer will simultaneously receive
and consume the benefit from the entity’s performance of providing access to its intellectual
property as the performance occurs.
The entity shall apply an appropriate method to measure its progress towards the complete
satisfaction of that performance obligation to provide access.
Right to Use
The customer has the right to use the entity’s intellectual property as it exists at the point in time
at which the license is granted if the customer can direct the use of, and obtain substantially all
of the remaining benefits from, the license at the point in time at which the license is granted.
This is the case if the intellectual property to which the customer has rights will not change.
Any activities undertaken by the entity merely change its own asset (I.e., the underlying
intellectual property), which may affect the entity’s ability to provide future licenses; however,
those activities would not affect the determination of what the license provides or what the
customer controls.
If the customer has the right to use the intellectual property, the promise to grant a license is a
performance obligation satisfied at a point in time.
The entity shall consider the following indicators of transfer of control when determining the
point in time at which the license transfers to the customer.
a. The entity has a present right to payment for the asset.
b. The customer has legal title to the asset.
c. The entity has transferred physical possession of the asset.
d. The customer has the significant risks and rewards of ownership of the asset.
e. The customer has accepted the asset.
However, revenue shall not be recognized before the point in time where the customer is able to
use and benefit from the license. For example, if a software license period begins before an
entity provides (or otherwise makes available) to the customer a code that enables the customer
to immediately use the software, the entity would not recognize revenue before that code has
been provided (or otherwise made available).
The following factors shall be disregarded when determining whether a license provides a right
to access or a right to use the entity’s intellectual property:
a. Restrictions of time, geographical region or use - those restrictions define the attributes of
the promised license, rather than define whether the entity satisfies its performance
obligation at a point in time or over time.
b. Guarantees provided by the entity that it has a valid patent to intellectual property and that it
will defend that patent from unauthorized use - a promise to defend a patent right is not a
performance obligation because the act of defending a patent protects the value of the
entity’s intellectual property assets and provide assurance to the customer that the license
transferred meets the specifications of the license promised in the contract.
Safe-based or usage-based royalties
Regardless of whether the promise to grant a license is not distinct or distinct and regardless of
whether the distinct license provides the customer a right to access or a right to use the entity’s
intellectual property, an entity shall recognize revenue fro a sales-based or usage-based royalty
promised in exchange for a license of intellectual property only when (or as) the later of the
following events occurs:
a. The subsequent sale or usage occurs; and
b. The performance obligation to which some or all of the sales-based or usage-based royalty
has been allocated has been satisfied (or partially satisfied).
An entity is exempt from applying the “Constraining estimates of variable consideration”

principle of PFS 15 when recognizing revenue from sales-based or usage-based royalty.
Summary of Principles
Promise to grant license is

Not distinct Distinct
 Treat all promises in the contract as a  Treat the promise to grant the license as a
single performance obligation separate performance obligation
 Use general principles to determine  Use specific principles to determine if the
whether the performance obligation is promise provides the customer a:
satisfied over time or at a point in time. a. Right to access - performance
obligation is satisfied overtime.
Revenue is recognized over the
license period.
b. Right to use - performance obligation
is satisfied at a point in time.
Revenue is recognized at the time
when the license is provided.
Promise to grant license is distinct

Right to access Right to use
 The customer cannot direct the use of,  The customer can direct the use of, and
and obtain substantially all of the obtain substantially all of the remaining
remaining benefits from the license at the benefits from, the license at the point in
point in time at which the license is time at which the license is granted.
granted.
 Intellectual property (IP) changes  Intellectual property (IP) does not change
throughout the license period. throughout the license period.
a. The entity continues to be involved
with the IP; and
b. The entity undertakes activities that
significantly affect the IP.
 May be evidenced by a sales-based
royalty agreement between the entity and
the customer
Extracts from IFRS 15

Example 11 - Determining whether goods or services are distinct and Example 54 - Right to use
intellectual property.
An entity, a software developer, enters into a contract with a customer to transfer a software
license, perform an installation service and provide provide unspecified software updates and
technical support (online and telephone) for a two-year period. The entity sells the license,
installation service and technical support separately. The installation service includes changing
the web screen for each type of user (fro example, marketing, inventory management and
information technology). The installation service is routinely performed by other entities and
does not significantly modify the software. The software remains functional without the updates
and the technical support.
Application of the General Principles:
Each of the promised goods and services are distinct because of the following reasons:
a. The customer can benefit from each promised good or service either on its own or together
with the other promised goods or services.
 Each of the promised goods or services can be sold separately.
 The software remains functional even without the updates and technical support.
b. Each promise good or service is separately identifiable.
 The installation service does not significantly modify the software.
 As such, the software and the installation service are separate outputs rather than
inputs used to produce a combined output.
Conclusion:
There are four performance obligation In the contract:
1. The software license.
2. The installation service
3. Software updates; and
4. Technical support
The entity shall then determine whether each of the performance obligations will be satisfied
over time or at a point in time.
Application of specific principles (licensing):

Since the promise to grant the software license is distinct from the other promises in the
contract, the entity shall determine the nature of the license whether it provides the customer
with either:
a. Right to access the entities intellectual property as it exists throughout the license period; or
b. A right to use the entity’s intellectual property as it exists at the point in time at which the
license is granted.
Additional facts:
When making the determination above, the entity observes that the software is functional at the
time that the license transfers to the customer, and the customer can direct the use of, and
obtain substantially all of the remaining benefits from, the software when the license transfers
to the customer.
Furthermore, the entity concludes that because the software is functional when it transfers to
the customer, the customer does not reasonably expect the entity to undertake activities that
significantly affect the intellectual property to which the license relates. This is because at the
point in time that the license is transferred to the customer, the intellectual property will not
change throughout the license period.
Conclusion:
The nature of the entity’s promise in transferring the license is to provide a right to use the
entity’s intellectual property as it exists at a point in time. Consequently, the entity accounts for
the license as a performance obligation satisfied at a point in time.

Example 55 - License of Intellectual Property
An entity enters into a contract with a customer to license (for a period of three years)
intellectual property related to the design and production processes for a good. The contact
also specifies that the customer will obtain any updates to that intellectual property for new
designs or production processes that may be developed by the entity. The updates are
essential to the customer’s ability to use the license, because the customer operates in an
industry in which technologies change rapidly. The entity does not sell the updates separately
and the customer does not have the option to purchase the license without the updates.
The promises to provide the license and the updates are not distinct because of the following
reasons:
a. The customer’s ability to use the license without the updates is limited because the
customer operates in an industry in which technologies change rapidly.
 Each of the promises to provide the license and the updates are not separately
identifiable because the promises are highly interrelated.
Conclusion:
Since the promise to grant the license is not distinct from the promise to provide the updates,
both promises are accounted for together as a single performance obligation.
The entity applies the general principles of PFRS 15 to determine whether the single
performance obligation is satisfied over time or at a point in time. The entity does not need to
apply the specific principles to determine whether the license provides the customer the right to
access or the right to use the entity’s intellectual property.
Using the general principles, the single performance obligation is satisfied over time because
the customer simultaneously receives and consumes the benefits of the entity’s performance as
it occurs, I.e., as the entity provides the updates to the software.
Example 56 - Identifying the distinct license
An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved

drug compound for 10 years and also promises to manufacture the drug for the customer. The
drug is a mature product; therefore the entity will not undertake any activities to support the
drug, which is consistent with its customary business practices.
Case A - License is not distinct

No other entity can manufacture this drug because of the highly specialized nature of the
manufacturing process. As a result, the license cannot be purchased separately from the
manufacturing services.
The promises to provide the license and the manufacturing services are not distinct because the
customer cannot benefit from the license without the manufacturing service and that each
promise is not separately identifiable from the other.
Conclusion:
Since the promise to grant the license is not distinct from the promise to provide the
manufacturing services, both promises are accounted for together as a single performance
obligation.
The entity uses the general principles of PFRS 15 to determine whether the performance single
obligation is satisfied over time or at a point in time. The entity does not need to apply the
specific principles to determine whether the license provides the customer the right to access or
the right to use the entity’s intellectual property.
Case B - License is distinct

The manufacturing process used to produce the drug is not unique or specialized and several
other entities can also manufacture the drug for the customer.

The promises to provide the license and the manufacturing services are distinct because the
customer can benefit from the license without the manufacturing service and that each promise
is separately identifiable from the other.
Conclusion:
There are two separate performance obligations in the contract:
1. License of patent rights; and
2. Manufacturing service
Since the license is distinct, the entity applies the specific principles to determine whether the
license provides the customer the right to access or the right to use the entity’s intellectual
property.
The problem states the following” “The drug is a mature product, therefore the entity will not
undertake any activities to support the drug, which is consistent with its customary business
practices.”
From the statement above, it can be inferred that the intellectual property to which the customer
has rights will not change because the entity does not take activities that significantly affect the
intellectual property to which the customer has rights.
Therefore, the nature of the entity’s promise in transferring the license is to provide a right to
use the entity’s intellectual property in the form and the functionality with which it exists at the
point in time that it is granted to the customer.
Consequently, the license is a performance obligation satisfied at a point in time.
The entity applies the general principles to determine whether the manufacturing service is a
performance obligation satisfied at a point in time or over time.
The 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 transaction price is normally the contract price. However, the transaction price may not be
equal to the contract price if the consideration in the contract is affected by any of the following:
a. Variable consideration;
b. Constraining estimates of variable consideration (an entity is exempt from applying this
principle on sales-based or usage-based royalty);
c. The existence of a significant financing component in the contract;
d. Non-cash consideration; and
e. Consideration payable to a customer.
The transaction price in a franchise contract is commonly referred to as franchise fees.
Franchise Fees
Franchise fees refer to payments made by the franchisee to the franchisor in relation to the
franchise right granted by the franchisor. These fees may cover the supply of know-how, initial
and subsequent services, and equipment and other tangible assets.
Franchise fees come in the form of:

1. Initial franchise fee - this is the one-off payment made by the franchisee to the franchisor to
obtain the franchise right. Initial franchise fees are normally paid at the signing of the
franchise agreement and are normally non-refundable. However, some franchise
agreements allow initial franchise fees to be paid over an extended period of time and
provide for the right of refund up to a certain amount.
The franchise agreement details the responsibilities of both the franchisor and the
franchisee, and is usually for a specific length of time (typically 5 to 10 years). Most
franchise agreements provide for renewal when they expire.
Aside from consideration for the supply of know-how, initial franchise fees may also cover
for the franchisor’s initial services in assisting the franchisee in establishing the new
business.
Examples of initial services provided by the franchisor to the franchisee include the
following:
a. Assistance in site selection, lease negotiations, financing, fitting-out of the premises,
and supervision of the construction activity.
b. Initial training in all facets of operating the business.
c. Assistance with staff recruitment and training.
d. Access to preferential purchasing arrangements the franchisor has put in place.
e. Provision of systems (e.e.g., accounting, information and quality control).
f. Advertisement and promotion.
g. Preparation for and professional execution of the grand opening.
h. Initial presence of a trouble-shooter for the first few days after the opening.
Initial franchise fees do not norm ally include costs of initial inventory or furniture and
fixtures.
2. Continuing franchise fees - these are the periodic payments made by the franchisee to the
franchisor for the ongoing franchisee support. Continuing franchise fees are also referred
to as royalty fees and are usually based on a certain percentage (typically 1% to 7%) of the
franchisee’s sales, but can also be set up as a fixed amount or on a sliding scale, and are
payable in weekly or monthly arrears.
In some cases, continuing franchise fees may be charged separately for the following:
a. Management fees - these pay primarily for ongoing franchise support and are usually
calculated as percentage of franchisee’s sales.
b. Training and conference fees.
c. Accounting and other special service fees - in some franchises, the franchisor provides
bookkeeping services or maintains the information system of franchisees. Fees may
be charged for these services.
d. Marketing services fund - additional fee may be charged as contribution to the
marketing services fund or advertising fee intended to pay for national product
advertising and marketing activities.
e. Renewal fund - a fund may be established to cover for the renewal fee of the of teh
franchise when it expires. Contributions to funds are not recognized as revenue by the
franchisor until the earnings process occurs (e.g., actual renewal).
Continuing franchise fees are calculated in various ways which may include the following:
a. Straight payments based on percentage of sales.
b. Flat fee payments on weekly or monthly basis.
c. Markup on products or services provided.
3. Sale of equipment and other tangible assets - in most franchise agreements, the franchisor
provides equipment and other tangible assets to the franchisee for a separate fee. Also,
the franchisor may purchase goods centrally and supplies directly to franchisees. A
markup, purchasing, or handling fee may be charged on tangible assets transferred to
franchisees.
The transaction price is allocated to the performance obligations based on the relative stand-
alone prices of the distinct goods or services.
The stand-alone selling price is the price at which a promised good or service can be sold
separately to a customer.
If there is only one performance obligation in a contract, the transaction price shall be allocated
only to that single performance obligation.

Example 35 - Allocation of variable consideration
An entity enters into a contract with a customer for two intellectual property licenses (License X
and Y), which the entity determines to represent two performance obligations each satisfied at a
point in time. The stand-alone selling prices of Licenses X and Y are CU800 and CU1,000,
respectively.
CASE A - Variable consideration allocated entirely to one performance obligation
The price stated in the contract for License X is a fixed amount of CU800 and for License Y the
consideration is 3% of the customer’s future sales of products that use License Y. For purposes
of allocation, the entity estimates its sales-based royalties (I.e., the variable consideration) to be
CU1,000.
Analysis:
The fixed consideration of CU800 for License X and the estimated variable consideration of
CU1,000 for License y reflect the stand-alone selling prices of Licenses X and Y of CU800 and
CU1,000, respectively.
Therefore the entity shall allocate the fixed consideration of CU800 entirely to License X and the
variable consideration of CU1,000 entirely to License Y.
Accounting:
 The CU800 fixed consideration is recognized as revenue when License X is transferred to
the customer.
 Since the consideration in License Y is in the form a sales-based royalty, revenue shall be
recognized only when those subsequent sales occur.
CASE B - Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for License X is a fixed amount of CU300 and for License Y the
consideration is 5% of the customer’s future sales of products that use License Y. The entity’s
estimate of the sales-based royalties (I.e., the variable consideration is CU1,500.
License Y is transferred to the customer at the inception of the contract and License X is
transferred 3 months later.
Analysis:
The fixed consideration of CU300 for License X and the estimated variable consideration of
CU1,500 for License Y do not reflect the stand-alone selling prices of Licenses X and Y of
CU800 and CU1,000, respectively.
Therefore, the entity shall:

a. Allocate the fixed consideration of CU300 to License X and License Y on the basis of their
stand-alone selling prices; and
b. Allocate the variable consideration of CU1,500 to License X and License Y also on the
basis of their stand-alone selling prices.
The allocations are made separately because the performance obligations in the licenses are
satisfied at different points in time, and therefore, the timing of revenue recognition varies
between the two licenses and between the two considerations.
More specifically:
 The performance obligation for License X is satisfied when License X is transferred to the
customer (I.e., 3 months after contract inception) while the performance obligation for
License y is satisfied when the subsequent sales occur.
 The fixed consideration is recognized as revenue when the licenses are transferred to the
customer while the variable consideration is recognized as revenue when the subsequent
sales occur.
Allocation of the fixed consideration:

Stand-alone selling prices Allocation Allocated amounts
License X 800 300 x (800/1,800) 133
License Y 1,000 300 x (1,000/1,800) 167
Totals 1,800 300
The revenue from the fixed consideration is recognized as follows:

a. The CU133 allocated to License X will be recognized as revenue when License X is
transferred to the customer, I.e., 3 months after contract inception.
b. The CU167 allocated to License Y is recognized as revenue at contract inception (License
Y is transferred to the customer at contract inception).
Allocation of the variable consideration:

Additional fact:
In the first month, the customer made total sales of CU4,000. Therefore, the royalty due is
CU200 (4,000 x 5%).
The entry makes the following allocations:

Stand-alone selling prices Allocation Allocated amounts
License X 800 200 x (800/1,800) 89
License Y 1,000 200 x (1,000/1,800) 111
Totals 1,800 200
The revenue from the variable consideration is recognized as follows:
a. The CU89 allocated to License X is initially recognized as a contract liability because
although the subsequent sale by the entity’s customer has occurred, the performance
obligation to which the royalty has been allocated has not been satisfied (I.e., License X is
not yet transferred to the customer). The CU89 will be recognized as revenue 3 months
after contract inception when License X is transferred to the customer.
b. The CU111 allocated to License Y is recognized as revenue because the sale has already
occurred.
Step 5: Recognize revenue when (or as) a performance obligation is satisfied
A performance obligation is satisfied when the control over a promised goods or service is
transferred to the customer.
 If the performance obligation in the contract is satisfied over time, revenue is recognized
over time as the entity progresses towards the complete satisfaction of the obligation.
 If the performance obligation in the contract is satisfied at a point in time, the entity
recognizes revenue when the performance obligation is satisfied.
Revenue is measured at the amount of the transaction price allocated to the satisfied
performance obligation.

Example 57 - Franchise Rights
An entity enters into a contract with a customer and promises to grant a franchise license that
provides the customer with the rights to use the entity’s trade name and sell the entity’s
products for 10 years. In addition to the license, the entity also promises to provide the
equipment necessary to operate a franchise store. In exchange for granting the license, the
entity receives a sales-based royalty of 5% of the customer’s monthly sales. The fixed
consideration for the equipment is CU150,000 payable when the equipment is delivered. The
fixed consideration reflects the stand-alone selling price of the equipment.
The entity, as a franchisor, has developed a customary business practice to undertake activities
such as analyzing the customer’s changing preferences and implementing product
improvements, pricing strategies, marketing campaigns and operational efficiencies to support
the franchise name.
The promise to grant the license and the promise to transfer the equipment are distinct
because:
a. The customer can benefit from each promise on their own or together with other resources
that are readily available. (That is, the customer can benefit from the license together with
the equipment that is delivered before the opening of the franchise and the equipment can
be used in the franchise or sold for an amount other than scrap value).
b. The license and equipment are separately identifiable.
The implied promise to undertake the activities of analyzing the customer’s changing
preferences and implementing product improvements, pricing strategies, marketing campaigns
and operational efficiencies to support the franchise name are not performance obligations
because these activities do not directly transfer goods or services to the customer but rather a
part of the entity’s promise to grant a license and, in effect, change the intellectual property to
which the customer has rights.
Conclusion:
There two separate performance obligations in the contract:
1. Franchise license; and
2. Equipment
 Since the license is distinct, the entity applies the specific principles to determine whether
the license provides the customer the right to access or the right to use the entity’s
The problem states the following: “The entity, as a franchisor, had developed a customary
business practice to undertake activities, such as. . . .”
From the statement above, it can be inferred that the intellectual property to which the
customer has rights will change because the entity undertakes activities that significantly
affect the intellectual property to which the customer has rights.
Therefore, the nature of the entity’s promise in transferring the license is to provide a right
to access the entity’s intellectual property in its current form throughout the license period.
Moreover, all of the following criteria under PFRS 15 are met:

a. The customer reasonably expects that the entity will undertake activities that
significantly affect the intellectual property to which the customer has rights.
This is on the basis of the entity’s customary business practice to undertake activities
such as analyzing the customer’s changing preferences and implementing product
improvements, pricing strategies, marketing campaigns and operational efficiencies.
In addition, because part of the entity’s compensation is dependent on the success of

the franchisee (as evidenced through the sales-based royalty), the entity has a shared
economic interest with the customer that indicates that the customer will expect the
entity to undertake those activities to maximize earnings.
b. The rights granted by the license directly expose the customer to any positive or
negative effects of the entity’s activities identified in (a) above.
The franchise license requires the customer to implement any changes that result from
the activities undertaken by the entity and thus exposes the customer to any positive or
negative effects of those activities.
c. Those activities do not result in the transfer of a good or a service to the customer as
those activities occur.
Even though the customer may benefit from the activities undertaken by the entity
through the rights granted by the license, they do not transfer a good or service as
those activities occur.
Accordingly, the promise to transfer the license is a performance obligation satisfied

over time.
 The entity applies the general principles to determine whether the promise to transfer the
equipment is a performance obligation satisfied at a point in time.
The transaction price includes a fixed consideration of CU150,000 and a varibale consideration
of 5% of customer sales.
The entity applies the general principles of PFRS 15 to determine whether the variable
consideration should be allocated entirely to the performance obligation to transfer the franchise
license.
Since the fixed consideration of CU150,000 reflects the stand-alone selling price of the
equipment, the variable consideration shall be allocated entirely to the franchise license.
Consequently, the fixed consideration will be allocated only to the equipment.
The fixed consideration of CU150,000 will be recognized as revenue when the equipment is
transferred to customer while the variable consideration of 5% of customer sales will be
recognized as revenue as those sales occur.

Example 61 - Access to intellectual property
An entity, a well-known sports team, licenses the use of its name and logo to a customer. The
customer, an apparel designer, has the right to use the sport’s team name and logo on items
including t-shirts, caps, mugs and towels for one year. In exchange for providing the license,
the entity will receive fixed consideration of CU2 million and a royalty of 5% of the sales price of
any items using the team name or logo. The customer expects that the entity will continue to
play games and provide a competitive team.
The only performance obligation in the contract is the promise to grant the license.
The additional activities associated with the license are not performance obligations because
they do not directly transfer a good or service to the customer, but rather part of the entity’s
promise to grant the license and, in effect, change the intellectual property to which the
customer has rights.
Since the promise to grant the license is distinct, the entity, shall apply the specific principles to
determine whether the license provides the customer right to access or right to use the entity’s
The entity considers the indicators for “right of access’ as follows:

a. The entity concludes that the customer would reasonably expect that the entity will
undertake activities that will affect the intellectual property (I.e., the team name and logo) to
which the customer has rights.
This is on the basis of the entity’s customary business practice to undertake activities such
as continuing to play and providing a competitive team.
In addition, because some of the consideration is dependent on the success of the

customer (through the sales-based royalty), the entity has a shared economic interest with
the customer, which indicates that the customer will expect the entity to undertake those
activities to maximize earnings.
b. The entity observes that the rights granted by the license (I.e., the use of the team’s name
and logo0 directly expose the customer to any positive or negative effects of the entity’s
activities.
c. The entity also observes that even though the customer may benefit from the activities
through the rights granted by the license, they do not transfer a good or service to the
customer as those activities occur.
Since all the criteria are met, the license provides the right to access the entity’s intellectual
property as it exists throughout the license period. Consequently, the performance
obligation is satisfied over time.
The transaction price includes a fixed consideration of CU2 million and a variable
consideration of 5% of customer sales.
Both the fixed and variable considerations are allocated to the sole performance obligation
of granting the license.
Revenue is recognized as follows:

a. For the fixed consideration of CU2 million, the entity applies the general principles of
PFRS 15 to determine a measure of progress that best depict the entity’s performance
(for example, the inputs or outputs method).
b. For the variable consideration of 5% sales, the entity recognizes revenue equal to 5%
of the customer’s sales as those sales occur.
Existence of a significant financing component in the contract
When determining the transaction price, the promised consideration shall be adjusted for
the effects of the time value of money if the timing of agreed payments explicitly or implicitly
provides the customer or the entity with a significant benefit of financing the transfer of
goods or services to the customer.
The core principle when adjusting the promised consideration is that the revenue
recognized shall reflect the cash selling price, I.e., the price that the customer would have
paid had he paid for the goods or services outright in cash.
When adjusting the promised consideration, the discount rate used shall be the rate that
would be reflected in a separate transaction between the entity and the customer at
contract inception. That rate reflects the credit characteristics of the party receiving
financing in the contract, as well as any collateral or security and assets transferred in the
contract. The discount rate may be identified as the rate that discounts the promised
consideration to the cash selling price.
After contract inception, the discount rate shall not be updated for changes in interest rates
or other circumstances.
The difference between the promised consideration and the cash selling price is the
financing component, which is recognized as interest revenue or interest expense,
separately from revenue from contracts with customers. Interest revenue or interest
expense is recognized only to the extent that a contract asset (or receivable) or a contract
liability is recognized in accounting for a contract with a customer.
The customer does not have a significant financing component if:

a. The customer paid in advance and the transfer of the goods or services is at the
customer’s discretion.
b. A substantial amount of the consideration is variable and contingent on the occurrence
or non-occurrence of a future event that is beyond the control of teh customer or the
entity.
c. The difference between the promised consideration and the cash selling price arises
from reasons other than financing.
The promised consideration need not be adjusted for the effects of a significant financing
component if the consideration is expected to be collected within 1 year from the date of
transfer of the goods or services.

Example 59 - Right to use intellectual porperty
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony
by a noted orchestra. The customer, a consumer products company, has the right to use the
recorded symphony in all commercials, including television, radio and online advertisements for
2 years in Count ry A. In exchange, for providing the license, the entity receives fixed
consideration of CU10,000 per month. The contract does not include any other goods or
services to be provided by the entity. The contract is non-cancellable.
There is only one performance obligation in the contract, I.e., the promise to grant the license.
Since the promise to grant the license is distinct, the entity shall apply the specific principles to
determine whether the license provides the customer a right to access or right to use the entity’s
Analyses:
An entity does not have any contractual or implied obligations to change the licensed recording.
The intellectual property to which the customer has rights will not change (or is static).
Therefore, the nature of the entity’s promise in transferring the license is to provide a right to
use the entity’s intellectual property in the form and the functionality with which it exists at the
point in time that it is granted to the customer.
Consequently, the license is a performance obligation satisfied at a point in time.
Since the timing of the agreed payments provides the customer a significant benefit of financing
(I.e., the performance obligation is satisfied at a point in time when the license is granted while
the consideration will be received on a monthly basis over the 2-year contract term), the
transaction price shall be adjusted for the effects of the time value of money.
Accordingly, the transaction price is the present value of the future cash flows of CU10,000 per
month.
The transaction price computed in step 3 is allocated to the single performance obligation of
granting the license.
The amount computed in “step 3” is recognized as revenue in its entirety at the point in time
when the license is granted to the customer.
Additional information:
Assume the appropriate discount rate is 125 per annum.
The amount of revenue recognized at the date the license is granted to the customer is
computed s follows:
 10,000 x (PV of ordinary annuity @ 1%, n=24)

 10,000 x 21.2434 = CU212,434
The difference between the transaction price of CU212,434 and the total consideration of
CU240,000 (10,000 per month x 24 months) will be recognized as interest income over the
contract term using the effective interest method.
Journal Entries
Illustration 1: Recognition and measurement of revenue

On December 1, 2021, ABC Co. Enters into a franchise contract with XYZ, Inc. The franchise
provides XYZ, Inc. With the right to use ABC’s trade name and sell ABC’s products for 5 years.
The contract requires an initial franchise fee of 3% of XYZ’s sales payable at the end of each
month.
The P120,000 initial franchise fee is non-refundable and payable in full at contract inception.
ABC Co., as a franchisor, has developed a customary business practice to undertake the
following pre-opening activities:
a. Assistance in site selection, lease negotiations, and fitting-out of the premises.
b. Initial training in all facets of operating the business.
c. Assistance with staff recruitment and training.
d. Advertisement and promotion.
e. Preparations for and professional execution of the grand opening.
ABC Co. does not provide the activities above separately from the granting of the franchise
right.
The new franchise business started in December and as of December 31, 2021, ABC has no
remaining obligation or intent to refund any of the cash received and all of the services (I.e., the
pre-opening activities) required under the franchise agreement have been performed.
XYZ, Inc. Reports total sales of P2,000,000 in December , 2021.12.28
Requirement: Provide the journal entries on December 1, 2021 and December 31, 2021,
respectively.
Solutions:
Step 2: Identify the performance obligation in the contract
The only performance obligation in the contract is the promise to grant the franchise license.
The additional pre-opening activities associated with the franchise license are not performance
obligations because they do not directly transfer a good or service to the customer, but rather
part of the entity’s promise to grant the license.
PFRS 15.26 provides the following examples of promised goods or services:

a. Sale of goods produced by a manufacturing entity
b. Resale of goods purchased by a trading entity (e.g., retailer)
c. Resale of rights to goods or services purchased by an entity
d. Performing a contractually agreed-upon task(s) by a service-oriented entity
e. Constructing, manufacturing or developing an asset on behalf of a customer
f. Providing a service of standing ready to provide goods or services (e.g., unspecified
updates to software that are provided on a when-and-if-available basis) or of making goods
or services available for a customer to use as and when the customer decides
g. Providing a service of arranging for another party to transfer goods or services to a
customer (e.g., acting as n agent of another party)
h. Granting rights to goods or services to be provided in the future that a customer can resell
or provide to its customer
i. Granting licenses, and
j. Granting options to purchase additional goods or services (when those options provide a
customer with a material right).
Notice that the granting of licenses is included in the examples above. However, pre-opening
activities (initial services) related to the granting of license are not included in the examples
above.
Moreover, the pre-opening activities are, in nature, administrative tasks to set up the franchise
contract. Performance obligations do not include administrative tasks to set up a contract.
determine whether the license provides the customer a right to access or a right to use the
entity’s intellectual property.
The existence of a shared economic interest (I.e., the sales-based royalty) between the entity
and the customer may indicate may indicate that the customer could reasonably expect that the
entity will continue to be involved in the intellectual property and will undertake activities that
significantly affect the intellectual property to which the customer has rights.
In such case, the intellectual property to which the customer has rights changes throughout the
license period.
Therefore, the franchise provides the customer the right to access the entity’s intellectual
property. Accordingly, the performance obligation is satisfied over time.
The transaction price includes a fixed consideration of P120,000 (the initial franchise fee) and a
variable consideration of 3% of customer sales (the continuing franchise fee).
Step 4: Allocate the transaction price to the performance obligation
Both the fixed and variable considerations are allocated to the sole performance obligation of
granting the franchise license.
Revenue is recognized as follows:

a. For the fixed consideration of P120,000, the entity applies the general principles of PFRS
15 to determine a measure of progress that best depict the entity’s performance.
Because the contract provides the customer with unlimited use of the entity’s intellectual
property for a fixed term (I.e., 5 years), an appropriate measure of progress may be a time-
based method (I.e., straight-line).
PFRS 15.B18 states that, “If the entity’s efforts or inputs are expended evenly throughout
the performance period , it may be appropriate for the entity to recognize revenueon a
straight-line basis.
b. For the variable consideration of 3% of sales, the entity recognizes revenue equal to 3% of
the customer’s sales as they occur.
The journal entries are as follows:
12/31/2021 Cash 120,000
Contract liability 120,000
To record the non-refundable initial
franchise fee
 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.
PFRS 15 does not prohibit the use of alternative terms for “contract asset” and “contract liability”
so long as sufficient information is provided to enable users of the financial statements to
distinguish between ‘receivables” and “contract assets”. Accordingly, the “unearned franchise
fee” account may be used in lieu of contract liability.
The initial franchise fee is initially recognized as a liability because the performance obligation is
not yet satisfied.
12/31/2021 Contract liability (120K ÷ 5 years) x 1/12 2,000
Revenue 2,000
To recognize revenue from the initial
franchise fee
12/31/2021 Receivable (2,000,000 x 3%) 60,000
Revenue 60,000
To recognize revenue from the continuing
franchise fee (sales-based royalty)
Receivable is debited rather than “Contract Asset” because ABC Co. Has an unconditional right
to the consideration.
 Receivable - is an entity’s right to the consideration that is unconditional.

 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 (e.g., the entity’s future performance).
ABC reports the following in its December 31, 2021 financial statements:
Receivable 60,000
Revenue from initial franchise fee 2,000
Revenue from continuing franchise fee 60,000
Notice that even if the initial franchise fee (upfront fee) is non-refundable and that the new
franchise business has already started operations, the initial franchise fee is not yet recognized
as revenue in full, but rather deferred and recognized over the license period. This current
treatment under PFRS 15 differs from the treatment under the old GAAP.
Under the old GAAP (particularly, US GAAP FAS No. 45, paragraph 5), revenue from initial
franchise fee is recognized as revenue when:
a. The franchisor has no remaining obligation or intent (by agreement, trade practice, or law)
to refund any cash received or forgive any unpaid notes or receivables;
b. Substantially all of the initial services of the franchisor required by the franchise agreement
have been performed; and
c. No other material conditions or obligations related to the determination of substantial
performance exist.
Under the old GAAP, the initial franchise fee of P120,000 would have been recognized in full in
December.
It should be noted to IFRS 15 (on which PFRS 15 is based) is a joint project between the IASB
and the FASB. Therefore, the accounting treatment under the new US GAAP is the same as
the accounting treatment under IFRS 15 Revenue from Contracts with Customers.
Illustration 2: Recognition and measurement of revenue
On December 31, 2021, Mr. Eugene H. Krabs Co., enters into a contract with Sheldon J.
Plankton Co. to transfer a license for a fixed fee of P100,000 payable as follows:
 20% is payable upon signing of contract.
 80% is represented by a note receivable collectible in 4 equal annual installments starting
December 31, 2022. The appropriate discount rate is 12%.
Case #1: Right to use
The license provides Plankton the right to use Mr. Krab’s patented secret formula for a burger
patty. Plankton continues to operate using its trade name and has the discretion of developing
a new product name for the products it will produce using the secret formula. The license does
not explicitly require Mr. Krabs to undertake activities that will significantly affect the intellectual
property to which Plankton has rights. Neither does Plankton expect that Mr. Krabs will
undertake such activities. Mr. Krabs provides the secret formula to Plankton on December 31,
2021.
Requirement: Provide the relevant entries
Solution:
The only performance obligation in the contract is the promise to provide the secret formula.
determine whether the license provides the customer the right to access or the right to use the
entity’s intellectual property.
Analysis:
By the terms of the agreement, Plankton can direct the use of, and obtain substantially all of the
remaining benefits from, the license at the point in time at which the license is granted because
the intellectual property will not change. (I.e., Mr. Krabs does not continue to be involved with
the secret formula and does not undertake activities that significantly affect the intellectual
property to which the Plankton has rights).
Therefore, the license provides the customer the right to use the entity’s intellectual property.
Accordingly, the performance obligation is satisfied at a point in time.
Since the timing of the agreed payments provides the customer a significant benefit of financing
(I.e., the performance obligation is satisfied at the point in time when the license is granted while
80% of the consideration will be received over the next 4 years, the transaction price shall be
adjusted for the effects of the time value of money.
Accordingly, the transaction price is the sum of the 20% cash down payment and the present
value of the note receivable. The transaction price is computed as follows:
Cash down payment (P100,000 x 20%) 20,000

PV of notes receivable:
[(100K x 80%) ÷ 4] x PV of ordinary annuity @ 12%, n=4 60,747
Transaction price 80,747
The transaction price is allocated to the sole performance obligation of granting the license.
The transaction price is recognized as revenue in full when the secret formula is transferred to
the customer (I.e., December 31. 2021)
The entry is as follows:
12/31/2021 Cash 20,000

Notes receivable 80,000
Revenue 80,747
Unearned interest income 19,253
The difference between the transaction price and the nominal amount of the consideration is
recognized as “unearned interest income” to be amortized as interest income using the effective
interest method (I.e., not as franchise fee revenue because this portion effectively constitutes a
financing transaction). Interest income is earned due to passage of time.
Case #2: Right to access
The license provides Plankton the right to use Mr. Krab’s patented secret formula for a burger
patty. The agreement requires Plankton to discontinue using its trade name and instead use
Mr. Krab’s trade name. Plankton is bound by the terms of the contract to abide with Mr. Krabs’
policies on the use of the secret formula but is given the right to any subsequent modifications
to the secret formula.
Solution:
Step 2: General principles - same with case #1
Analysis - Specific Principles
By the terms of the agreement, Plankton cannot direct the use of, and obtain substantially all of
the remaining benefits from, the license at the point in time at which the license is granted
because the intellectual property changes throughout the license period.
This is evidenced by Mr. Krabs’ continuing involvement with the secret formula and its
undertaking of activities that significantly affect the intellectual property to which the customer
has rights (I.e., modification to formula).
Therefore, the license provides the customer the right to access the entity’s intellectual property.
Accordingly, the performance obligation is satisfied over time.
Mr. Krabs shall apply the general principles in PFRS 15 to determine an appropriate measure of
its progress towards the complete satisfaction of the performance obligation.
Because the contract provides the customer with unlimited use of the entity’s intellectual
property for a fixed term (I.e., 4 years - the collection period of the notes receivable), an
appropriate measure of progress may be a time-based method (I.e., straight-line).
Step 3: Determine the transaction price - same with Case #1
Step 4: Allocate the transaction price to the performance obligations - same with Case #1

The transaction price is recognized as revenue over time throughout the license period.
The entry on December 31, 2021 is as follows:

12/31/2021 Cash 20,000
No revenue is recognized because the performance obligation is not yet satisfied.
The entry on December 31, 2021 is as follows:

12/31/2022 Contract liability (80,747 ÷ 4) 20,186.75
Revenue 20,186.75
Mr. Krabs shall also recognize interest income as follows:

12/31/2022 Unearned interest income 12,710.36
Interest income (60,747 x 12%) 12,710.36
Case #3: Administrative tasks to set up a contract
Use the facts in Case #2. The license provides the customer the right to access the entity’s
intellectual property. Therefore, the performance obligation is satisfied over time.
In addition, the contract requires Mr. Krabs to undertake pre-opening activities of training
Plankton in operating the new business, assisting in the recruitment and training of staff, and
assisting in the grand opening of the new business.
The P20,000 cash down payment is non-refundable and represents a fair measure of services
already rendered as of December 31, 2021.
Solution:
The only performance obligation in the contract is the promise to provide the secret formula.
The pre-opening activities are, in nature, administrative tasks to set up the contract.
Performance obligations do not include administrative tasks to set up a contract.
In accordance with PFRS 15.B49, Mr. Krabs shall treat the non-refund able upfront fee (I.e.,
P20,000 cash down payment) as an advance payment for the license granted, and therefore,
would be recognized as revenue over the license period (because the performance obligation is
satisfied over time).
Analysis - Specific Principles - same with Case #2
Step 3 to 5: - same with Case #2
The entries are as follows:

12/31/2021 Cash 20,000
Revenue 20,186.75
Again, the treatment above differs from the treatment under the old GAAP. Under the old
GAAP, if a non-refundable down payment represents a fair measure of services already
rendered, revenue is recognized for the non-refundable cash payment received. Unlike PFRS
15, the old GAAP does not distinguish initial services as administrative tasks to set up a
contract.
Exception:
However, in accordance with PFRS 15.B51, an entity is not precluded from charging a non-
refundable upfront fee as compensation for initial services to set up a contract.
Continuing Case #3 above, let us assume the following information:

 The P20,000 cash down payment is non-refundable and represents a fair measure of
services already rendered as of December 31, 2021.
 The costs of the services already rendered amount to P15,000.

12/31/2021 Cash 20,000
12/31/2021 Expenses 15,000
Cash 15,000

Revenue 20,000
To charge the non-refundable fee as
compensation for the initial services
12/31/2022 Contract liability (80,747 - 20K) ÷ 4 15,186.75
Revenue 15,186.75
PFRS 15 is not clear if the amount to be charged to the non-refundable upfront fee as
compensation for initial services to set up a contract is the actual cost of the services rendered,
the fair value of the services, or the amount of the non-refundable upfront fee. Until clarification
guidance is issued, this would be open to different interpretations.
It should be noted though that the exception above is just an option - not a requirement. The
exact statement of PFRS 15.B51 is as follows: “An entity may charge a non-refundable fee in
part as compensation for costs incurred in setting up a contract (or other administrative tasks as
described in paragraph 25)”. The word “may” as used in the standards means that the entity
has the option of, but is not required in, applying a certain provision.
Case #4: No initial services required
Use the facts in Case #2. The license provides the customer the right to access the entity’s
intellectual property. Therefore, the performance obligation is satisfied over time.
In addition, the contract does not require Mr. Krabs to undertake pre-opening activities. Mr.
Krabs has no past practice of voluntarily undertaking such activities.
The P20,000 cash down payment received is non-refundable and the collectability of the note is
reasonably assured.
Solution:
Steps 1 to 5 - same with Case 2 and 3

12/31/2021 Cash 20,000
Revenue 20,186.75
Under PFRS 15, the assessment of performance obligations and the recognition of revenue are
not necessarily affected by initial services to set up a contract or by the upfront fee being
refundable or non-refundable.
In all of the cases above, the performance obligation in the contract remains the granting of the
right over the use of the formula which is either satisfied over time or at a point in time,
depending on the terms of the contract). The presence or absence of initial services to set up a
contract does not affect the recognition of revenue. This is because most initial services are
normally administrative tasks to set up a contract (PFRS 15.25 and .B49) and administrative
tasks to set up a contract are not performance obligations unless they result ion the transfer of a
promised good or service to the customer (PFRS 15.26). Since such tasks are not performance
obligations, they do not require the allocation of the transaction price, regardless of whether the
transaction price is refundable or not.
Contract Costs
Contract costs include:

a. Incremental costs of obtaining a contract
b. Costs to fulfill a contract
Incremental costs of obtaining a contract
Incremental costs of obtaining a contract - are costs incurred in obtaining a contract with a
customer that the entity would not have incurred had the contract not been obtained (e.g.,
franchise acquisition costs such as sales commissions and other related costs).
 Such costs are recognized as asset if the entity expects to recover them.
 Costs that would have been incurred regardless of whether the contract obtained are
recognized as expense, unless these costs are explicitly chargeable to teh customer
regardless of whether the contract is obtained.
As a practical expedient, incremental costs of obtaining a contract are recognized as expense

when incurred if the expected amortization period of the asset is one year or less.
Costs to fulfill a contract
Costs incurred in fulfilling a contract that are within the scope of other standards (e.g., PAS 2
Inventories, PAS 16 PPE, or PAS 38 Intangible Assets) are accounted for in accordance with
these standards.
Costs incurred in fulfilling a contract that are outside the scope of other standards are
recognized as asset if all of the following criteria 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 is satisfying performance
obligations in the future; and
c. The costs are expected to be recovered.
Costs that relate directly to a contract (or a specific anticipated contract) include any of the
following:
a. Direct labor (e.g., salaries and wages of employees who provide the promised services
directly to the customer)
b. Direct materials (e.g., supplies used in providing the promised services to a customer)
c. Allocations of costs that relate directly to the contract or to contract activities (e.g.,
allocation of franchise development)
d. Costs that are explicitly chargeable to the customer under the contract; and
e. Other costs that are incurred only because an entity entered into the contract (e.g., costs
related to the training new franchises, providing on-site support, site selection assistance
prior to or during the franchisee’s grand opening period, training materials and the like).
The following costs are recognized as expenses when incurred:

a. General and administrative costs (unless those costs are explicitly chargeable to the
customer under the contract)
b. Costs of wasted materials, labor or other resources to fulfill the contract that were not
reflected in the price of the contract.
c. Costs that relate to satisfied or partially satisfied performance obligations in the contract
(I.e., costs that relate to past performance); and
d. Costs for which an entity cannot distinguish whether the costs relate to unsatisfied
performance obligations or to satisfied or partially satisfied performance obligations.
Amortization and impairment
Contract costs that are recognized as asset shall be amortized on a systematic basis that is
consistent with the transfer to the customer of the goods or services to which the asset relates.
The amortization shall be updated to reflect a significant change in the expected timing of
transfer of the related goods or services to the customer. Such a change shall be accounted for
as a change in accounting estimate in accordance with PAS 8.
Summary of Concepts
1. Direct costs (incremental costs of obtaining a contract and costs to fulfill a contract) -
avoidable costs directly associated with the franchise agreement. Initially recognized as
asset and subsequently recognized as expense when the related franchise revenue is
recognized. Accordingly, if franchise revenue is deferred, direct costs are also deferred.
However, deferred costs shall not exceed the amount expected to be recovered from the
contract.
2. Indirect costs - costs, such as selling and administrative costs, not directly associated with
the franchise agreement and are incurred even in the absence of a franchise agreement.
Indirect costs are recognized immediately as expense in the period they are incurred.
Illustration 1: Revenues and Costs
On December 1, 2021, ABC Co. enters into a contract with a customer to grant a license over a
patented technology. The consideration in the contract is a fixed fee of P1,000,000, payable at
contract inception. The license period is 4 years. During December 2021, ABC Co. incurs
direct contract costs of P120,000 and indirect costs of P30,000. The license is transferred to
the customer on January 2, 2022.
Case #1: Right to use
The license provides the customer the right to use the entity’s intellectual property as it exists at
the point in time at which the license is granted.
Requirement: Provide the journal entries
Solution:
2021
12/01/2021 Cash 1,000,000
Contract liability 1,000,000
12/31/2021 Deferred contract costs 120,000
Expense (indirect costs) 30,000
Cash 150,000
2022
01/02/2022 Contract liability 1,000,000
Revenue 1,000,000
01/02/2022 Cost of license (expense) 120,000
Deferred contract costs 120,000
Case #1: Right to access

The license provides the customer the right to access the entity’s intellectual property as it
exists throughout the license period. ABC Co. uses a time-based method in measuring its
progress towards the complete satisfaction of the performance obligation.
Requirement: Provide the journal entries

Solution:
2021
12/01/2021 Cash 1,000,000
Contract liability 1,000,000
12/31/2021 Deferred contract costs 120,000
Expense (indirect costs) 30,000
Cash 150,000
No revenue is recognized in 2021 because the license is not yet transferred to the customer,
even though the performance obligation is satisfied over time.
2022
01/02/2022 No entry
01/02/2022 No entry
No revenue is recognized on January 2, 2022 because the performance obligation (I.e., granting
the use of the license over a 4-year period) is not yet satisfied, even though the license is
already transferred to the customer. Since, no revenue is recognized, no amortization of
deferred contract costs is also recognized.
2022
01/31/2022 Contract liability (1M ÷ 4) x 1/12 20,833.33
Revenue 20,833.33
01/31/2022 Cost of license (120K ÷ 4) x 1/12 2,500
Deferred contract costs 2,500
Noticed that the deferred contract costs are amortized as expense on a systematic basis that is
consistent with the transfer to the customer of the services to which the asset relates (I.e., time-
based).
Illustration 2: Interest revenue and profit for the year
On January 1, 2021, ABC Co. enters into a contract with a customer to transfer a license for a
fixed fee of P100,000 payable as follows:
 20% is payable upon signing of the contract.
 80% is represented by a notes receivable collectible in 4 equal annual installments starting
 The license transfers to the customer on January 3, 2022.
 During 2021, ABC Co. incurs direct contract costs of P20,000.
 Collectability of the note is reasonably assured.
 The license provides the customer with the right to use ABC’s intellectual property as it
exists at the point in time at which the license is granted.
Requirement: Compute for the profits in 2021 and 2022, respectively.
Solution:
The only performance obligation in the contract is the promise to transfer the license.
The performance obligation is satisfied at a point in time because the license provides the
customer the right to use the entity’s intellectual property as it exists at the point in time at which
the license is granted.
Cash down payment (100,000 x 20%) 20,000

PV of notes receivable:
[(100K x 80%) ÷ 4) x PV of ordinary annuity @ 12%, n=4 60,747
Transaction price 80,747
The transaction price is allocated to the sole performance obligation of granting the license.
The transaction price will be recognized as revenue in full on January 3, 2022 when the license
is transferred to the customer.
The profits in 2021 and 2022 are computed as follows:

2021 2022
Revenue - 80,747
Cost of franchise - (20,000)
Gross profit - 60,747
Interest income 7,290 5,764
Indirect costs - -
Profit for the year 7,290 66,511
Amortization table
Date Collections Int. Income Amortization Present Value
01/01/2021 60,747
12/31/2021 20,000 7,290 12,710 48,037
12/31/2022 20,000 5,764 14,236 33,801
12/31/2023 20,000 4,056 15,944 17,857
12/31/2024 20,000 2,143 17,857 0
No revenue is recognized in 2021 because the license is not yet transferred to the customer.
Consequently, no cost of franchise is also recognized as expense. However, irrespective of the
satisfaction of the performance obligation in the contract, interest income is nonetheless
recognized because there is passage of time.
Uncertainty in the collectability of contract revenue
Contract inception
If the uncertainty in the collectability of contract revenue arises at contract inception, the entity
does not recognize any revenue from the contract. Any consideration received is recognized as
a liability and recognized as revenue only when either of the following has occurred:
or substantially all, of the consideration has been received and is non-refundable; or
The entity shall continue to assess the contract to determine if the criteria in PFRS 15 are
subsequently met.
Subsequent period
If the uncertainty in the collectability of contract revenue arises subsequent to contract to

contract inception, the uncollectability is accounted for as impairment of trade receivable and/or
contract asset. The impairment is accounted for under PFRS 9 Financial Instruments,
presented in accordance with PAS 1 Presentation of Financial Statements, and disclosed in
accordance with PFRS 7 Financial Instruments: Disclosures. However, PFRS 15 makes it
clear that such amounts are disclosed separately from impairment losses from other contracts.
Illustration 1: Significant uncertainty - Inception of contract
On January 1, 2021, ABC Co. enters into a contract with a customer to transfer a license for a
fixed fee of P100,000 payable as follows:
 20% is payable upon signing of contract.

 80% is represented by a note receivable collectible in 4 equal annual installments starting
 The license transfers to the customer on January 1, 2021.
 ABC Co. incurs direct contract costs of P20,000 on January 1, 2021.
 On January 1, 2021, ABC Co. determines that there is significant uncertainty as to the
collectability of the note.
 The license provides the customer with the right to use ABC’s intellectual property as it
Requirement: Provide the necessary journal entries.
Solution:
Since criterion (e) (I.e., the consideration in the contract is probable of collection) is not met,
ABC Co. shall not recognize any revenue from the contract. Any consideration received from
the contract is recognized as a liability and recognized as revenue only when either of the
following has occurred:
or substantially, of the consideration has been received and is non-refundable; or
12/31/2021 Cash 20,000

In subsequent periods, ABC Co. shall continue to assess the contract to determine if the criteria
are subsequently met.
If the criteria are subsequently met, ABC Co. shall account for the contract in accordance with
PFRS 15 prospectively. For example, if collectability becomes certain in 2022, ABC Co. shall
derecognize the contract liability and recognize revenue from the contract.
Notes on old accounting treatment:

PAS 18 Part B.18(b) FAS No. 45 (US GAAP)
 If the initial fee is collectible over an  In case of significant uncertainty in teh
extended period and there is a significant collection of revenue, the “cost recovery
uncertainty that it will be collected in full, method” may be used in lieu of the
the fee is recognized as cash installments installment sales method/ Under the cost
are received. This method is sometimes recovery method, profit from the franchise
referred to as “installment sales method.” agreement is recognized when cash
collections exceed the direct costs
incurred on the franchise.
It should be noted that PFRS 15 allows the entity to recognize revenue equal to the costs
incurred which the entity expects to recover. However, this provision applies only to
performance obligations satisfied over time wherein there is no reasonable measure of progress
available. This provision of PFRS 15 differs from the “cost recovery method” under the old US
GAAP as follows:
Costs Recovery Approach under

PFRS 15 FAS No. 45 (US GAAP)
 Applicable only to performance obligations  Applicable in case of significant
satisfied over time wherein there is no uncertainty in the collectability of revenue
reasonable measure of progress regardless of the nature of the
available. performance obligation in the contract.
 The entity recognizes revenue only to the  The entity recognizes revenue only when
extent of costs incurred that are expected cash collections exceed the costs
to be recovered. The recognition of incurred.
revenue is not based on collections
exceeding costs.
Illustration 2: Significant uncertainty - Inception of contract
On July 1, 2021, ABC Co. entered into three franchise agreements. Information on these
agreements is summarized below:
Franchise Probability of Cash down Present Value of Direct costs

Collection payment Note incurred
A Reasonably assured 20,000 60,747 32,000
B Uncertain 20,000 48,037 25,000
C Significantly uncertain 20,000 33,801 21,520
Totals 60,000 142,585 78,520
Additional information:
 The cash down payments are non-refundable and were received upon the signing of the
contracts.
 The appropriate discount rate on all of the contracts is 12%. The first installment on each of
the notes receivable is due on July 1, 2022.
 It was assessed that the receivable from Franchisee B is doubtful of collection. This is
because, at contract inception, ABC Co. determines that the region where the customer
operates is undergoing economic difficulty. Therefore, ABC Co. expects that the
consideration will not be collected in full. However, ABC Co. believes that the region’s
economy will recover in the near term and that the license will help the customer increase
its sales. Accordingly, ABC Co. expects to provide the customer a price concession and
concludes that it is probable that that it will collect only half of the P48,000 note receivable.
The adjusted present value of the note is P24,018. the adjusted discounted rate is 12%.
 All the three licenses provide the customers the right to use the entity’s intellectual property
as it exists at the point in time at which the license is granted.
 The licenses are transferred to the customers on July 1, 2021.
Requirements: Compute for the total profit from the three contracts in 2021.12.29
Solution:
Revenues
Franchisee A (20,000 cash down payment + 60,747 PV of note) 80,747
Franchisee B (20K cash down payment + 24,018 adjusted PV of note) 44,018
Franchisee C -
Total revenues 124,765
Costs of franchise
Franchisee A (32,000)
Franchisee B (25,000)
Franchisee C -
Total costs of franchise (57,000)
Gross profit 67,765
Interest income (60,747 + 24,018 + 33,801) x 12% x 6/12 7,114
Profit for the year 74,879
Again, the PFRS 15 treatment above differs from the old accounting treatment. Under the old
accounting treatment, the franchise agreement with Franchisee C would have been accounted
for under the “installment method” (PAS 18 Part B) or “cost recovery method” (FAS No. 45)
Under the PFRS 15 treatment above, the direct costs incurred in Franchisee C are deferred and
will be amortized to expense when the related revenue is recognized. However, in case the
direct costs do not qualify for recognition as asset (for example, if ABC Co. does not expect to
recover them), the direct costs would have been recognized as expense in 2021, even though
the related revenue is not yet recognized.
Illustration 3: Significant uncertainty - Subsequent period
On January 1, 2021, ABC Co. Enters into a franchise agreement with a customer. The price
stated in the contract is 5% of the customer’s future sales in relation with the franchise.
Franchise fees are due on a semi-annual basis. The customer earns P800,000 sales evenly in
2021.

01/01/2021 No entry
06/30/2021 Cash (800,000 x 1/2 x 5%) 20,000
Revenue 20,000
12/31/2021 Cash (800,000 x 1/2 x 5%) 20,000
Revenue 20,000
In 2022, the customer’s financial condition declines. The customer’s current access to credit
and available cash on hand are limited. The customer is able to pay only the first semi-annual
royalties. The customer earnsP400,000 sales evenly in 2022.

06/30/2022 Cash (400,000 x 1/2 x 5%) 10,000
Revenue 10,000
12/31/2022 Cash (400,000 x 1/2 x 5%) 10,000
Revenue 10,000
In 2023, the customer continues to use the entity’s patent. However, the entity learns that the
customer has lost access to credit and its major customers and thus the customer’s ability to
pay significantly deteriorates. ABC Co. therefore concludes that it is unlikely that the customer
will be able to make any further royalty payments for ongoing usage of the entity’s patent. As a
result of the significant change in facts and circumstances, the entity reassesses criteria “a” to
“e” of Step 1 in PFRS 15 and determines that they are not met because it is no longer probable
that the entity will collect the consideration to which it will be entitled.
The balance of the billings in 2022 remains outstanding. The customer earns P300,000 sales
evenly in 2023.
Because the criteria in Step 1 (particularly criterion (e) “probable of collection”) are not met, the
contract now fails to qualify for accounting under PFRS 15. Therefore, ABC Co. shall cease
from recognizing further revenue from the contract and shall account for any impairment of the
existing receivable in accordance with PFRS 9 Financial Instruments.
Additional fact:
ABC Co. tests its receivable on December 31, 2023 and concludes that the recoverable amount
is only P1,000.

12/31/2023 Impairment loss 9,000
(1,000 recoverable amount - 10,000 carrying
amount)
Receivable 9,000
Notice the differing treatments in 2022 and 2023. in 2022, the uncertainty in the collectability of
revenue is not significant. Thus, ABC Co. continues to recognize revenue from the contract. An
impairment test of the existing receivable on December 31, 2022 would have been
necessitated.
In 2023, the uncertainty in the collectability of revenue becomes significant. Therefore, ABC
Co. ceases from recognizing further revenue from the contract.
Class Activities
Exercise 1
An entity, a creator of comic strips, licenses the use of the images and names of its comic strip
characters in three of its comic strips to a customer for a four-year term. There are main
characters involved in each of the comic strips. However, newly created characters appear
regularly and the images of the characters evolve over time. The customer, an operator of
cruise ships, can use the entity’s characters in various ways, such as in shows or parade, within
reasonable guidelines. The contract requires the customer to use the latest images of the
characters. In exchange for granting the license, the entity receives a fixed payment of P1
million each year of the four-year term.
Requirements: Apply “Steps 2 and 5” of PFRS 15 to identify the following:

a. What are the performance obligation(s) in the contract?
b. Does the license provide the customer the right to access or the right to use the entity’s
intellectual property?
c. Is (Are) the performance obligation(s) in the contract satisfied over time or at a point in
time?
d. How shall the entity recognize revenue from the contract?
Exercise 2
An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an
operator of cinemas, has the right to show the movie in its cinemas for six weeks. In exchange
for providing the license, the entity will receive a portion of the operator’s ticket sales for Movie
XYZ.
Requirements:
a. (Step 2) Identify the performance obligation(s) in the contract.
b. (Step 3) Determine whether the transaction price is a fixed consideration or a variable
consideration.
c. (Step 4) Determine how the transaction is is allocated to the performance obligations in the
contract.
d. (Step 5) State how the entity recognizes revenue from the contract.
Exercise 3
On January 1, 2021, Pongcuter Co. Enters into a contract with a customer to grant a software
license for P1,000,000. The fee is payable at contract inception. The license has a term of four
years, to reckon from the date the customer can use the software. The customer can determine
how and when to use the right without further performance by Pongcuter Co. and does not
expect that Pongcuter Co. will undertake any activities that significantly affect the intellectual
property to which the customer has rights. The software is transferred to the customer on
February 1, 2021. However, the code, which is necessary for the customer to use the software,
is transferred only on April 1, 2021.
Requirements: Apply “Steps 2 to 5” of PFRS 15 to identify the following:

a. The performance obligation(s) in the contract.
i. Does the license provide the customer the right to access or the right to use the entity’s
intellectual property?
ii. Is (are) the performance obligations in the contract satisfied over time or at a point in
time?
b. The transaction price.
c. Allocation of the transaction price.
d. The recognition of revenue from the contract.
e. Provide the journal entries.
Exercise 4
On January 1, 2021, ABC Co. enters into a contract with a customer to transfer a license.
 The initial franchise fee is P100,000 payable as follows: 20% cash down payment upon
signing of the contract and the balance is payable in 4 equal annual installments starting
 The contract also requires ABC Co. to transfer equipment to the customer. The equipment
has a cost of P30,000 and a stand-alone selling price of P40,000.
 The license has a stand-alone selling price of P38,000.
 ABC Co. regularly sells the license and the equipment separately.
 The license provides the customer the right to use the entity’s intellectual property as it
 The equipment is transferred to the customer on January 15, 2021 while the license is
transferred to the customer on February 1, 2021.
Requirements: Apply “Steps 2 to 5” of PFRS 15 to identify the following:

a. The performance obligation(s) in the contract. State how the performance obligation(s)
is/are satisfied.
b. The transaction price.
c. Allocation of the transaction price.
d. The recognition of revenue from the contract.
e. Provide the necessary journal entries in January and February 2021.

Revenue From Contracts With Customers

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Revenue From Contracts With Customers

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PFRS 15: Revenue from Contracts with Customers

Effectivity Date: January 1, 2018

PFRS 15 is effective for annual periods beginning on or after January 1, 2018.

PFRS 15 applies to contracts wherein the counterparty is a customer.

A counterparty to a contract is not a customer if he agrees to participate in the entity’s activities

PFRS 15 applies to individual contracts with customers. However, as a practical expedient,

An entity applies the following steps when recognizing revenue:

Step 1: Identify the contract with the customer

Examples of licenses of intellectual property:

Franchises are of two types:

Between two private entities or individuals

Promise to grant license is not distinct

Promise to grant license is distinct

The intellectual property changes throughout the license period if:

Safe-based or usage-based royalties

An entity is exempt from applying the “Constraining estimates of variable consideration”

Promise to grant license is

Promise to grant license is distinct

Extracts from IFRS 15

Application of the General Principles:

Application of specific principles (licensing):

Extracts from IFRS 15

Step 2: Identify the performance obligations in the contract

Application of the General Principles:

An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved

Case A - License is not distinct

Step 2: Identify the performance obligations in the contract

Application of the General Principles:

Case B - License is distinct

Step 2: Identify the performance obligations in the contract

Application of the General Principles:

Consequently, the license is a performance obligation satisfied at a point in time.

Step 3: Determine the transaction price

The transaction price in a franchise contract is commonly referred to as franchise fees.

Franchise fees come in the form of:

Step 4: Allocate the transaction price to the performance obligations

Extracts from IFRS 15

CASE A - Variable consideration allocated entirely to one performance obligation

CASE B - Variable consideration allocated on the basis of stand-alone selling prices

Therefore, the entity shall:

Allocation of the fixed consideration:

The revenue from the fixed consideration is recognized as follows:

Allocation of the variable consideration:

The entry makes the following allocations:

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

Extracts from IFRS 15

Step 2: Identify the performance obligations in the contract

Moreover, all of the following criteria under PFRS 15 are met:

In addition, because part of the entity’s compensation is dependent on the success of

Accordingly, the promise to transfer the license is a performance obligation satisfied

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations

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

Extracts from IFRS 15

Step 2: Identify the performance obligations in the contract

The entity considers the indicators for “right of access’ as follows:

In addition, because some of the consideration is dependent on the success of the

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations

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

Revenue is recognized as follows:

Existence of a significant financing component in the contract

The customer does not have a significant financing component if: