REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS 15)

PFRS 15-Five Step Model

It establishes FIVE STEP MODEL that will apply to revenue earned from a contract with a customer regardless of type of
revenue transaction or industry.

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of
financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a
contract with a customer.

Application of the standard is mandatory for annual reporting periods starting from 1 January 2017 onwards. Earlier
application is permitted.

NOT applicable to:

o IAS 17 - Leases
o IFRS 9 - Financial Instruments and other contractual rights
o IFRS 10 - Consolidated Financial Statements
o IFRS 11 - Joint Arrangements
o IAS 27 - Separate Financial Statements
o IAS 28 - Investment in Associate and Joint Venture
o IFRS 4 - Insurance Contracts
o And non-monetary exchanges between entities in the same line of business to facilitate sales to customers
or potential customers. [IFRS 15:5]

A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of another
standard. In that scenario:
 if other standards specify how to separate and/or initially measure one or more parts of the contract, then
those separation and measurement requirements are applied first. The transaction price is then reduced by
the amounts that are initially measured under other standards;
 if no other standard provides guidance on how to separate and/or initially measure one or more parts of the
contract, then IFRS 15 will be applied.

Five Step Model Framework [COTAR]

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

1) IDENTIFYING THE CONTRACTS WITH CUSTOMER

Conditions:
 Approved contracts by parties
 Rights of each party in G/S can be identified
 Terms of payment in G/S can be identified
 Contract has Commercial Substance
 Probable collection of the consideration to which entity is entitled to in exchange of G/S

NOTE: if not yet meet all - Re-assess the contract; if meet all - the contract is within scope of PFRS
*G/S stands for Good or Services

2) IDENTIFYING PERFORMANCE OBLIGATION

a) Goods and Services that are distinct:
(SEPARATE PERFORMANCE)
 The customer can benefit from the good or services on its own
 The entity’s promise to transfer G/S can be SEPARATELY identifiable from other promise
to the customers.
b) A series of distinct goods or services that is transferred to the customer in the SAME pattern of
transfer to a customer:
(SINGLE PERFORMANCE)
 Each distinct good or services in series is consecutively transferred to a customer would
be a Performance Obligation (PO) satisfied over time
  A single method measuring progress would be used towards complete satisfaction of
Performance Obligation to transfer each distinct G/S in the series to customer.

3) DETERMINE THE TRANSACTION PRICE

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

For Variable Consideration:

Expected Value
Consider the sum of
probability weighted
amounts for the range of
possible outcome
This is appropriate estimate
if the entity has large
number of contract with
similar characteristic
Most Likely Amount
Only consider the single most
likely amount from the range
of possible consideration
amounts
It is appropriate to use this
estimate if the contract has
only few possible outcome

4) ALLOCATE THE TRANSACTION PRICE TO PERFORMANCE OBLIGATION

 Applicable when contact has multiple PO.

The allocation bases:

1. Relative Stand Alone Selling Price (Rela-SAP)
2. If Relative Stand Alone Price is not observable

Entity must estimate using:

 ADJUSTED ASSESSMENT APPROACH (MV-Approach)
 EXPECTED COST PLUS MARGIN APPROACH (Cost-plus Approach)
 RESIDUAL APPROACH (only in limited instance)

5) RECOGNIZE REVENUE AS THE ENTITY SATISFIES PERFORMANCE OBLIGATION

 REVENUE - is recognized as CONTROL is passed either:
A. Over Time
B. At the Point in Time
 CONTROL - is the ability to direct the use of and obtain substantially all the remaining benefits of
an asset.

* Possession of thing and enjoyment of right in the concept of an owner.

A. Over Time:

Following Criteria:
 The customer simultaneously RECEIVES and CONSUMES all the benefits provided by the
entity
 The entity CREATES or ENHANCE the value of asset controlled by the customer
 The PO does not create an asset with alternative use to the entity and the entity has an
ENFORCEABLE RIGHT to payment for the performance completed to date

*ONE criteria is sufficient to recognize revenue Over Time.However, if none of the above criteria is
present in the problem, recognize the revenue At Point in Time.
B. At Point in Time
 Revenue is recognized when control is passed at the point in time.
It includes but not limited to:
 Entity has the present right to payment for asset 
The customer has:
 1. Physical Possession of Asset
2. Accepted the Asset
3. Legal Title to Asset
4. Significant Risk and Reward related to Ownership of Asset

How to determine the passage of control to customer?

Does customer simultaneously receive and consume the benefits provided by the YES Recognize revenue
entity’s performance? OVER TIME
NO
Does entity’s performance creates or enhances an asset that customer controls as YES Recognize revenue
the asset is created or enhanced? OVER TIME
NO
Does entity’s performance not create an asset with an alternative use to the entity YES Recognize revenue
and the entity has an enforceable right to payment (for performance completed to OVER TIME
date)?
NO
Recognize revenue AT POINT IN TIME

Presentation in financial statements

 Contract liability
 Contract asset
 Receivable

Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a
contract asset, or a receivable, depending on the relationship between the entity’s performance and the
customer’s payment.

A contract liability is presented in the statement of financial position where a customer has paid an amount of
consideration prior to the entity performing by transferring the related good or service to the customer. A
contract liability is recognized at the earlier of the date:
1. The entity receives consideration before the good or service is transferred to the customer (i.e., advance
payment).
2. The entity has an unconditional right to the consideration before the good or service is transferred to the
customer (i.e., a non-cancellable contract requires payment in advance).

Contract asset vs. receivable

Where the entity has performed by transferring a good or service to the customer and the customer has not yet
paid the related consideration, a contract asset or a receivable is presented in the statement of financial
position, depending on the nature of the entity’s right to consideration.

A contract asset is recognised when the entity’s right to consideration is conditional on something other than the
passage of time, for example future performance of the entity.

A contract asset (excluding amounts recognized as a receivable) is recognized when the good or service is
transferred to the customer before the consideration is received or becomes due.

A receivable is recognised when the entity’s right to consideration is unconditional except for the passage of
time. A right to consideration is unconditional if only the passage of time is required before payment of the
consideration is due, even if the amount is subject to refund in the future.

Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impairment relating to
contracts with customers should be measured, presented and disclosed in accordance with IFRS 9. Any difference
between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be
presented as an expense, for example, an impairment loss.

PROBLEMS
Problem 1: (Five Step Model) On January 10, 20x8, XYZ Company enters into a contract to deliver product BB
and CC to Mr. Octopus for P200,000. The contract requires that product BB to be delivered first and states that the
payment for the delivery of product BB is conditional on the delivery of product CC. The relative stand alone selling
price of products BB and CC are P40,000 and P60,000, respectively. The consideration of P200,000 is due only after the
entity has transferred both products BB and CC.

Required: Apply the five step model provided by PFRS 15.

1. Identifying Contracts with the Customer

In this case, all the criteria in determining the existing contract with the customer are present such as the
following:
 Approved Contract by Parties:
[Contract to deliver or sale of products BB and CC]

 Rights of each party in Goods or Services can be Identified:

[Mr. Octopus has rights to receive product BB and CC]

 Terms of payment in Good or Services can be Identified:

[Payment in full due only after XYZ transferred both products BB and CC]

 Contract has Commercial Substance:

[It has commercial substance because the delivery by XYZ Company of products BB and CC results
in the payment of the contact price by Mr. Octopus]

 Probable collection of the Consideration to which the entity is entitled to in exchange of

Goods or Services
[Yes, there is probability of collection of consideration which is after delivery of both product BB
and CC]

2. Identifying Performance Obligation:

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

3. Determine Transaction Price:

The transaction price of P200,000 is clearly determinable in this case. The said contract price shall be
allocated in the next step using relative stand alone prices.

4. Allocate Transaction Price:

The transaction price of P200,000 shall be allocated based on the relative stand alone price of BB and CC.
Thus, the following allocation:

Product BB Product CC
Relative Stand Alone Price 40,000 60,000
Ratio based on SAP 40% 60%
Transaction Price 200,000 x 40% 200,000 x 60%
x Ratio
Allocated Transaction Price 80,000 120,000

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

The revenue is to be recognized At Point in Time.Since the customer, MR. Octopus, has physical possession
of assets due to acceptance of assets delivered and that XYZ has the present right to payment for the
delivery of assets, there is passing of control at point in time. Hence, revenue shall be recognized.

6. What is the entry in the book of XYZ to record the satisfaction of the performance to deliver
product BB to Mr. Octopus?
Debit Credit
Contract asset P80,000
Revenue P80,000
 7. What is the entry in the book of XYZ upon performance of the obligation to deliver product CC
and to recognize unconditional right to consideration?
Debit Credit
Receivable 200,000
Contact asset 80,000
Revenue 120,000

Problem 2: (Transaction Price) Global Telecommunication Corporation agrees to sell to XYZ Company voice
minutes over a period of one year. XYZ Company promises to pay P0.20 per minute for the first 100,000 minutes. If the
minutes purchased exceeded 100,000 minutes, then the price falls to P0.15 per minute for all minutes purchased. If the
minutes exceeded 150,000 minutes, then the price falls to P0.10 per minute for all purchased. In effecting the
agreement, price shall be reduced retrospectively.

Based on Global’s experience with similar agreements, it estimates the following outcome:
Less the 100,000 100,000 up to 150,000 Exceeding 150,000
60% 30% 10%
Required: What is the estimated transaction price under expected value method?

(P.20 x 60%) + (P.15 x 30%) + (P.10 x 10%) = P0.175 per minute

Problem 3: (Transaction Price) SMARTY Company enters into business with AAA Corporation to build a call center.

SMARTY Company will receive payment of P150,000 if completed on time or P110,000 if completion is delayed.

SMARTY estimated the following with respect to timely completion of the asset:
Call Center is completed within time agreed, Call Center is completed but with delay as to
hence, no delay turnover
95% 5%
Required: What is the estimated transaction price?

Since there are only two possible outcome under the contract, it is appropriate to use “Most Likely Outcome” approach to
better predict the variable transaction price instead of expected value. Hence, the answer is P150,000 which is the
single most likely amount.

Problem 4: (Contract liability and Receivable) On January 1, 20x1, ABC Co. enters into a contract to install a
gate for a customer on March 31, 20x1. The contract requires the customer to pay a consideration of P5,000 in
advance on January 31, 20x1. The customer pays the consideration on March 1, 20x1. The installation was finished
on March 31, 20x1.

Requirement: Provide the journal entries under each of the following scenarios: (a) the contract is cancellable and
(b) the contract is non-cancellable. (Ignore contract cost)

Cancellable Non-cancellable
Jan. 1, 20x1 (Contract inception)
No entry No entry
Jan. 31, 20x1 (Whether the customer pursues or cancels the contact)
No entry Receivable P5,000
Contract liability P5,000
Mar. 1, 20x1 (Advance payment is received / The payment is received before the gate is installed)
Cash P5,000 Cash P5,000
Contract liability P5,000 Receivable P5,000

Mar. 31, 20x1 (Performance obligation is satisfied (i.e. the gate is installed)
Contract liability P5,000 Contract liability P5,000
Revenue P5,000 Revenue P5,000
Notes:
Scenario Accounting
Consideration is received or becomes due before goods or services are Recognized a contract
transferred to the customer liability
Goods or services are transferred to the customer before consideration is
received:
a. Right to consideration is conditional Recognized a contract asset
b. Right to consideration is unconditional Recognized a receivable
Problem 5: (Contract assets) On January 1, 20x1, ABC Co. enters into a contract with a customer for the
installation of roof tiles. The expected number of roof tiles to be installed is 1,000 units. The contract price is P100 per
roof tile installed. However, the customer shall pay the total consideration only when all of the 1,000 roof tiles have
been installed.

ABC assess that the performance obligation will be satisfied over time because:
1. ABC’s performance creates or enhances an asset that the customer controls as the asset is created or
enhanced; and
2. ABC does not have an alternative use for the asset created and ABC has an enforceable right to payment
for performance completed to date (i.e., ABC is entitled to consideration in the event the contract is
terminated for reasons other than its failure to perform as promised).

As of January 1, 20x1, 800 roof tiles have been installed. The remaining 200 tiles have been installed on February 7,
20x1. The customer fully pays the consideration on February 9, 20x1.

Required: Provide the journal entries. Ignore the contract costs.

January 1, 20x1 No Entry

January 31, 20x1 Contract asset (800 units x P100) 80,000

Revenue 80,000

February 7, 20x1 Receivable (1,000 units x P100) 100,000

Contract asset 80,000
Revenue 20,000

February 9, 20x1 Cash 100,000

Receivable 100,000

Problem 6: On January 5, 20x8, BBB Company enters into a cancellable contract to transfer product AA to Mr.
Yolando on April 5, 20x8. The contract requires that Mr. Yolando pay consideration of P2,000 in advance on January
15, 20x8. Mr. Yolando pays the consideration on March 5, 20x8. Then BBB delivered the product on March 31, 20x8.

Required:
1. What is the entry on January 15, 20x8 when payment of the contract is due?
2. What is the entry to record the receipt of cash of P2,000 on March 5, 20x8?
3. What is the entry on March 31, 20x8 to record satisfaction of performance obligation?

1 No entry because BBB Company has no unconditional right to consideration since the
contract is cancellable. Hence, no receivable account shall be set up on January 15, 20x8.

2 Cash 2,000
Contract liability 2,000
The receipt of P2,000 without performing the obligation gives rise to a contract liability. No
revenue shall be recognized until BBB Company has performed the obligation to deliver the
product.

3 Contract liability 2,000

Revenue 2,000
Revenue shall now be recognized because BBB Company has performed the obligation to
deliver the product.

Problem 7: On January 5, 20x8, Santos Company enters into a non-cancellable contract to transfer beauty
products to Angelina on April 5, 20x8. The contract requires that Angelina pay consideration of P2,000 in advance on
January 15, 20x8. Angelina pays the consideration on March 5, 20x8. Then Santos Company transferred the
product on March 31, 20x8.

Required:
1. What is the entry on January 15, 20x8 when payment of the contract is due?
2. What is the entry to record the receipt of cash of P2,000 on March 5, 20x8?
3. What is the entry on March 31, 20x8 to record satisfaction of performance obligation?

1 Receivable 2,000
Contract liability 2,000
 Due to the non-cancellable, Angelina Company has unconditional right to consideration.
Hence, receivable account shall be set up on January 15, 20x8.

However, Santos Company has not yet performed the obligation to transfer the beauty
product on the said date. Thus, a contract liability shall be credited instead of revenue.

2 Cash 2,000
Receivable 2,000
The collection of P2,000 cash for the non-cancellable contract results to credit of receivable
account. No revenue shall be recognized as of March 5, 20x8 because Santos Company
has not yet performed the obligation to deliver the products.

3 Contract liability 2,000

Revenue 2,000
Revenue shall now be recognized because Santos Company has performed the obligation to
deliver the products. Hence, contract liability shall be debited in order to close the
liability due to said performance obligation.

PROBLEM 8: On January 1, 20x8, PLDTee enters into wireless contract in which customer MVP is provided with
handset and a voice and data plan for P3,500 per month. PLDTee identified the handset and wireless plan as a
separate performance obligations.

The handset can be separately sold by PLDTee for a price of P20,000 which provides observable evidence of
standalone selling price. PLDTee offers a 12-month service plan without a phone that includes the same level of
services for a price of P2,500 per month.

Required:
1. How much is the total transaction price to be allocated to the separate performance obligation?
2. How much of the transaction price is allocated to the wireless plan?
3. How much of the transaction price is allocated to the handset?
4. On January 1, 20x8, what is the entry at the inception of the contract?
5. On January 31, 20x8, what is the entry to record the monthly billing of monthly fee?

Problem 6: (IFRS 15 Revenue from Contracts with Customers) On January 1, 20x1, ABC Co. enters into a
contract with a customer to transfer a license.
 The initial franchise fee is ₱100,000 payable as follows: 20% cash down payment upon signing of the
contract and the balances is payable in 4 equal annual installments starting December 31, 20x1. The
appropriate discount rate is 12%.
 The contract also requires ABC Co. to transfer equipment to the customer. The equipment has a cost of
₱30,000 and a stand-alone selling price of ₱40,000.
 The license has a stand-alone selling price of ₱38,000.
 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 exists at the point
in time at which the license is granted.
 The equipment is transferred to the customer on January 15, 20x1 while the license is transferred to the
customer on February 1, 20x1.

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) are satisfied.
b. The transaction price.
c. Allocation of transaction price.
d. The recognition of revenue from the contract.
e. Provide the necessary journal entries in January and February 20x1

Step 2: Identify the performance obligations in the contract

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.
Moreover, the fact that ABC Co. regularly sells the license and the equipment separately indicates that a customer
can benefit from each of the license and the equipment on its own or with other readily available resources.

Conclusion:
There are two separate performance obligations in the contract:
1. 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 intellectual property.

The problems states that 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. Therefore, the performance obligation of transferring the
license is satisfied at a point in time.

 ABC Co. uses the general principles to identify whether the performance obligation of transferring the equipment
is satisfied over time or at a point in time.

Since control over the equipment transfers to the customer upon delivery, the performance obligation is also
satisfied at a point in time.

Summary of answers to Requirement (a):

The two separate performance obligations in the contract are as follows:

2. Equipment (satisfied at a point in time)

Requirement (b):
Step 3: Determine the transaction price
The transaction price is sum of the 20% cash down payment and the present value of the future cash flows from the
note receivable. This is computed as follows:

Cash down payment (100,000 x 20%) 20,000

PV of note receivable:
[(100K x 80%) ÷ 4] x PV of ordinary annuity @12%, n=4 60,747
Transaction price 80,747

Requirement (c):
Step 4: Allocate the transaction price to the performance obligations
The transaction price is allocated to the performance obligations in the contract on the basis of their stand-alone
selling prices. The allocation is done as follows:

Performance obligations Stand-alone selling prices Allocation Transaction price

License 38,000 (80,747 x 38K/78K) 39,338
Equipment 40,000 (80,747 x 40K/78K) 41,409
Totals 78,000 80,747

Requirement (d):
Step 5: Recognize revenue when (or as) a performance obligation is satisfied
The ₱41,409 allocated to the equipment will be recognized as revenue on January 15, 20x1 while the ₱39,338
allocated to the license will be recognized as revenue on February 1, 20x1.

Requirement (e):

The entry on January 1, 20x1 is as follows:

Jan. 1, 20x1 Cash on hand 20,000
Note receivable 80,000
Contract liability 80,747
Unearned interest income 19,253

Jan. 15, 20x1 Contract liability 41,409

Revenue 41,409
 Jan. 15, 20x1 Cost of sales 30,000
Inventory 30,000

The entry on March 1, 20x1 is as follows:

Feb. 1, 20x1 Contract liability 39,338
Revenue 39,338

Problem 7: (IFRS 15 Revenue from Contracts with Customers) MangTurkz Food Corporation enters into
franchise agreement on June 1, 20x7 with Mr. ShawaWarma for a package with total fee of P500,000. The right
granted is to operate the business for 4 years. The terms of payment provide that a down payment of P180,000 shall be
paid and balance is payable in 4 years. Mr. Warm issued an 8% non-interest bearing note for the balance. (PV of
ordinary annuity 3.312132).The agreement provides for a royalty payment of 2% of the monthly gross sales. The
total fee of P500,000 includes the following with their stand-alone prices:
Rights to trade name and market area P250,000
Machinery and equipment (Food Stall) cost P80,000 100,000
Training and other services 50,000

All the services inclusive in the package were performed as of October 30, 20x7 while the equipment was installed
only on January 1, 20x8. The franchise commenced on January 15, 20x8. The total gross sales in 20x8 amounted to
P1,500,000.

Required:

Case A: (Applying PFRS 15)

1. If MangTurkz Food Corporation satisfied the obligation at point in time as when Mr. Warma has obtained control
of the rights, how much of the total contract price is allocated to the transfer of rights, sale of equipment and
services?

2. If MangTurkz Food Corporation satisfied the obligation at point in time as when Mr. Warma has obtained control of
the rights, how much revenue shall be recognized in December 31, 20x7?

3. If MangTurkz Food Corporation satisfied the obligation at point in time as when Mr. Warma has obtained control of
the rights, how much revenue shall be recognized in December 31, 20x8?

4. If MangTurkz Food Corporation satisfied the obligation and provides access to the rights and must continue
(recognized over time) to perform updates and services, how much revenue shall be recognized in December 31,
20x7?

5. If MangTurkz Food Corporation satisfied the obligation and provides access to the rights and must continue
(recognized over time) to perform updates and services, how much revenue shall be recognized in December 31,
20x8?

FRANCHISE

THE FIVE STEPS PROCESS OF REVENUE RECOGNITION (PFRS 15)

STEP 1: Identify the contract with the customer

The contract is with a customer and the collectability of the consideration is PROBABLE.

STEP 2:Identify the performance obligations in the contract

Each promise to deliver a DISTINCT good or service in the contract is treated as a separate performance obligation.

A promised good or service is distinct if:

(a) The customer can benefit from the good or service either on its own or together with other resources that
are readily available to the customer.
(b) The promise to transfer the good or service is separately identifiable from other promises in the contract
If the promise to grant the license is distinct from other promises in the contract, the entity should determine
whether the license provides the customer with either RIGHT TO ACCESS the entity's intellectual property or
RIGHT TO USE the entity's intellectual property.

RIGHT TO ACCESS - Performance obligation is satisfied OVER TIME since 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 it is granted.
Thus revenue recognition is OVER THE LICENSE PERIOD.

RIGHT TO USE - Performance obligation is satisfied AT A POINT IN TIME since 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 it is granted. Thus
revenue recognition is AT A POINT IN TIME after satisfaction of performance obligation."

Right to Access (Over Time)

The customer has the right to access the entity’s IP 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.

A license is a promise to provide a right to access if all of the following criteria are met:
1. 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.
2. The right granted by the license directly expose the customer to any positive or negative effects of the
entity’s activities.
3. The entity’s activities do not result in the transfer of a good or a service to the customer as those
activities occurs (i.e., they do not represent a separate performance obligation).

Although not determinative, the existence of a shared economic interest between the parties (e.g., sales or
usage-based royalties) may be an indicator that the customer has a reasonable expectation that the entity will
undertake such activities.

Rights to Use (At a Point in Time)

The customer has the right to access the entity’s IP as it exists throughout the license period 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.

If the license does not meet all three criteria, the license agreement provides a right to use the license and the
entity would recognize revenue at the point in time when the control of the license transfers to the customer.

Two types of Franchise

1. A contract between two private entities or individuals.

2. A contract between private entity or an individual and the government.

Under the licensing section of PFRS 15, the promise to grant the license must be determined first whether
the license of Intellectual Property (IP) is distinct or not because PFRS 15 includes specific application
guidance for distinct licenses of IP.

For licenses that are not distinct, an entity will follow the general requirements in the standards to account
for all promises as a single performance obligation (that contains a license and at least one other good or
service).

For distinct licenses of IP, the promise to grant a license is treated as a separate performance obligation
from other promises in the contract. An entity must determine whether the license transfers to the customer at
a point in time or over time by considering the nature of the promise to the customer. The standard states
that entities provide their customers with either:
A right to access The entity’s intellectual property as it exists throughout the license period,
including any changes to that intellectual property, which is recognized as
revenue over time. Therefore, the consideration received is recognized as
revenue over the license period.
 A right to use The entity’s intellectual property as it exists at the point in time when the license
is granted, which is recognized as revenue at a point time. Therefore, the
consideration received is recognized as revenue at the time the license is
provided.

STEP 3: Determine the transaction price

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. sales tax or VAT)

NOTE: If there is a significant financing component, then the consideration receivable needs to be discounted to
present value using the rate at which the customer would borrow.

Transaction price in a franchise contract is commonly referred to as the franchise fees.

Franchise fees come in the form of:

(1) INITIAL FRANCHISE FEE - payment for establishing the relationship and providing some initial services.
CRITERIA TO RECOGNIZE REVENUE:
S - satisfaction of performance obligation (substantial performance) P -
period of refund has expired (non-refundable) ( if silent)
C - collectability is reasonably assured ( if silent)

NOTE: (EXCEPTION TO THE RULE ABOVE) Cash received as down payment is recognized as revenue if
nonrefundable and represents a fair measure of the services already rendered by franchisor even though there
is no substantial performance.

(2) CONTINUING FRANCHISE FEE (CONTINGENT FRANCHISE FEE) -are fees received (a) in return for
continuing rights granted by the agreement; (b) for providing management training, advertising and
promotion, legal assistance and other support.

Continuing franchise fees (royalty fee) should be reported as revenue when they are earned unless portion of
them has been designated for a particular purpose. (e.g. if it is conditional)

STEP 4: Allocate the transaction price to the performance obligations.

The transaction price is allocated to the performance obligations on the RELATIVE STAND-ALONE PRICES of the
distinct goods and services. (Using relative sales value approach or residual approach)

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

 For performance obligations satisfied over time, revenue is recognized as the entity progresses towards
the complete satisfaction of the performance obligation.
 For performance obligations satisfied at a point in time, revenue is recognized when the entity
completely satisfied the performance obligation.

NOTE: Revenue is measured at the amount of transaction price allocated to the performance obligation satisfied.

Franchise Revenues

1. Initial Franchise Fees - it is a once off lump sum, paid by the franchisee to the franchisor, upon
signing the franchise agreement. It acts as a payment for:
a. Assistance in site selection, leased negotiation, financing and supervision of construction
activity.
b. Initial training in all facets of operating a business.
c. Assistance with staff recruitment and training.
d. Access to preferential purchasing arrangements the franchisor has put in place.
e. Provision of bookkeeping and advisory services.
f. Advertising and promotion.
 g. Assistance in the acquisition of signs, fixture and equipment.

Note: PFRS 15 for Licenses

Distinct -
account the Right to Access the IP (Over Right to Use the IP (Point in time)
license as a
Time)
separate
performance Has right to access if the following Revenue is recognized at the time when the
obligation. criteria are met: license is granted.
a. The contract requires or
customers expect the IP will The intellectual property (IP) does not
change and customer had to change throughout the license period.
change IP.
b. Right granted by the license may
have negative or positive effects
on the customer.
c. No further transfer of goods or
services.

The IP changes throughout the

license period.

1. The entity continues to be

involved with the IP.
2. The entity undertakes activities
that significantly affect the IP.

Not
Distinct - Over Time Point in time
account the Apply general PFRS 15 guidance to determine if the performance obligation is satisfied
license as a over time or at a point in time.
single
performanc
e obligation.

3. Continuing Franchise Fee (Royalty Fee) - it is a fee paid by the franchisee for the ongoing services
(e.g. management trainings, advertising, promotion, accounting, legal assistance and other special
services received from the franchisor. Typically it is computed based on a percentage of gross sales
of franchisee and it is paid on a regular basis.

Sales Based or Usage Based Royalties

The standard provides explicit application guidance for recognizing sales-based and usage-based
royalties from licenses of IP. Specifically, the standard creates an exception to the requirement
to estimate variable consideration for transaction that involve sales and usage-based royalties
resulting from the licenses of IP. As a result, these amounts are only recognized at the later of
when:
1. The sale or usage occurs or
2. The performance obligations (to which some or all of the sales or usage-based royalties
have been allocated) have been satisfied (or partially satisfied).

This exception may result in an accounting treatment that is similar to current practice.

Use the following information for the next two (3) questions:
On January 1, 20x22, ABC Franchising Company entered into a franchising contract with Lobster to grant the latter
several rights for a transaction price of P1,700,000. These rights include:
 License to access the trademark, tradename, and other intellectual property of the franchisor for a term of 5
years, renewable at the end of every term.
 Receipt of interior decoration and equipment to be used in the store premise.
 Employee training course for property conduct of business operations.
 Initial delivery of one thousand units of merchandise.

Each of the enumerated performance obligation of the franchisor are determined to be separate and distinct from
one another based on the guidance of IFRS 15. The directly observable standalone selling price of thee performance
obligations are as follows:

License P1,200,000
Fixed assets 200,000
Training 100,000
Merchandise ?

By December 31, 20x22, the interior decoration and equipment have all been installed and the training course has
been fully completed by the employees. However, only 400 units of merchandise has been received by the franchisee.

1. Assuming the standalone selling price of the merchandise is highly variable and cannot be reliably estimated,
how much is the revenue recognized due to the satisfaction of the performance obligation relating to the license
to access the intellectual property of the franchisor?
A. P240,000 B. P620,000 C. P1,200,000 D. P1,580,000

2. Assuming the cost of the merchandise is P450 per unit and a desired margin of 10% based on sales is applicable,
how much is the transaction price to be allocated to the performance obligation relating to the employee training
if standalone selling price of the merchandise is to be estimated using the estimated cost plus a margin approach?
A. P85,000 B. P100,000 C. P170,000 D. P425,000

3. Assuming the standalone selling price of the merchandise is P1 million and that the contract instead provides
the franchisee a licensee to use the intellectual property of the franchisor. How much is the total franchise
revenue to be recognized for the year ended December 31, 20x22?
A. P639,200 B. P816,200 C. P1,292,000 D. P1,700,000

Use the following information for the next three (3) questions:

On January 1, 20x21, SMC Company granted a franchise to a franchisee. The franchise agreement required the
franchisee to pay a nonrefundable upfront fee in the amount of P1,600,000 and on-going payment of royalties
equivalent to 10% of the sales of the franchisee. The franchisee paid the nonrefundable upfront fee on January 1,
20x21.

In relation to the nonrefundable upfront fee, the franchise agreement required the entity to render the following
performance obligation which were separate and distinct from each other.

 To construct the franchisee’s stall with stand-alone selling price of P400,000.

 To deliver 20,000 units of raw materials to the franchisee with stand-alone selling price of P500,000.
 To allow the franchisee to use the entity’s tradename for a period of 5 years starting January 1, 20x21. The
stand-alone selling price of the use of the tradename was P100,000.

On July 31, 20x21, the entity completed the construction of the franchisee’s stall. On December 31, 20x21, the
entity was able to deliver 15,000 units of raw materials to the franchisee. For the year ended December 31, 20x21, the
franchisee reported sales revenue amounting to P1,000,000.
4. Under IFRS 15, what amount should SMC Company recognize as revenue in relation to the delivery of the raw
materials on December 31, 20x21?
A. P800,000 B. P500,000 C. P600,000 D. P375,000

5. Under IFRS 15, what amount should SMC Company recognize as revenue in relation to the construction of the
franchisee’s stall on December 31, 20x21?
A. P640,000 B. P400,000 C. P1,600,000 D. P0

6. Under IFRS 15, what amount should SMC Company recognize as total revenue for the year ended December 31,
20x21?
A. P1,600,000 B. P1,372,000 C. P1,700,000 D. P1,2760,000