— Chapter 5 Revenue Recognition - Franchise and Consignment Contract with Customers: Introduction Franchise When one party (ranchisor) grants business rights to operate a franchised business to another, party (franchisee), questions arise concerning the accounting status of the inifial consideration Paid or promised upon the Inillation of the contract, These questions are prompted by Uncertainties relating to the collectibiliy of receivables from the franchisee and the cost. 0f performance or ability fo perform required services on the part of the franchisor. ‘reo! dec! of professional judgment is required. in making such determinations. Although promulgated standards on this topic provide broad guidelines the general criteria for fevenue recognition govern the accountant’s actions in specific cases. In some arrangements the delivery of the goods by the manufacturer (wholesaler) to the dealer (retailer) is not considered to be full performance and a sale because the manufacturer retains tiie to the goods. Another method of accounting has developed for use when property Is exchanged without a transfer, of title and without a sales contract being completed. This specialized method of marketing certain types of products makes use of « device known as a consignment. Under this arrangement, the consignor [monutacturer) ships merchandise fo the consignee (dealer). who is fo act os an agent for the consignor in seling the merchancise. Bo!h consignor and consignee are interested in seling — the former to make @ profit or develop a market, the latter fo make a commission on the sales. Franchise Accounting A franchise agreement involves the granting of business rights by the franchisor to o franchisee that will operate the renchise outlet in certain geographical area or location. Four types of franchise orangements have evolved: + Manutactureretailier, Manufacturer-wholesoler, Service sponsoretailer, and + Wholesaler-etailer 31334 Chagee’ In franchise arrangements, the franchisor. such as Jollibee and Chowking grants to Se franchisee, quite offen an individual, a right to sell the franchisor’s products and use iis som for a speciiied period of lime. The franchisor also typically provides initial start-up services (sae {8 identifying locations, remodeling or constructing facilities. selling equipment, and ro froining fo the franchisee) as well as providing ongoing producls and services (such 05 4oAcrae branded products ond adverising and administrative services}. So, 0 franchise involves = license to use the tranchisor’s Intellectual property, Bul oso Involves initial soles of prom ‘and services as well as ongoing soles of products and services. The franchisor must evoke: och port of the franchise orangement fo identity the performance obligations Fronchise agreements vary but usvolly involve an initicl payment (called on initia! fanchise feat ‘by ine franchisee and ongoing payments of continuing franchise fees. For the infil franchise te the Franchisor (the parly who grants business rights under the franchise) normally provices Sm franchisee [the _porly who operates the: franchised business) with the following services: 1. Assislonce in te selection ©. Analyzing location ¢ Bb. Negotioing leave Evaivation of potential income < Supervision of construction activity ©. Oboining financing « . Designing building | 7 ¢._ Supervising contractor while building ‘sistance in the acqusition of signs. fixures, and equipment Provision of bookkeeping and advisory services @. Setting up franchise's records . Advising on income, real estate, and other toxes” .__ Advising on local regulations of the franchise's business 4. Provision of employee ond management training 7. Provision of quality control ¢ PFRS 15 on Franchise Arrangements ideniities two sources of revenve: Sole of Inifal franchises and rolated asseis or services, and + Continuing fees based on the operations of franchises, Performance obligations relate to: + Right fo open a business + Use of rade name or other intellectual property of the franchisor. + Continuing services, such as marketing help, training, and in some cases supaive Inventory and inventory management. Franchisors commonly charge improvements to recognition and measurement are ones tha will not key have fo be Srersed when ine (ASS completes the second phase of Ine project. Beope. PFS 4 applies fo SF. all insurance contracts (including reinsurance contacts) that an entity isues and IE sensronce contracts thot it holds 5 not apply to oiher ssels ond lobillies of an insurer, such as financial assets and Borcil liilties within the scope of PAS 39 Financial tnsituments: Recognition and eSsurement 5 nol address accounting by policyholders Benton of insurance contract. An insurance contract isa “contract under which one tthe insurer) aceepls significant Insurance isk. from another party (ihe yholdel! by agreeing to compensate the policyholder if a specified uncerfoin even! (the insured event) adversely affects the policyholder. ounfing policies. tne PFRS exempls an insurer femporarily (unil completion of Phase the Insurance Projeci ftom some requirements of other PFRSs including ihe requirement nsider the 1ASBs Framework In selecting accounting policies for Insurance contracts rovers the PERS. Prohibits provisions for possible cloims under contracts that are not in existence at the repoting date (such os cotastophe and equalization provisions Requires atest forthe adequacy ofrecognized insurance liabiliies and an impaiment est for reinsurance asses Requires an Insurer fo keep insuronce fbifies in ils Bolonce sheet until they ore discharged or canceled, oF expre, ond prohibits offseting insurance habiilies ogonst felgied reinsurance assets. : sn accounting policies. PERS 4 permits cn insurer to change ils accounting policies Pavronce contrac's oniy if. 0s a resus financial stolements present information that Ze elevort oni no les reliable, er more reliable Gnd no less eleva. In particule, Gn = cannot infroduce any of the following practices, although it may continue using Sauriing policies that involve ther: rechuting insurance lobiities on on unciscounted bass Measuring contractual rights to future investment management fees at on amount thal exceeds thet fat volue a: implied by o comparison wih curent market based ‘ees for smior services. Jing nor-uniorm accounting policies for he iruronce fobs of subsiories, suring insurance Habiilies. the PFRS permits the iniroduction of an accounting Sat involves remecsuring designated insurance labillies consslently in each period + current market Interest icles (and. if the Insucet so elects. olher cuent estimates Sumptions]. Without this permission, on insurer would hove been requred To Oppiy nge in aecounting policies conssiently 10 oil slr hobiities onChapter & Prudence. An insurer need not change ils accounting policies for insurance contracts eliminate’ excessive prudence. However, It an Insurer already measures iis Insuranae ‘conlracts wih sufficient prudence, it should not inroduce additional prudence. Fottre invesiment merans. Thee 6 0 febutlgule Fresumgiion thal at iaers too statements wil becomes less relevant and reliable if inoduces an accounting policy © fellects fulure investment margins in he measurement of Insuranes contacts, Asel cicsleaions. hen Gh fuer changes is oecounting poles or Faure obi itmay reciasstty some or all fnancio\ assets as ‘a fair value trough ‘Other Issues. The PRS. oS Clarifies that ar insurer need not account for an embedded derivative se Gt fat value If he embedded derivative meets the definition ot an insur contract Requires an insurer to unbundie (that, js, to, account separately for) de ‘Corhponents of some insurance contracts, fo avoid the omission of assels Gnd a fromis balance sheet CGlarties the applicability of the practice sometimes known os ‘shaciow acct Petmils an expanded presentation for insurance contracts ecquired in 0 Bust ‘combination or porfolio transfer, Addresses limited aspects of discretionary participation features containes insurance’ contracts oF financial insruments. ‘Overview of PERS 17 ~ Insurance Contract Objective PERS 17 Insurance Contracts establishes the principles for the recognition, measurement. resentation and disclosure of Insurance contracts within the scope of lhe Standard, The: Objective of IFkS 17 is fo ensure that an ently provides relevant information that faith fepresents those contracts. This information gives a boss for Users of financial statements ‘sess the effect ina! insurance conltacts have on the entity's financial postion, fnenci Berformance and cash Hows, (RS 17:1] Scope irGorance contracts, including reinsurance contract, it issues; Reinsurance contract i ng investment conltects with discretionary porlicipation features i! sues, provideo Enhty olso haves Insurance contracts. Somé Contrac's meet ine defintion of on insurance contract but have as their primary, the provision of services for a fixed fee. Such faved contracis ore in the scope oF the Sl Unies an ently chooses fo Gppy to them IFKS 15 Revenue fom Contacts wih Customers Provided ihe folewing conditions ore met: TRS 17.5} {o),the entity doesnot retect an assessmen! of the sk associated with on individual cus in setting the price of the contract with that customer; (0) the contract compensales customer by providing service, rather than by making cash payments to ihe customer {c) the insurance risk transtered by the contract orises pimanly from the cusiomer's use Services rather than fiom uncertalnly over tne cos! of those services. Effective date PERS 17 effective for annual reporting periods beginning on or after 1 January 202) goplication |s pemitied it both frrs 1S Revenue from Contracts with Customers ond i Financial instruments have also been applied. (IFRS 17:C1} Transition An ently sholl opply the standord retrospectively unless impcacticable, in which cote have thes fen of using eer Ine modified revospective opproach oF the far valve Op Under the moaitied retrospective cpprogch, an entity shal utize reasonable ond su iniSrmarlen Sod mamas ihe vse Of einichion Inet would have been used (o Opoy = Ietraspectivs Gpproacn. But reed oniy vse inlormarion avehabie without Undue coe oF Under is cpprzach he use of rina is erm, tinal the ony broclca so information fer ie reslorement of prot periods. [ERS 12: Ce-e7} Under the fair value approach. an entily determines the CSM al the transition date c= difference between the fal value of a group of Insurance contracts ot thal date ana tha Measured a} thai date. Using this appreach, on Honsition there is no need for OnAUl (HFRS 17:C2T, C24] application of the Standard: those entilies akeasy applying IFRS & speciivelyre-cesignato ond reciassiy Tmnonciol aves held 163 ‘dei with Contracts within the scope of the Standard. {IFRS 17:C30-C3l}Chapter 13 <1 deposit So Selites leccounting’ WP o business leertained in ent. a. The ‘oily = francioh sit holds: provided the rary purpose Eine standard, ieisiomers and Revol customer Poensates the feuslomer, ang Somers Use oF 2021, corer Bas ond 1S 9 » case entities Blue approach ne supportoble fo opply @ ful costo elon ical source of on date as the fe Gnd the Fer GnnUG! GrOUpE fog IFRS 9 may ties connected Insurance Contracts 913 Entities can choose not to restate IFRS 9 comporatives with any difference between the Previous conying amount of those financial assets and the carrying amount at the date ot fale Sepicction recognized inthe opening eauily al the dole. oh lel application. Any restatemen's of prior periods must reflect all the requrements Of IFRS 9. [IFRS T7.C31] PFRIC 12: Service Concession Arrangements Defined: A sevice concession arangement is an arrangement whereby a goverment or other public #es'oBacy contrac wih & private cperator io develop (or Upgrade). operate and matte the grantot's infasructure assets such as roads, bridges, Tunnes. airports, energy SistDUton, Networks, prisons or Nospitals. the grantor controls or reguiates what services ihe Sperator ost rovide Using the dssels, lo whom and at whgh price, Gnd ako Conlok ony significant fescual interest in the assels at the end of the term of the arrangement The objective of IFRIC. 1218 10. Clarity how certain aspects of existing. |ASS ierafure ‘aro fo be applied fo service Concession - orrangements, Two types of service concession arrangements. PFRIC 12 draws a distinction between two 1ypes Of service concession arrangement 1. The operator receives a financial asset, specifically an unconditional contractual {ight fo receive a specified or determinable amount of cash or another financial asset from the government in retum for constructing or Upgrading @ publ sector asset, ond then opefating and maintaining the assel for a specitiea period at time. This colsgary includes quarantees by the gavemment fo pay for any shoxfall between amounts received from users of tne public service Gnd specition or Geterminatle amounts. 2. The operator receives on infangible asset ~ a right fo Charge for use of a public sector set hat constructs or upgrades and then must operale and maintain fora soecifiod Beiog. oF me, A ah! to charge uses is nol an Uncenclional right to receive cath ecause the Gmounts are contingent onthe exient to which the public uses the sevice. PFRIC_12 ollows for the posibiity that both !ypes of rangement may exis within a single contract: to the extent thal the government hos given an unconditional guarantee of Rayment for ine consiruction of the public sector asset. the Operator has a fincicial ose: fo he exten! thal the operaicr Ras fo rely on ihe puBIC Using the service in order to obtain Payment, tne operator has an intangible ssel ‘Accounting ~ Financial Asset Model ‘he operator recognizes a financial asset fo the extent thet It has an unconditional contractual fight fo receive cash or another financial asset fom of ot the direction of the grantor for the. onsuction services, The operator has an unconditional righ 10 feceive costrit the grantor Contractual guarantees to pay the operator 2. spaciiied of determinable omounis or b: the shortfall it any, between cmounls received from users of the public service and. specified or determinable amounts, even if payment f contingent on the operator ensuring that the infrastructure meets specified quaily or elficiency requtements, The operator measures the financial asset at falr valve. Accounling - Intangible Asset Model aes, The operafor recognizes Gn intangible oss to the extent that it receives a right (a licence) to charge users of the public service. A right to charge Users of Ihe public semice is Nolan ncondifonal right to receive cash because the amounts are contingent on the extent tnot the public uses the service, The operator measures the intongible asset at fair valve, Operating revenue The opefator Of a service concession arangement recognizes ond measures revenue in ‘accordance with PRS 15 for ihe services il performs, Aggounting by the, Government (Grantor b PFRIC 12 does not address accounting for the government side of service concession ‘Qrrangements. PFRSs Ore no! designed to opoly to nol-for-piofl acilvites in the private sector or ihe public sector, However, ine Infemailonal Public Sector Accounting standorcs board {pease hat started fs own project on sevice concension orangemenls wich wil ve senous Eonsideration to accounting by grantors. The principles applied in FRIC 12 will be Considered § port of the project914 Chapter 12 ‘MULTIPLE CHOICE QUESTIONS Insurance Contracts ‘An Insuranice. contract can contain both deposit and insurance elements. An example ‘ight be a reinsurance contract where the cedent receives G repayment of the prommiums ta fulure time it inere are no claims under the contract, Effectively nis constitutes a loan by the cedent thot wil be fepald in the fulure. PRS 4 requires that . Each payment by the Cedent is accounted for cs a loon advance and as & yment for Insurance cover. b, The Insurance premium is dccounted for 05a revenve item inthe income state= meni G. The premium is accounted for uncier IFRS 15 d._The premium poid is treated purely as c loan and is accounted for under IFRS 2. Which of the following accounting practices has been outlawed by PFRS No. 4 ‘a. Shadow Accounting: Catastrophe Accounting . Attest for the adequacy of recognized insurance labilfies 4. An impairment fest for reinsurance assets, 3. Which of the following types of insurance contract would probably not be covered by PrRS 48 2. Motor insurance ¢. Medical insurance B. Ue insuronce Pension plan 4. PFRS 4 says that insurance contracts shouic! ‘a. Be Covered by existing accounting policies during phase one. b. Comply with ine PFRS Framework document Comply with all existing PFRS. d. Be covered by PAS 32 and PFRS 9 only 5. PFRS 4 wos introduced principally for what reason? {@. "To ensure that insurance companies could comply with Intemational Financial Reporting Standards by 20x3. b. To completely overhaul insurance accounting. ¢: AS a response to recent scandals within the Insurance industry, d. Because of pressure from the financial services authorities in several counties. 6. Which Intemational Financial Reporling’ Slandard will apply to those contracts that prin: cipal transter financial risk, such os credit derivatives 3. PAS 32. PERS 9, Bi. Pas 16: PERS 4 7. If an nity gives 0 product waranty thal hos been isved drecly by a manufactures dealer, 0 retailer, which Philippine Hnanciol Reporting Standarcs is Ikely to cover this warranty? G. PERS 4 . PFRS 9 and PAS 27. BPRS 9. ci Pas 32. PERS 9 requires an entity to separate embedded derivatives that meet certain conditions trom the hos! insurance contrac! that contains them. Italo rquies ihe embedded derive {ive to be measured at fair value and any changes in far value 10 Go Into Proll oF loss. An ingurer need not separate an embedded derivative that iiself meets tne definion of on Insurance contract, Which of Ihe following fypes of embedded derivalive would ned to be fair-vaived under PFRS 9 when embedded In an insurance confact? '@.. The guarantee of minimum interest rates ue futly vaive of a contract, Besin benett inked To equity prices or stock market index payor eal Policytiolde’s option to surender the Insurance contract for a cash valve Was specified in the original insurance coniact The guarantee of minimum equity retums thot is availabe only it the policy decides fo fake a life contingent annuity,Chaper 13 en's. An example ntof the premiums consltuies @ loon dvance and oF & the income state sd for under IFRS 8 PERS No. 42 not be covered smational Financis Several counties contracts that pe by o manufactures stkely to cover tn g. ot certain conditions > embedded deriva into prot or loss. Ay the Getiniion of = vative would ned %= Foci? the surrender or ma ex poyable only = oF a cash value ay it the policyhoiser 9 urarice Contracts 915 Insurers con recognize\an intangible asset that is the ference between the fot value Ghd book value of insurance ilabillies taken on in business combination. This asset should Be cecounted for using. ©. PAS 38, intangible Assets. BERS 4, insurance Contracts, only PAS 16, Property, Pront, and Equipment, Such Gn ase! should not be accounted for unl phase two if he insurance Entty A wales single poly fr @ P100.000 premium and excecls claims fo be made of 60,000 in 2546. Al tne ‘lie of veing the policy. there ore commission Cosi of P20.000. Assume 0 discount rate of Sw risk-res: Tne Entity says thal i @ provision lorrsk ond uncer {ainly were fo be made. it woud emount to P28,000 ond hat ins sk would expire evenly Over yours 20:7, 20x8, and 2039. Under existing policies, the entity would spread. he Bremiums, the cicims expense, ond the commissioning Cosi over the fs! two Yours of the poly. Invesiment relyrs in years 0x7 ond 20x8 are #2060 ond P4,000 respectively, Wh {Sih erat in year 2007 ond 20x, using the matehing and deteral opproach in yess 20:7 Gnd 208% 0. Pr Peto Pas pe 8 101000 10,000 a ©" 26,000 PERS 4 does not apply fo: Product warranties, which are covered by PAS 18 and PAS 37; Employer's assels and llabillies under employee benefits plans, which are covered by PAS 1? ond PFRS 2 . e Contingent consideration payable or receivable in a business combination, which f covered by Prk 3, Business Combinations roperly insurance contract Which of the following items are outside the scope of PFRS 4 unless the issuer elects to ‘pply PFRS 4 to such conhiactse o. Financial guarantee contracts ¢. Medical insurance 5! Motor insurance te insurance PERS 4 permis on insurer fo change iis accounting policies for insurance contracts only If asaresuit: 6. its financial statements present information that is more relevant 5: nolesretape. ormorefeiabie a. allot the above nbundle" is defined as ‘An uncertain future event that is covered by on insurance contract and Greats insurance isk. iia ee b. Aconiract uncer which one patty (the insurer) accepts significant insurance fs from anather party the poliemoider by agreeing fo compensate the olicyholder ia speciied uncerfain future even! {Ihe insured event) adversely ‘fects the policyholder ¢. Represents the fist phase of the project on insurance contracts. 3. Account for the components of a contract asf hey were separate contracts To unbundle a contract, an insurer component shall ©. Apply PERS 4 fo the insurance component. 8: ABpiy PERS 9 fo deposit component, ¢. Bola and b. &. None of the above {tis an ossessment of whether the camying amount! of on insurance flabilly needs 10 be: increased (or the carying amount of related deterred acquisifion costs or related Intangible assets decreased), based on a review of future cash flows: ‘3. Unbundle Insured event B. insurance risk &‘Labitly adequacy testChap for controctucily tween amour for delerminco ensuing thot Pa nents. tion services i for ony Ube 2S with PAS Sa vould be equies period congement in le construction phase se agnaoveooa — Chapter 14 Government Accounting - General Fund Definition (Section 109 of PD 1445) Government Accounting encompasses the processes of analyzing, recording, classitying. summarizing and communicating all transactions involving the receipt, disposition ond uilization of goverment funds ond property and interpreting the results thereot, ‘As a process, it puts together all activities pertaining fo the gathering of data which are to 'be used as the bases for management decisions. It includes: 1. bookkeeping referred to os anaiysis, recording and journatizing, 2. posting or grouping oF classitying of similar items 3. preparation of periodic financial reports 4. analysis of reports todetermine their accuracy and adequacy as wellas the efficiency ‘and effectiveness of agency operations Like commercial accounting, government accounting is on art and are based on fundamental concepts regarding accounting functions and the rules governing accounting practices. These ruies which are derived from experience and reason are flexible ond in a Constant process of evolution. Primary Purpose of Government Business To render service to the public os distinguished trom the usval profit motive of the private business Peculatities of Government Business [As to Purpose: The primary purpose of the government business is to render service to the public at the lowest cost possible os distinguished from the usual profit molive of the private business. [As to Ownership: There ate no defined inalvicual ownership interes n the govemmetn business that can be ‘acquired, sold, transfered or redeemed in the commercial sense. Although every citizen is said fo have-a shore in the assets of the government, no one may dispose of his share and realize prof from 921