REVENUE

RECOGNITION
 INCOME
Income includes both revenues and gains.

 Revenue is income arising in the ordinary course of

an entity’s activities. It is usually the largest amount
in a statement of profit or loss.

 Gain is the increase in net profit resulting from

something other than the day to day earnings
from recurrent operations, and are not associated
with investments or withdrawals
What is Revenue Recognition?

 Revenue recognition is an accounting

principle that outlines the specific conditions

under which revenue is recognized.

Conditions for Revenue Recognition
According to the IFRS criteria, for revenue to be recognized, the
following conditions must be satisfied:

1. Risks and rewards of ownership have been transferred from

seller to the buyer.
2. The seller does not have control any longer over the goods sold.
3. The collection of payment from goods or services is reasonably
assured.
4. The amount of revenue can be reasonably measured.
5. Costs of revenue can be reasonably measured.
 Conditions (1) and (2) are referred to as PERFORMANCE.
This occurs when the seller has done what is expected to be
entitled to payment.

 Condition (3) is referred to as COLLECTABILITY.

The seller must have a reasonable expectation that he or she
will be paid for the performance.

 Conditions (4) and (5) are referred to as MEASURABILITY.

The matching principle dictates that the seller must be able
to match the revenues to the expenses.
IFRS 15 - Revenue Recognition from Contracts
• IFRS 15 sets out the rules for the recognition of revenue based on
transfer of control to the customer from the entity supplying the
goods or services.

• Revenue is recognized to show the transfer of goods or services to a

customer in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services.

• Control of an asset is described as the ability to direct the use of,

and obtain substantially all of the remaining benefits from the asset.
Scope of IFRS 15

IFRS 15 applies to all contracts with customers except:

 Leases (IFRS 16)

 Insurance contracts (IFRS 4)
 Financial instruments and other contractual rights and
obligations (IFRS 9)
 Non-monetary exchanges between entities in the same
line of business.
 Definitions
The following definitions are given in the standard:

Income. Increases in economic benefits during the accounting period in

the form of inflows or enhancements of assets or decreases of liabilities
that result in an increase in equity, other than those relating to
contributions from equity participation.

Revenue. Income arising in the course of the entity’s ordinary activities.

Contracts. An agreement between two or more parties that creates

enforceable rights and obligations.
 Definitions

Contract Asset. An entity’s right to payment for goods or services already

transferred to a customer if that right to payment is conditional on
something other than the passage of time (for example the entity’s future
performance). Commonly referred to as unbilled receivables.

Example: An entity will recognize a contract asset when it has fulfilled a

contract obligation but must perform other obligations before being
entitled to payment. This is in contrast to a receivable, which is the right
to payment that is unconditional, except for the passage of time.
Is contract asset the same
as account receivable ?
 Differences of Contract Asset and
Accounts Receivable
Contract Asset Accounts Receivable

• Conditional right • Unconditional right

• Arises when the entity have
already performed something
but a condition has to be done.
• Payment can be expected once
the condition is completed.
• Arises when the goods and/or
services are delivered /
performed.
• Payment can be expected after
the passage of time.
Illustration: Entity ABC agreed to build a hotline center for a
big client, XYZ. The project will take six months and will start
on Oct. 1. Total contract price is P300,000. The contract
states that payment will be made when the hotline is
complete and handed over to XYZ. After three months and
under IFRS 15, ABC needs to recognize the revenue based
on the progress towards completion. The project is 50%
complete at year-end, Dec. 31.

Journal Entry :

Dec. 31 Contract Asset P150,000

Revenue P150,000
 Definitions
Receivable. An entity’s right to consideration that is unconditional (i.e.
only the passage of time is required before payment is due).

Contract Liability. An entity’s obligation to transfer goods or services to a

customer for which the entity has received consideration (or the amount
is due) from the customer. Contract liabilities might be described as
unearned revenue.

Customer. A party that has contracted with an entity to obtain goods or

services that are an output of the entity’s ordinary activities in exchange
for consideration.
 Definitions
Performance Obligation. A promise in a contract with a customer to
transfer to the customer either:
a. a good or service (or a bundle of goods or services) that is distinct; or
b. a series of distinct goods or services that are substantially the same
and that have the same pattern of transfer to the customer.

Stand-alone selling price. The price at which an entity would sell a

promised goods or services separately to a customer.

Transaction price. 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.
 RECOGNITION AND MEASUREMENT
IFRS 15 sets out five steps for the recognition process:

Step 1. Identify the contract with the customer.

A contract with a customer is within the scope of IFRS 15 only when:

a. The parties have approved the contract and are committed to carrying
it out.
b. Each party’s rights regarding the goods and services to be transferred
can be identified.
c. The payment terms for the goods and services can be identified.
d. The contract has commercial substance.
e. It is probable that the entity will collect the consideration to which it will
be entitled.
f. The contract can be written, verbal or implied.
RECOGNITION AND MEASUREMENT

Step 2. Identify the separate performance obligations.

 A contract includes promises to provide goods or services to a customer.

 Those promises are called performance obligations.

 A company would account for a performance obligation separately only if

the promised good or service is distinct.

 A good or service is distinct if it is sold separately or if it could be sold

separately because it has a distinct function and a distinct profit margin.
RECOGNITION AND MEASUREMENT

Step 2. Identify the separate performance obligations.

Factors for consideration as to whether an entity’s promise to transfer
the good or service to the customer is separately identifiable
include, but are not limited to:
a. The entity does not provide a significant service of integrating the
good or service with other goods or services promised in the
contract.
b. The good or service does not significantly modify or customize
another good or service promised in the contract.
c. The good or service is not highly dependent on or highly
interrelated with other goods or services promised in the contract.
1. RECOGNITION AND MEASUREMENT
Step 2. Identify the separate performance obligations.

Some contracts may involve more than one performance obligation.

For example, the sale of car with complementary driving lesson would be
considered as two performing obligations.

1. The car; and

2. Driving lesson.

Performance obligations must be distinct from each other.

The following conditions must be satisfied in order for the good or service to
be distinct:
a. The buyer (customer) can benefit from the goods or services on its own.
b. The good or service is separately identified.
RECOGNITION AND MEASUREMENT
Step 3. Determine the transaction price.

Transaction price is the amount of consideration a company expects to be

entitled to from the customer in exchange for transferring goods or services.

It would reflect the company’s probability-weighted amounts or estimate of

variable consideration (including reasonable estimates of contingent
amounts) in addition to the effects of the customer’s credit risk and the time
value of money (if material).

Variable contingent amounts are only included when it is highly probable

that there will not be a reversal of revenue when any uncertainty associated
with the variable consideration is resolved.
RECOGNITION AND MEASUREMENT
Step 3. Determine the transaction price.

Transaction price is usually readily determined.

Most contracts involve a fixed amount.

What is the transaction price, if the sale price of a car with

complementary driving lesson is P800,000.

Answer: P800,000
RECOGNITION AND MEASUREMENT
Step 4. Allocate the transaction price to the performance
obligations.

Where a contract contains more than one distinct performance

obligation, a company allocates the transaction price to all
separate performance obligations in proportion to the stand-
alone selling price of the good or service underlying each
performance obligation.

If the good or service is not sold separately, the company would
have to estimate its stand-alone selling price.
RECOGNITION AND MEASUREMENT
Step 4. Allocate the transaction price to the performance
obligations.

If an entity sells a bundle of goods and/or services which it also

supplies unbundled, the separate performance obligations in the
contract should be priced in the same proportion as the
unbundled prices.

This would apply to mobile phone contracts where the

handset is supplied “free”. The entity must look at the stand-
alone price of such a handset and some of the consideration for
the contract should be allocated to the handset.
 RECOGNITION AND MEASUREMENT
Step 4. Allocate the transaction price to the performance
obligations.
Assuming that a car will be sold at P800,000 with free driving lesson. The
stand-alone prices of the car and driving lesson are P800,000 and P2,500
respectively.

Performance Stand-alone Percentage Transaction Allocation

Obligations Price of Total Price Amount
Car 800,000 99.69% 800,000 797,520
Driving lesson 2,500 0.31% 800,000 2,480
Total 802,500 100.00% 800,000 800,000
 RECOGNITION AND MEASUREMENT
Step 4. Allocate the transaction price to the performance obligations.
In the example above, the revenue associated with the car would be recognized
at the point of sale in time when the buyer takes possession of the car. On the
other hand, the complementary driving lesson would be recognized when the
service is provided.
Cash P 800,000
Revenue P 797,520
Deferred Revenue 2,480

When the complementary driving lesson has been provided.

Deferred Revenue 2,480

Revenue 2,480
 RECOGNITION AND MEASUREMENT
Step 5. Recognize revenue when (or as) a performance is
satisfied.
When an entity satisfies a performance obligation by transferring control of a
promised good or service to the customer, a performance obligation can be
satisfied at a point in time, such as when goods are delivered to the customer,
or over time.
An obligation satisfied over time will meet one of the following criteria:
a. The customer simultaneously receives and consumes the benefits as
the performance takes place.
b. The entity’s performance creates or enhances an asset that the
customer controls as the asset is created or enhanced.
c. The entity’s performance does not create an asset with an alternative
use to the entity and the entity has an enforceable right to payment for
performance completed to date.
RECOGNITION AND MEASUREMENT
Step 5. Recognize revenue when (or as) a performance is
satisfied.

The amount of revenue recognized is the amount allocated

to that performance obligation on Step 4.

An entity must be able to reasonably measure the outcome

of a performance obligation before the related revenue can be
recognized.
RECOGNITION AND MEASUREMENT
Step 5. Recognize revenue when (or as) a performance is
satisfied.

The conditions for revenue recognition, conditions (1) and (2)

state that revenue would be recognized when the seller has done
what is expected to be entitled to payment. Therefore, revenue is
recognized either:

 at a point in time; or
 over time
Case: Allocating the Transaction Price
to the Performance Obligations
A mobile phone company gives customers a free handset when
they sign a two-year contract for provision of network services.
The handset has a stand-alone price of P1,000 and the contract
is for P200 per month.

Prior to IFRS 15, the company would recognize no revenue in

relation to the handset and total of P2,400 per annum in relation
to the contract.
Case: Allocating the Transaction Price
to the Performance Obligations

Under IFRS 15, revenue must be allocated to the handset

because delivery of the handset constitutes a performance
obligation. This will be calculated as follows:
Performance Stand-alone Percentage
Obligation Price of Total
Handset 1,000 17.24%
Contract-two years 4,800 82.76%
Total Value 5,800 100.00%
CasCase: Allocating the Transaction Price
to the Performance
Case: Allocating the Obligationse:
Transaction Price
Allocating the Transaction
to the Performance Price to the
Obligations
Performance Obligations
As the total receipts are P4,800, this is the amount which must be
allocated to the separate performance obligations. Revenue will
be recognized as follows (rounded to nearest peso):
Year 1
Handset (P200 x 24 = P4,800 x 17.24%) P 828
Contract [(P200 x 24 = P4,800 x 82.76%)/2] 1,986
P 2,814

Year 2
Contract [(P200 x 24 = P4,800 x 82.76%)/2] P 1,986
CasCase: Allocating the Transaction Price
to the Performance Obligationse:
Contractthe
Allocating Costs
Transaction Price to the
Performance Obligations
The incremental costs are costs that would not have
been incurred had that individual contract not been
obtained (such as sales commission).
Currently, entities either expense the costs of obtaining
a contract as incurred, include them as part of contract
costs under IAS 11 Construction Contracts, or capitalize
them under IAS 38 Intangible Assets as directly
attributable costs.
CasCase: Allocating the Transaction Price
to the Performance Obligationse:
Contractthe
Allocating Costs
Transaction Price to the
Performance Obligations
As a practical expedient, incremental costs of obtaining a
contract can be expensed if the amortization period would be
one year or less.

Any other costs of obtaining a contract are expensed when

incurred unless they are explicitly chargeable to the customer
regardless of whether the contract is obtained.
 CasCase: Allocating the Transaction Price
to the Performance Obligationse:
Contract
Was
Allocating Costs
an unavoidable
the obligation
Transaction Price totothe
pay an
incremental
Performancecost incurred as a result of
Obligations
obtaining a contract with customer?
 CasCase: Allocating the Transaction Price
to the Performance
Example: A company wins a Obligationse:
competitive tender to provide
Allocating
consulting the to
services Transaction
a new customerPrice to the
and incurs the
following costs to obtain the contract:
Performance Obligations
Costs Amount IFRS 15 Accounting Treatment
• Expensed as incurred as these would have been
• External legal fees P 35,000 incurred whether or not the tender was won.

• Travel cost to deliver 5,000 • Expensed as incurred as these would have been
proposal incurred whether or not the tender was won.

• Commission to sales 10,000 • Recognize as an asset as these are increment

employees costs of obtaining the contract and the company
expects to recover them through future
consultancy fees.
• Total Cost Incurred P 50,000
 Performance Obligations Satisfied Over Time

• A performance obligation satisfied over time meets the criteria in

Step 5 above and, and if entered into more than one accounting
period, would be described as a long-term contract.
• In this type of contract, an entity often has an enforceable right to
payment for performance completed to date.
• The standard describes this as an amount that approximates the
selling price of the goods or services transferred to date (i.e.
recovery of the costs incurred by the entity in satisfying the
performance plus a reasonable margin).
Performance Obligations Satisfied Over Time

Methods of measuring the amount of performance completed to date

encompass:

 Output methods recognize revenue on the basis of the value

of the customer of the goods or services transferred. They include
surveys of performance completed, appraisal of units produced or
delivered, etc.
 Input methods recognize revenue on the basis of the entity’s
inputs, such as labor hours, resources consumed, costs incurred.
If using a cost-based methods, the cost incurred must contribute
to the entity’s progress in satisfying the performance obligation.
Performance Obligations Satisfied at a
Point in Time

• A performance obligation not satisfied overtime will be satisfied

at a point in time.

• This will be the point in time at which the customer obtains

control of the promised asset and the entity satisfies a
performance obligation.
Performance Obligations Satisfied at a
Point in Time

Some of the indicators of the transfer of control are:

a. The entity has a present right to payment for the asset.

b. The customer has legal right to the asset.
c. The entity has transferred physical possession of the asset.
d. The significant risks and rewards of ownership have been
transferred to the customer.