PFRS 15

REVENUE FROM CONTRACTS WITH

CUSTOMERS

V I LO G , L H E A M C .
Reporter
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 OBJECTIVES
 To know the core principle of revenue
recognition
 To know the five step model for revenue
recognition
 To define a contract, performance
obligation and transaction price
 To describe the revenue recognition at a
point in time or over time

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 INTRODUCTION

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 INTRODUCTION

• PFRS 15 is the new global framework for revenue recognition.

• Entities that sell products and services in a bundle or multiple deliverables or those engaged in major projects could
see significant change in the timing of revenue recognition.
• Entities likely to be affected by this new revenue standard include those engaged in telecom, software, engineering,
construction and real estate.
• For other industries, it will be business as usual, as in the case of sale of merchandise in the ordinary course of
business
• REVENUE is income in the ordinary course of business activities.
• INCOME is increase in economic benefit during the accounting period in the form of the following:
• Inflow or enhancement of asset
• Decrease in liability that results in an increase in equity, other than contributions from equity participants
• PFRS 15 applies to all contracts with customers., except:
a) Leases under PFRS 16
b) Insurance contracts under PFRS 17
c) Financial instruments under PFRS 9

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 CORE PRINCIPLE

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 CORE PRINCIPLE

1. An entity should recognize revenue standard in a manner that depicts the pattern of transfer of
good or service to a customer
2. The amount recognized as revenue should reflect the consideration to which the entity expects to
be entitled in exchanged for good or service

Depending on whether certain criteria are met, revenue is recognized:

a) At a point in time or at particular date when control of the good or service is transferred to
the customer.
b) Over time or over a certain period in a manner that depicts the entity’s performance.

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 FIVE-
STEP
MODEL
STEP 1 Identifying a
contract

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 I d e n ti f y i n g a c o n t r a c t

‒ A contract is an agreement between tow or more parties that creates enforceable rights and obligations in a contract.
‒ Enforceability of the rights and obligations I a contract is matter of law.
‒ Contracts may be written, oral or impliedly by an entity’s customary business practice
‒ Generally, contracts should be accounted for separately.
Contract Criteria

A contract with a customer must meet all of the following Should any of the following is satisfied, contracts
criteria: must be combined:
a) The parties to the contract have approved the a) The contracts are treated as a single package.
contract in writing, orally or in accordance with b) The consideration in one contract depends on
customary business practice. the good or service of another contract
b) The rights and obligations of the parties in the c) The goods or services in the contract relate to a
contract can be identified single performance obligation.
c) The payment terms in the contract can be identified
d) The contract has commercial substance.
e) The collection of the consideration is probable

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 FIVE-
STEP
MODEL
STEP 2 Identify the
performance
obligation

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 I d e n ti f y t h e p e r f o r m a n c e o b l i g a ti o n

‒ A performance obligation is a promise to deliver a good or service in a contract with customer

‒ A promise constitutes a performance obligation if the promised good or service is distinct.
‒ A promised good or service is distinct if it meets both of the following criteria
a. The customer can benefit from the good or service.
b. The entity’s promise to transfer the good or service to the customer is separately identifiable from other
promises on the contract.

DISTINCT GOOD OR SERVICE:

1. Sale of finished goods produced by a manufacturer
2. Sale of merchandise inventory by a retailer
3. Constructing, manufacturing or developing asset on behalf of the customer, as in long-term construction
contract
4. Granting license or franchise
5. Performing a contractually agreed-upon task for a customer, as in bookkeeping service or payroll processing
service

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 FIVE-
STEP
MODEL
STEP 3 Determine
the transaction
price

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 D e t e r m i n e t h e t r a n s a c ti o n p r i c e

The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in
exchange for transferring good or service to a customer.

Factors that may affect the transaction price are:

1. Variable consideration
- Variable consideration is included in the transaction price when it is highly probable that a significant
reversal of revenue or decrease in revenue will not occur.
2. Time value of money
- If the contract has a significant financing component, the consideration should be adjusted for time value
of money. Except if the contract period is less than one year.
- Revenue is measured based on cash selling price. The difference between total consideration and cash
selling price is accounted for as interest income.
3. Noncash consideration
- Noncash consideration is measured at fair value. However, if the fair value cannot be reasonably estimated,
the stand-alone selling of the promised good or service is used.
4. Consideration payable to the customer – vouchers, coupons and volume rebates.

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 FIVE-
STEP
MODEL
Step 4 Allocation of the
transaction price

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 A l l o c a ti o n o f t h e t r a n s a c ti o n p r i c e

Determining stand-alone selling price

The best evidence of the stand-alone selling price is an observable price of a good or service when sold on a
stand-alone basis or when sold separately.

If the stand-alone selling price is not directly observable, the entity must estimate such price by using the
following methods:
a. Adjusted market assessment approach – This method means the entity may refer to prices from competitors
for similar good or service adjusted for specific cost and margin.
b. Expected cost plus margin approach - This method means the entity may forecast expected cost to satisfy
the performance obligation adjusted for an appropriate margin or profit.
c. Residual approach – This method may be used only when either the selling price of the good or service is
highly variable or is uncertain. Under this method, the stand-alone selling price is the difference between the
total transaction price and the sum of the observable stand-alone selling prices of other goods or services in
the contract.

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 FIVE-
STEP
MODEL
Step 5 Recognition
of revenue

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 R e c o g n i ti o n o f r e v e n u e

An entity recognizes revenue when or as it satisfies a performance obligation by transferring control of a

good or service to a customer.
Control of an asset refers to the ability to direct the use of the asset and obtain substantially all of the
benefits form the asset.
Revenue can be recognized either at point in time or over time
The following factors would indicate revenue recognition
The following factors would indicate revenue recognition
over time
at a point in time
a) The customer simultaneously receives and consumes
a) The entity has the right to receive payment for the
the benefits provided by the performance as the
asset and for which the customer is obliged to pay.
entity performs. (routine payroll services)
b) The customer has a legal title to the asset.
b) The entity’s performance creates or enhance an asset
c) The entity has transferred physical possession of the
that the customer controls as the asset is created or
asset to the customer.
enhanced. (asset construction on customer site)
d) The customer has the significant risks and rewards of
c) The entity’s performance does not create an asset
the ownership of the asset.
with an alternative use to the entity and the entity
e) The customer has accepted the asset.
has an enforceable right to receive payment for
performance completed to date.
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 Sale of goods
‒ When goods are sold in the ordinary course of business, revenue is recognized unquestionably at the point of
sale
‒ Stated differently, legal tittle passes to the customer at the point of sale. Incidentally, the point of sale is
usually the point of delivery which may be actual or constructive.
‒ Legally, it is delivery that transfers title or ownership from the seller to buyer.

Sale with a right return

PFRS 15, paragraph B21, provides that an entity shall recognize the following with respect to a sale with a
right of return:
a. Revenue equal to the total sale price less the sale price of the expected return
b. Refund liability equal to the sale price of the expected return.
c. A recover asset and the corresponding reduction of cost of goods sold equal to the cost of the expected
return.

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 Consignment arrangement
Consignment is a method of marketing goods in which the entity called the consignor transfers physical
possession of certain goods to a dealer or distributor called the consignee that sells the goods on behalf of the
consignor.
The consignor shall not recognize revenue upon delivery of the goods to the consignee until the goods are
sold by the consignee
When consigned goods are sold by the consignee, a report called account sales is given to the consignor
together with a cash remittance for the amount of sales minus commission and other expenses chargeable against
the consignor.

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 Bill and hold arrangement
Bill and hold arrangement is a contract under which an entity bills a customer for a product but the entity
retains possession of the product.
Depending on the terms of the contract, revenue shall be recognized when the customer obtains control or
takes title of the product even though the product remains in an entity’s physical possession.

All of the following criteria must be met for the recognition of revenue in a bill and hold arrangement:
a. The customer has requested for the arrangement
b. The product must be identified separately as belonging to the customer.
c. The product must be ready for physical transfer to the customer anytime
d. The entity cannot have the ability to use the product or to direct it to another customer.

Customer loyalty program

Many entities use a customer loyalty program to build brand loyalty, retain their valuable customers and of
course, increase sales volume.
The customer loyalty program is generally designed to reward customers for past purchases and to provide
them with incentives to make further purchases.

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 Measurement
‒ An entity shall account for the award credits as a “separately component of the initial sale transaction”. In other
words, the granting of award credits is effectively accounted for as a “future delivery of goods or services”
‒ PFRS 15, paragraph 74, provides that an entity shall allocate the transaction price to each performance
obligation identified in a contract on a relative stand-alone selling price. In other words, the fair value of the
consideration received with respect to the initial sale shall be allocated between the award credits and the sale
based on relative stand-alone selling price.

Recognition
‒ The consideration allocated to the award credits is initially recognized as deferred revenue and subsequently
recognized as revenue when the award credits are redeemed

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 T H A N K YO U F O R
YO U R ATT E N T I O N

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