PFRS

15
Revenue from Contracts with
Customer
REVENUE 1.)
PFRS 15: 2.)
RECOGNITION Revenue from Installment
Contracts with Sales
Customers

3.)
4.) 5.)
Long-term
Franchise Consignment
Construction
Accounting Sales
Contracts
 ?
Before the change
When and how to recognize revenue

After the change

IAS 18 Revenue
IAS 11 Construction Contracts IASB FASB
IFRIC 13 Customer Loyalty Programmes IFRS setter US GAAP setter

IFRIC 15 Agreements for the Construction

IFRS 15
of Real Estate
Revenue from
IFRIC 18 Transfers of Assets from Customers
Contracts with
SIC-31 Revenue – Barter Transactions Customers
Involving Advertising Services
PFRS 15: Revenue from Contracts with Customers
 PFRS 15: REVENUE RECOGNITION
5- Step Process Other Revenue Recognition Issues

1. Right of return
1. Contract with customers 2. Repurchase agreements
2. Separate performance obligations 3. Bill-and-hold arrangements
3. Determining the transaction price 4. Principal-agent relationships
4. Allocating the transacton price 5. Consignments
5. Satisfying the performance 6. Warranties
obligations 7. Non-refundable upfront fees

PFRS 15: Revenue from Contracts with Customers

 PFRS 15: REVENUE FROM
CONTRACTS WITH CUSTOMERS
introduces
5-Step Model for Revenue Recognition
Step 1
Step 2 Step 3 Step 4 Step 5
Recognize
Identify the Identify the Determine the revenue when
Allocate the
contract with performance transaction (or as) the
TP to the PO entity satisfies a
customer obligation (PO) price (TP)
PO

PFRS 15: Revenue from Contracts with Customers

 Step 1
- agreement between two or more parties
Identify the creating enforceable rights + obligations
contract with
customer

 written  oral

Attributes:
 The contract has been approved.
 The rights and payment terms regarding goods and services can be identified.
 The contract has commercial substance.
 It is probable that the consideration will be received (evaluate customer's ability and
intention to pay.

PFRS 15: Revenue from Contracts with Customers

 A Contract Does NOT Exist if Both
of the Following are TRUE
1. The contract in underperformed

2. Both the seller and the buyer CAN

TERMINATE the contract without any
penalty.
 Step 1
NOTES:
Identify the  Performance of either party give rise to a contract asset of liability
contract with  If the customer pays, or an entity has a right to an amount of consideration
customer before the entity transfers a good or service to the customer, the entity
shall recognize contract liability
 If an entity performs before the customer pays consideration of before
payment is due, the entity shall recognize contract asset excluding any
amount presented as receivable.
 An entity may use alternative descriptions other than contract asset or
liability.

PFRS 15: Revenue from Contracts with Customers

 CONTRACT ASSET VS. RECEIVABLES
Contract asset Receivables

Is the entity’s right to consideration Is the entity’s right to consideration

in exchange for goods or services that is unconditional
transferred to a customer

PFRS 15: Revenue from Contracts with Customers

 Step 1
ILLUSTRATIVE PROBLEM
1:
Identify the On August 1 2023, ABC Company entered into a contract of sale with DEF .
contract with The contract is structured such that ABC must deliver the goods on
customer September 30, 2023 and DEF must pay P80,000 on October 31, 2023. The
cost of the goods transferred is P65,000

REQUIRED: Provide the necessary journal entries on:

a. August 1, 2023
b. September 30, 2023
c. October 31, 2023

PFRS 15: Revenue from Contracts with Customers

 Step 1
ILLUSTRATIVE PROBLEM
2:
Identify the On August 1 2023, ABC Company entered into a contract of sale with DEF .
contract with The contract is structured such that ABC must deliver the goods on October
customer 31, 2023, and DEF must pay P80,000 on September 30, 2023. The cost of
the goods transferred is P65,000

REQUIRED: Provide the necessary journal entries on:

a. August 1, 2023
b. September 30, 2023
c. October 31, 2023

PFRS 15: Revenue from Contracts with Customers

 Step 1
ILLUSTRATIVE PROBLEM
3:
Identify the On January 1, 2023 PICPA entered into a contract with SLU Accounting for
contract with the sale of two mirrorless camera for P50,000 each. The contract requires
customer one camera to be delivered on February 14, 2023 and states that the payment
for the delivery of the first camera is conditional on the delivery of the
second camera. The second camera is delivered on July 31, 2023 and the
payment for the two cameras was received on September 8, 2023.
REQUIRED: Provide necessary journal entries on
- January 1, 2023
-February 14, 2023
-July 31, 2023
-September 8, 2023

PFRS 15: Revenue from Contracts with Customers

 Step 1
Combination of contracts
 The contracts are negotiated as a package with a single commercial objective
Identify the  The consideration for each contract is interdependent on the other, or
contract with  The overall goods or services of the contracts represent a single performance
customer obligation.

Contract
modifications

 change in the scope, or price, or both= approved by the parties

 Accounting = based on character and price of additional goods/services

PFRS 15: Revenue from Contracts with Customers

 Two Scenarios in a Contract Modification
Modifies the existing
Creates a new Contract
contract

Conditions:
1. The scope of the contract increases An entity shall account for the existing contract
because of the addition of promised hoods modification as if it were a part of the existing
or services THAT ARE DISTINCT contract if the remaining goods or services are
2. The price of the contract increases by an not distinct
amount of consideration that reflects the
entity’s standalone selling prices of the
additional promised goods or services and
any appropriate adjustments to price
Distinct:
A good or service that is promised to customer is distinct if both
of the following criteria are met:
1. The customer can benefit from the good or service on its
own
2. The entity’s promise to transfer the good or service to the
customer is separately identifiable from the promises in the
contract
 Step 1
ILLUSTRATIVE PROBLEM
:
Identify the ABC Corporation has a contract to sell 50,000 boxes of PS5 to a customer for 10
contract with Million or P200 per box over a three-month period. After the delivery of 30,000
customer boxes, ABC modifies the contract by promising to deliver additional 10,000 boxes
for an additional P1.8 Million or P180 per box. (which is the standalone selling
price of the products at the time of contract modification. ABC regularly sells the
product separately.
REQUIRED:
• Determine the total revenue that to be recognized after the modification
• Determine the revenue that must be recognized if ABC delivers 5,000 boxes of
PS5 to satisfy the original contract
• Determine the revenue that must be recognized if ABC delivers 5,000 boxes of
PS5 to satisfy the new performance obligation
 Step 1
ILLUSTRATIVE PROBLEM
:
Identify the ABC Corporation has a contract to sell 50,000 boxes of PS5 to a customer for 10
contract with Million or P200 per box over a three-month period. After the delivery of 30,000
customer boxes, ABC modifies the contract by promising to deliver additional 10,000 boxes
for an additional P1.8 Million or P180 per box. (which is the standalone selling
price of the products at the time of contract modification. ABC regularly does not
regularly sell the product separately.
REQUIRED:
• Determine the total revenue that to be recognized after the modification
• Determine the revenue that must be recognized if ABC delivers 5,000 boxes of
PS5
 Step 2 Performance Obligation
Identify the
performance
-promise in a contract with a customer to transfer to the
obligation/s customer either:
(PO)
Series of distinct goods/services that are
Good or Service (or bundle) substantially the same and have the same
that is distinct pattern of transfer

-Single performance obligation

 PO can be explicit or implicit (not small individual PO)
PFRS 15: Revenue from Contracts with Customers
 ILLUSTRATIVE PROBLEM
:
ABC Computers licenses customer relationship software to DEF Company. In addition to
providing the software itself, ABC Computers promises to provide consulting services by
extensively customizing the software to DEF’s information technology environment, for a
total consideration of P2,880,000. In this case, ABC is providing a significant service by
integrating the goods and services (the license and the consulting service)into one combined
item for which DEF has contracted. In addition, the software is significantly customized by
ABC in accordance with specification negotiated by DEF.

How many performance obligation/s should be accounted for under the contract?
 ILLUSTRATIVE PROBLEM
:
ABC Computers manufactures and sells computers that include
a warranto to make good on any defect in its computers for 150
days. In addition, it sells separately on extended warranty,
which provides protection from defects for three years beyond
the 150 days. How many performance obligation/s are present
 Step 3
Transaction price
Determine the
transaction -amount of consideration to which an entity expects in exchange for
price (TP) transferring promised goods/services to a customer excluding the
amounts collected on behalf of third parties.

How to determine the transaction price?

Variable Existence of Non-cash Consideration payabl
consideration significant consideration @ to a customer
financing
component Fair
Value

PFRS 15: Revenue from Contracts with Customers

 Variable Consideration

2 Methods to Estimate:

Expected Value: Most Likely Amount:

Probability-weighted amount in a range The single most likely amount in a range
of possible consideration amounts. of possible consideration outcomes.

 Can be based on a limited number  May be appropriate if the contract

of discrete outcomes and has only two possible outcomes
probabilities

PFRS 15: Revenue from Contracts with Customers

ABC enters into a contract with Victory Christian Fellowship to install a music system
together with its software. On January 1, 2023, Victory pays ABC an upfront fee of P50,000
for the six months of featured access. Victory also will pay ABC a bonus of P30,000 if
Victory can use the music system anytime without experiencing technical difficulty during
the six-month period. ABC estimates a 70% chance that it will achieve the usage target and
receive the P30,000 bonus
REQUIRED:
a. How much is the expected value of the contract price at inception?
b. How much is the most likely amount of the contract price?

PFRS 15: Revenue from Contracts with Customers

 ILLUSTRATIVE PROBLEM

Peabody Constructiown Company enters into a contract with a customer to build a

warehouse for 100,000, with a performance bonus of 50,000 that will be paid based on
the timing of completion. The amount of the performance bonus decreases by 10% per
week for every week beyond the agreed date. The contract requirements are similar to
contracts that Peabody has performed previously, and management believes that such
experience is predictive for this contract.
Management estimates:
60% contract will be completed by the agreed date
30% contract will be completed 1 week late
10% contract will be completed 2 weeks late

How should Peabody account for this revenue arrangement?

PFRS 15: Revenue from Contracts with Customers

Transaction price:

Fixed Amount Variable

= 50,000 performance bonus
= 100,000 based on completion date

On time: 60% × [100,000 + (50,000 × 1.0)] 90,000

1 week late: 30% × [100,000 + (50,000 × .90)] 43,500
2 weeks late: 10% × [100,000 + (50,000 × .80)] 14,000
Expected Value 147,500

PFRS 15: Revenue from Contracts with Customers

EXISTENCE OF SIGNIFICANT
FINANCING COMPONENT
On September 1, 2023, Ivana company sold goods to Alawi company in
exchange for a 4-year non-interest bearing note with a face value
amount of P500,000. The goods have a cost on Ivana’s book of
P200,000.
REQUIRED:
1. How much is the transaction price and gross profit if the cash selling
price of the goods is P300,000?
2. How much is the transaction price and gross profit if the cash selling
price is not available? (present value factor of 1 for four period is
0.683 based on an imputed rate of 10%)
 Step 4
Allocation Objective
Allocate the -to allocate the TP to each PO in an amount that depicts
TP to the PO the amount of consideration for transferring promised
goods/services.
Based on stand-alone
How to allocate the TP? selling price

Stand-alone = the price at which the entity would sell

selling price promised good or service separately to the
customer (@ contract inception)

 Take observable selling prices

 If observable prices not available, make estimate

PFRS 15: Revenue from Contracts with Customers

 Illustrative Problem
Jose enters into a 12-month telecom plan with the local mobile operator ABC on July 1,
20x9. The terms of plan are as follows:
Jose’s monthly fixed fee is P1,200. 1,200 x 12
Jose receives a free handset at the inception of the plan.
ABC sells the same handsets for P14,000 and the same monthly prepayment plans
without handset for P500/month.

How much revenue should ABC recognize from this plan in line with PFRS 15 for
20x9?

Total Revenue
Performance Obligations Sales Price % . Revenue 20x9
Cell Phone 14,000 70% 10,080 10,080
Service 6,000 30% 4,320 2,160
Total 20,000 100% 14,400 12,240
4,320 x 6/12
Transaction price: Allocation

PFRS 15: Revenue from Contracts with Customers

 Illustrative Problem
ABC Company enters into a contract to build (including maintenance) and operates high rise
condominium for a period of 25 years. Commencing upon completion of the construction of the said
condominiums. The fixed fee to build and operate the building is P100,000,000. There is a provable
evidence that the selling price of the building and maintenance is P30,000,000 and P21,000,000
respectively but none for operating the condominium. It is determined that the transaction price must
be allocated to the three performance obligations (construction of the building, maintenance, and
operating)
REQUIRED: ALLOCATE THE TRANSACTION PRICE OF P100,000,000 TO THE THREE PERFORMANCE
OBLIGATION ASSUMING:
1. The stand alone price of operating the condominium with reference to the price of the competitors
is P31,000,000
2. ABC estimates the total cost that will be incurred to operate the condominium is P29,500,000.
Normal gross profit of ABC is 20%
3. The stand alone selling price for operating the condominium is highly variable or uncertain because
ABC hasn’t previously said the service and hasn’t yet determined a price for it.
 Step 5 Performance obligation is satisfied when a promised
good or service is transferred to a customer.
Recognize
revenue when
(or as) the
entity satisfies a
PO

How can performance obligation be satisfied?

@ the point
over time of time
PFRS 15: Revenue from Contracts with Customers
 CONTRACT COST

Cost to obtain a contract Cost to fulfill a contract

 If not within PAS 2/PAS 16/PAS 38

Capitalize if:
 Cost relate directly to contract

 Costs generate/enhance resources used in

satisfying performance obligations in the
future
Capitalized
&  Costs are expected to be recovered
Amortized
PFRS 15: Revenue from Contracts with Customers
 How to How to make a transition
implement?

Full Retrospective Modified Retrospective adoption

adoption
Restrospectively to each Retrospectively with cumulative
-mandatory prior reporting period effect at the date of initial
effectivity date application

 What does it mean for you/ your business?

 FOUR IMPORTANT INDUSTRIES THAT
WILL FACE THE BIGGEST CHALLENGES

Telecommunications Manufacturers Real Estate & Software

Property Developers development
& Techonology

PFRS 15: Revenue from Contracts with Customers

 Illustration for Telecommunications Company under PFRS 15
(Multiple performance obligation)
Globemart, Inc., a telecommunications operator, entered into a contract with
Clay Jensen on March 1, 2017. In line with the contract, Clay Jensen subscribes for
Globemart's monthly plan for 12 months and in return Clay Jensen receives a free
Apple I-phone handset from Globemart. Clay Jensen will pay a monthly fee of 1,200
and gets the handset immediately after contract signature.

Globemart sells the same handsets for 3,600 and the same monthly plans for P800
per month without handset.

How should Globemart, Inc. recognize revenues from the contract with Clay
Jensen in 2017 under PFRS 15?

PFRS 15: Telecommunications Company

 Step 1
A written contract Step 3
between Globemart,
Identify the
contract with
Inc. and Clay Jensen. Determine the
customer transaction
price (TP)

Step 2
Monthly Fee P1,200
PO no. 1: Network
Mos. of subscription 12
Identify the services monthly plan
Total transaction price P14,400
performance PO no. 2: Apple Iphone
obligation (PO) handset

PFRS 15:Telecommunications Company

 Step 4 Stand- Allocated Billing
Performance alone Transaction Revenue per
Obligation Selling price month
Allocate the price
TP to the PO
Network services P9,600 P10,473 P872.75 P1,200
Handset 3,600 3,927 3927.00 0
Total P13,200 P14,400

Step 5
PO 1: Network Services (monthly plan) - Over time, as a monthly
Recognize
revenue when network services are provided.
(or as) the
entity satisfies a PO 2: Handset - at the point of time, when handset is delivered to
PO Clay Jensen.

PFRS 15: Telecommunications Company

Journal entries:

March 1, 2017 Contract Assets 3,927

Revenues from Sale of Goods 3,927
To record the revenue from sale of the Handset

March 31, 2017 Accounts Receivable 1,200

Contract Assets(1/12*3,927) 327.25
Revenue from Network Services 872.75
To record revenue from services for the first month

Total Revenue in 2017:

Revenues from sales of goods P3,927.00
Revenues from network services 8,727.50
Total Revenues P12,654.50

PFRS 15: Telecommunications Company

 Handler Company is an established manufacturer of equipment used in the
construction industry. Handler's products range from small to large individual pieces of
automated machinery to complex systems containing numerous components. Unit selling
prices range from $600,000 to $4,000,000 and are quoted inclusive of installation and
training. The installation process does not involve changes to the features of the
equipment and does not require proprietary information about the equipment in order for
the installed equipment to perform to specifications.

PFRS 15: Revenue from Contracts with Customers

Handler has the following arrangement with Chai Company.
 Chai purchases equipment from Handler for a price of $2,000,000 and chooses Handler to
do the installation. Handler charges the same price for the equipment irrespective of
whether it does the installation or not. The installation service included in the arrangement
is estimated to have a standalone selling price of $20,000.
 The standalone selling price of the training sessions is estimated at $50,000. Other
companies can also perform these training services.
 Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the
equipment.
 Handler delivers the equipment on September 1, 2019, and completes the installation of
the equipment on November 1, 2019 (transfer of control is complete). Training related to
the equipment starts once the installation is completed and lasts for 1 year. The equipment
has a useful life of 10 years.

PFRS 15: Revenue from Contracts with Customers

Questions:

(a) What are the performance obligations for purposes of

accounting for the sale of the equipment?

(b) If there is more than one performance obligation, how

should the payment of $2,000,000 be allocated to various
components?

PFRS 15: Revenue from Contracts with Customers

PFRS 15: Revenue from Contracts with Customers
 Illustration for Software development under PFRS 15
(Splitting the contract into 2 Separate obligations)

Baker Company is a software company who entered into a contract with a client
Jessica Davis on July 1, 2017. Under the contract, Baker company obliged to:
 Provide professional services consisting of implementation, customization, and
testing of software. Jessica Davis has bought software licence from a third party.
 Provide post-implementation support for 1 year after the customized software is
delivered.

Total Contract price is P2,475,000.

• Baker Company's normal charge for the support services is 10% of the package
price.

PFRS 15: Illustration for Software development

 Illustration for Software development under PFRS 15
(Splitting the contract into 2 Separate obligations)

Step 4
This would imply that the relative split between
Allocate the customization service and post delivery service is 100:10.
TP to the PO

Software development and customization service (2,475,000/110%) P2,250,000

Post-delivery support (2,475,000/110%× 10%) 250,000

PFRS 15: Illustration for Software development

 Illustration for Software development under PFRS 15
(Splitting the contract into 2 Separate obligations)

Internal cost estimations show that Baker Company's estimated total cost for the
contract is P2,025,000.
 Software development services P1,935,000.
 Post-delivery services P90,000

On December 31, 2017, Baker company incurred the following costs of fulfilling
the contract:
 Software development services, P585,000

How should Baker Company recognize revenue from this contract under
PFRS 15?

PFRS 15: Illustration for Software development

 Illustration for Software development under PFRS 15
(Splitting the contract into 2 Separate obligations)

Step 5 Measure the progress towards completion as of December 31, 2017.

Recognize
revenue when
Software development (585,000/1,935,000) 30%
(or as) the Post-delivery services (0/90,000) 0%
entity satisfies a
PO

Cost Allocated Revenue

Estimated Progress to transaction recognized in
Performance obligation incurred
total cost completion price 2017
to date
Software developmet P1,935,000 P585,000 30% P2,250,000 675,000
Post-delivery support 90,000 0 0% 225,000 0
Total P2,025,000 P585,000 n/a P2,475,000 P675,000

PFRS 15: Illustration for Software development

 PFRS 15: REVENUE RECOGNITION
5- Step Process Other Revenue Recognition Issues

1. Right of return
1. Contract with customers 2. Repurchase agreements
2. Separate performance obligations 3. Bill-and-hold arrangements
3. Determining the transaction price 4. Principal-agent relationships
4. Allocating the transacton price 5. Consignments
5. Satisfying the performance 6. Warranties
obligations 7. Non-refundable upfront fees

PFRS 15: Revenue from Contracts with Customers

Thank you for listening...