IFRS/PFRS 15 – Revenue from Contracts with Obligation to transfer distinct goods or services in the

Customers series to customer.

It establishes FIVE STEP MODEL that will apply to ** A performance obligation is a promise in a
revenue earned from a contract with a customer contract with a customer to transfer a good or service to
regardless of type of revenue transaction or industry. the customer.
3. DETERMINE THE TRANSACTION PRICE
Objective of revenue recognition under IFRS 15 Amounts collected on behalf of third parties (such as
-Recognize revenue to depict the transfer of goods or sales tax or VAT) are excluded.
services to customers in amount that reflects the  Considers past customary business practices
consideration that the company receives, or expects to  The transaction price is the amount of
receive, in exchange for these goods or services. consideration (for example, payment) to which an entity
expects to be entitled in exchange for transferring
Five Step Model Framework (COPAR) promised goods or services to o customer, excluding
1. Identify Contracts with the Customer amounts collected on behalf of third parties.
2. Identifying Performance Obligation  The transaction price (TP) includes:
3. Determine Transaction Price (TP)  An estimate of any variable
4. Allocate Transaction Price consideration using either the: (Better predicts
5. Recognize Revenue when (or as) the entity satisfies Entity’s Entitlement)
performance obligation a. PROBABILITY WEIGHTED EXPECTED
VALUE
1. INDENTIFYING THE CONTRACTS WITH CUSTOMER b. MOST LIKELY AMOUNT
Conditions:  The effect of the time value of money
 Approved Contract by parties if there is financing components in contract.
 Rights of each party in goods or services can be  The Fair Value or any Non-cash
identified consideration
 Terms of payment in goods or services can be For Variable Consideration:
identified  Contract has commercial substance EXPECTED VALUE MOST LIKELY AMOUNT
 Probable collection of the consideration to which Consider the sum of Only consider the single
entity is entitled to in exchange of goods or services. probability weighted most likely amount from
NOTE: If not yet met all – Re-assess the contract; If met amounts for the range of the range of possible
all – the contract is within the scope of PFRS 15 possible outcome consideration amounts
This is appropriate It is appropriate to use
2. IDENTIFYING PERFORMANCE OBLIGATION estimate if the entity has this estimate if the
large number of contract contract has only few
A. Goods and Services are distinct: (SEPARATE
with similar characteristic possible outcome
PERFORMANCE)
4. ALLOCATE THE TRANSACTION PRICE TO
 The customer can benefit from the goods or
PERFORMANCE OBLIGATION (PO)
services on its own
 For a contract that has more than one
 The entity’s promise to transfer goods or
performance obligation, an entity should allocate the
services can be SEPARATELY identifiable from other
transaction price to each performance obligation in on
promise to the customers.
amount that depicts the amount of consideration to
B. A series of distinct goods or services that is
which the entity expects to be entitled in exchange for
transferred to the customer in the SAME pattern of
satisfying each performance obligation.
transfer to a customer: (SINGLE PERFORMANCE)
 The total transaction price should be allocated
 Each distinct goods or services in series is
to each or separate performance obligation in
consecutively transferred to a customer would be a
proportion to stand-alone selling price of the goods or
Performance Obligation (PO) satisfied OVER TIME
services.
 A single method of measuring progress would
 Applicable when contract has multiple PO
be used towards complete satisfaction of Performance
The allocation bases:
1. Relative stand-alone selling price
 2. If relative stand-alone price is NOT B. AT POINT IN TIME
OBSERVABLE, entity must estimate using: Revenue is recognized when control is passed at the
 ADJUSTED MARKET ASSESSMENT APPROACH point in time. It includes but not limited to:
(MV-Approach) determine how goods or services will  The entity has the present right to payment
be sold and estimate the price those customers are for asset
willing to pay.  The customer has:
 EXPECTED COST PLUS MARGIN APPROACH i. Physical possession of asset
(Cost-Plus Approach) – project the estimated costs of ii. Accepted the asset
satisfying a performance obligation and add a normal iii. Legal title to asset
profit. iv. Significant risk and reward related to
 RESIDUAL APPROACH (Only in limited ownership of asset
instance) - The seller estimates an unknown (or highly Statement of Financial Position Presentation:
uncertain) stand-alone selling price by subtracting the • A contract asset or contract liability should be
sum of the known or estimated stand-alone selling presented in the statement of financial position when
prices from the total transaction price. The residual either party has performed in a contract.
approach is allowed only if the stand-alone selling price • Contract asset =Rights received >
is highly uncertain, either because: a. the seller hasn’t Performance obligation
previously sold the good or service and hasn’t yet Contract liability =Rights received <
determined a price for it, or b. the seller provides the Performance obligation
same good or service to different customers at PFRS (IFRS) 15 is not prescriptive about the treatment
substantially different prices. of contract assets/liabilities.
How to determine the passage of control to customer?
5. RECOGNIZE REVENUE AS THE ENTITY SATISFIES
PERFORMANCE OBLIGATION
 REVENUE is recognized as CONTROL is passed
either:
I. Over Time
II. 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. Illustrative Problem: On January 10, 2018, XYZ Company
A. OVER TIME enters into a contract to deliver product A and B to Mr.
The following are criteria’s of recognizing revenue OVER David for P200,000. The contract requires that product
TIME: A to be delivered first and states that payment for the
 The customer simultaneously RECEIVES and delivery of product A is conditional on the delivery of
CONSUMES all the benefits provided by the entity. product B. the relative stand-alone selling price of
 The entity CREATES or ENHANCES the value of products A and B are P40,000 and P60,000 respectively.
asset controlled by the customer. The consideration of P200,000 is due only after the
 The performance obligation does not create entity has transferred both products A and B.
an asset with alternative use to the entity and the entity Requirements: Apply the five step model provided by
has an ENFORCEABLE RIGHT to payment for the PFRS 15
performance completed to date. 1. Identifying contracts with the customer: In this case,
NOTE: ONE criterion met is sufficient to recognize all the criteria in determining the existing contract with
revenue Over Time. However, if none of the above the customer are present such as the following:
criteria is present in the problem, recognize the revenue  Approved contract by parties: [Contract to
AT POINT IN TIME deliver or sale of products A and B]
  Rights of each party in goods or services can Supplemental questions:
be identified: [Mr. David has rights to receive products A 1. Based on the above situation, what is the entry in the
and B] books of X?
 Terms of payment of goods or services can be Contract Asset 80,000
identified: [Payment in full due only after XYZ Revenue 80,000
transferred both products A and B] The entity recognizes revenue as when CONTROL of the
 Contract has Commercial Substance: [It has product transfers to the customer. In this case, Product
commercial substance because the delivery by XYZ A has been delivered to Mr. David and such act gives to
Company of products A and B results in the payment of the recognition of revenue. However, right to collect
the contract price by Mr. David] payment of Product A depends on the delivery of
 Probable collection of the consideration to product B. hence, this conditional right to consideration
which entity is entitled to in exchange of goods or results to setting up of contract asset account instead of
services: [Yes, there is probability of collection of receivable account.
consideration which is after delivery of both product(s) 2. What is the entry in the books of XYZ upon
A and B] performance of the obligation to deliver Product B and
2. Identifying Performance Obligation: to recognize unconditional right to consideration?
The promise to deliver products A and B by XYZ Receivable 200,000
as performance obligations. There is series of Contract Asset 80,000
performance obligation in this case and the Revenue 120,000
performance of one is dependent on the other. Hence,
there are two performance obligation such as delivery EXAMPLE
or transfer of products A and delivery of product B Globemart, Inc., a telecommunications operator,
3. Determine Transaction Price: entered into a contract with Kim Dorothy on March 1,
The transaction price of P200,000 is clearly 20x7. In line with the contract, Kim Dorothy subscribes
determinable in this case. The said contract price shall for Globemart's monthly plan for 12 months and in
be allocated in the next step using relative stand alone return Kim Dorothy receives a free Apple I-Phone
prices. handset from Globemart. Kim Dorothy will pay a
4. Allocate Transaction Price: monthly fee of P1,200. Kim Dorothy gets the handset
The transaction price of P200,000 shall be immediately after contract signature. Globemart sells
allocated based on the relative stand alone price of A the same handsets for P3,600 and the same monthly
and B. thus, the following allocation: plans for P800 per month without handset.
1. Determine the transaction price – the total
transaction price? a. P3,600 c. P13,200 b. P9,600 d.
P14,400

2. Allocate the transaction price to the performance

obligations: the allocated transaction price to each
5. Recognize revenue when (or as) the entity satisfies performance obligations?
performance obligation: a. None, since there is no contract
The revenue is to recognized At Point in Time. b. P9,600 network service and P3,600 for Apple I-Phone
Since the customer, Mr. David, has physical possession Handset
of assets due to acceptance of assets delivered and that c. P0 for network service and P13,200 for Apple I-Phone
XYZ has the present right to payment for the delivery of Handset
assets, there is passing of control at point in time. d. P10,473 network service and P3,927 for Apple I-
Hence, revenue shall be recognized. Phone Handset
 • Credited for the sales by the
consignee.
REVENUE RECOGNITION: CONSIGNMENT SALES • Debited when remittance is made by
the consignor.
A consignment constitutes the transfer of possession of
merchandise without the transfer of title from the Costs and expenses for consignment transactions
owner, called the consignor, to another person, called 1. The following items are to be allocated
the consignee. The consignee acts as an agent in behalf between sold and unsold items:
of the consignor for the purpose of selling the goods for (a) Freight cost paid by the consignor
a commission. upon shipment
The shipment of goods to the consignee is not treated (b) Freight and cartages paid by the
as a sale. Although a transfer of goods has taken place, consignee upon receipt of the shipment
it is not the intent of either the consignor or the (c) Insurance freight of consigned goods
consignee that sale and purchase transactions takes (d) Packaging costs of consigned goods
place. Title of the goods remains with the consignor, and (e) Costs and fees such as repairs,
recognition of the sale is deferred until goods are installations of devices paid by the consignor
transferred to a third party by the consignee. and/or consignor related to the consigned
Main Features of Consignment goods.
1. The consigned goods remain the inventory of 2. The following items are charged to the sold
the consignor. units:
2. All expenses incurred by the consignee on the (a) Commissions
consigned goods are reimbursable by the consignor. (b) Delivery and installation
3. The consignee is expected to take reasonable (c) Advertising
care of the consigned goods. (d) Reconditioning on delivered units to
4. The consignee is not liable to pay the customers
consignor until the goods are sold to a third party (e) Insurance in transit to customers
Accounting for Consignment (f) Expenses related to returned units
1. Consignor accounting delivered
Inventory on consignment account is debited Note:
for: 1. Amount assigned to unsold units represents the cost
• Cost of goods shipped on of inventory in the hands of the consignee.
consignment. 2. Amount assigned to sold units represents the cost
• Expenses related to consignment and expenses deductible from sales price to arrive at
incurred by the consignor. the net income.
• Reimbursable expenses related to the 3. Freight paid by the consignee representing delivery
consignment paid by the consignee. charges for goods delivered to customers is treated as
Inventory on consignment account is credited selling cost, while freight on total shipment represents
for: an inventoriable cost to be apportioned to the units
• Cost of goods returned by the sold and unsold.
consignee. 4. Freight paid for goods returned to consignor is
• Cost of consignment sales and treated as expenses.
expenses relating to consignment.
2. Consignee accounting METHODS OF ACCOUNTING FOR THE CONSIGNMENT
Consignor receivable account is: PROFIT BY THE CONSIGNOR
• Debited for expenses paid by the - In accounting for consignment sales, the
consignee but chargeable to the consignor. consignor may select an accounting process that
• Credited when remittance is made to will measure consignment profits in one of two
the consignor. ways: (a) profits merged together for all
Consignor payable account is: consignees or (b) profits determined for each
 consignee. The accounting plan and the chart of c. P 42,180 d. P 41,625
accounts will be based on the alternative
systems adopted.

Example:
LASSEDE COMPANY consigned 400 dresses to Anne
Fashions at a suggested retail price of P300 each. Fashionable Enterprises consigned 15 dozens of fine
LASSEDE paid freight charges of P1,200 on the shipment men’s suits with a cost of P800 a suit to Wonder Treats
on consignment. Anne paid delivery charges of P1,260 Company. Fashionable incurred freight cost of P35 per
for units sold, subject to subsequent settlement. dozen. As required by the agreement, Wonder Treats
LASSEDE and Anne agreed that any sales in excess of the reported sales of 8 dozens at P1,200 a suit and
suggested retail price will accrue to the latter. Anne reimbursable expenses of P2,500. Wonder Treats
submitted an account sales on the sale of 215 dresses, remitted the proceeds to Fashionable, net of the agreed
40% of which was sold at P348 each and the rest at 15% commissions on sale.
P384 each, All these sales were paid in cash. LASSEDE’s 7. How much cash was remitted by Wonder Treats to
cost is P225 each dress, before any deferred costs are Fashionable Enterprises?
taken into account. 1. How much should Anne remit to a. P139, 800 b. P142,500
LASSEDE for the aforementioned sales to customer? c. P 95,420 d. P142,800
a. P 63,240 b. P 78,204 8. How much was the consignment profit to Fashionable
c. P 64,500 d. P 79,464 Enterprises?
Sales (215x300) 64,500 a. P 55, 590 b. P 58,590
Delivery Exp. (1,260)
Remittance 63,240 c. P 18,430 d. P 18,340
2. The journal entry to be recorded by Anne for the 9. How much is the Inventory of consigned goods after
remittance to Lassede, assuming profits are separately the above mentioned sales?
determined and Anne uses the Consignment-In, will a. P 67, 445 b. P 67,544
NOT include c. P 67,545 d. P 65,744
a. a debit to Consignment-In of P64,500
b. a credit to commissions revenue of P14,964
c. a credit to cash of P63,240
d. a credit to Consignment-In of P1,260
3. How much is the commission earned by Anne from
sales of the consigned goods?
a. 7,942 b. 29,880
c. P14,964 d. P49,536
4. The cost of consigned goods to Lassede for the units
sold by Anne to customers was
a. P 49,020 b. P 60,392
c. P 52,260 d. P 63,902
5. The cost of the unsold 185 dresses still held by Anne
is shown at what amount in Anne’s Consignment-In
account?
a. P41,625 b. P49,020
c. P 42,180 d. P 0
6. The balance of the Consignment-Out account in the
books of Lassede after adjustment for recognized profit
will be
a. P0 b. P49,020
 (b) The existence of a significant financing component
in the contract
• Practical expedient: no requirement to reflect time
value of money if the period between customer
payment and the transfer of goods or services is one
year or less.
LONG TERM CONSTRUCTION CONTRACTS
SCOPE & RECOGNITION
IFRS 15 applies to construction contracts only if the
counterparty to the contract is a customer. [IFRS 9.6]
A ‘contract’ is an agreement between two or more
parties that creates enforceable rights and obligations. Construction contract – is a contract specifically
Contracts can be written, oral or implied by an entity’s negotiated for the construction of an asset or a
customary business practices. combination of assets that are closely interrelated or
A ‘customer’ is a party that has contracted with an interdependent in terms of their design, technology and
entity to obtain goods or services that are an output of function or their ultimate purpose or use.
the entity’s ordinary activities in exchange for It includes:
consideration. 1. Contracts for the rendering of services that
MEASUREMENT are directly related to the construction of an asset.
When (or as) a performance obligation is satisfied, an 2. Contracts for the destruction or restoration of
entity shall recognise as revenue the amount of the assets, and the restoration of the environment following
‘transaction price’ that is allocated to that performance the demolition of assets.
obligation. Types of Construction Contract
The ‘transaction price’ is the amount of consideration 1. Fixed price contract – a construction contract
to which an entity expects to be entitled in exchange for in which the contractor agrees to a fixed contract price
transferring promised goods or services to a customer, or a fixed rate per unit of output, which in some cases is
excluding amounts collected on behalf of third . subject to cost escalation clauses.
The consideration promised in a contract with a 2. Cost plus contract – a construction contract
customer may include fixed amounts, variable amounts, in which the contractor is reimbursed for allowable or
or both. defined costs, plus a fee.
The nature, timing and amount of consideration 2 Types of cost-plus contracts:
promised by a customer affect the estimate of the a. Cost-plus-variable-fee contract – the
transaction price. When determining the transaction contractor is reimbursed for the costs plus a
price, an entity shall consider the effects of the percentage of those costs. The contract price is
following: the sum of the costs and the variable fee.
(a) Variable consideration b. Cost-plus-fixed-fee contract – the
• Examples of variable consideration: discounts, contractor is reimbursed for the costs plus a
rebates, refunds, credits, price concessions, incentives, fixed amount. The contract price is the sum of
performance bonuses, penalties, rights of return and the costs and the fixed fee.
consideration contingent on the occurrence or non- Cost-plus pricing is used in cases where it is
occurrence of a future event. difficult for the contractor to quote the contract price
• An entity can only include variable consideration in because either:
the transaction price to the extent that it is highly  It is not possible to accurately estimate the
probable that a subsequent change in the estimated scope of the project
variable consideration will not result in a significant  There have been no precedent similar projects
revenue reversal; ie variable consideration is that can be used as basis for price quotation.
constrained. Construction Revenue – is the total amount of
• Variable consideration is estimated as either the consideration receivable under the contract.
expected value or the most likely amount.
In early stages of a contract, the contract revenue will  Directly related to a contract or specifically
often be an estimated of what the final amount will be, identifiable anticipated contract
as it may be dependent on the outcome of future  Generate or enhance resources that will be
events. used in satisfying performance obligations in the future
Contract revenue may alter where it is possible for the  Expected to be recovered.
contractor to make claims against the customer, or a Costs that relate directly to a contract (or a specific
third party, for costs that were not originally included in anticipated contract) include any of the following:
the contract. (a) direct labor Example: salaries and wages of
employees who provide the promised services directly to
the customer
(b) direct materials Example: supplies used in
providing the promised services to a customer
(c) allocations of costs that relate directly to the
Contract revenue comprises: contract or to contract activities Example: costs of
a. The initial amount of revenue agreed in the contract management and supervision, insurance and
contract depreciation of tools, equipment and right-of-use assets
b. The variations in contract work and claims, to used in fulfilling the contract
the extent that: (d) costs that are explicitly chargeable to the
o It is probable that they will result in customer under the contract
revenue (e) other costs that are incurred only because an
o They are capable of being reliably entity entered into the contract Example: payments to
measured subcontractors
Contract revenue is reduced by the amount of any An entity shall recognize the following costs as expenses
penalties arising from delays caused by the contractor in when incurred:
the completion of the contract. The result is that the (a) general and administrative costs (unless
construction revenue is measurable at fair value. those costs are explicitly chargeable to the customer
Construction Costs under the contract)
Contract Costs include: (b) costs of wasted materials, labor or other
a. Incremental costs of obtaining a contract resources to fulfil the contract that were not reflected in
b. Costs to fulfill a contract the price of the contract;
Incremental costs of obtaining a contract – costs (c) costs that relate to satisfied performance
incurred in obtaining a contract with a customer that obligations (or partially satisfied performance
the entity would not have incurred had the contract not obligations) in the contract (i.e., costs that relate to past
been obtained. (e.g., sales commission) performance); and
 Such costs are recognized as asset if the entity (d) costs for which an entity cannot distinguish
expects to recover them. whether the costs relate to unsatisfied performance
 Costs that would have been incurred obligations or to satisfied performance obligations (or
regardless of whether the contract was obtained are partially satisfied performance obligations).
recognized as expense, unless those costs are explicitly Any incidental income derived from the construction
chargeable to the customer regardless of whether the that is NOT included in contract revenue is accounted
contract is obtained. for as reduction of contract costs (for example, income
As a practical expedient, incremental costs of obtaining from the sale of excess/scrap materials)
a contract are recognized as expense when incurred if
the expected amortization period of the asset is one Method of Revenue Recognition in Construction
year or less. Accounting
Costs to fulfill a contract – that are outside the scope of 1. Over Time / Percentage of Completion
other standards are recognized as asset if ALL of the 2. Point in Time / Cost Recovery Method or
following criteria are met: Zero-Profit Approach
Percentage of Completion (Over Time)
- It is an application of the accrual assumption.
- This method is used when the outcome of the
construction contract can be estimated reliably,
contract revenue and contract costs associated
with the construction contract should be
recognized as revenue and expenses,
respectively, by reference the stage of
completion of the contract at the end of the
reporting period.
- This approach avoids mismatch between costs
being recognized as they are incurred, and
revenue only being recognized when the
contract is completed.

CONTRACT MODIFICATION

1. SEPARATE CONTRACT

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