Accounting

• Revenue from Contracts with Customers

  PFRS 15
• Learning Objectives

  • State the five steps in the recognition of revenue
  • Describe how performance obligations are identified in a contract
  • Describe how the transaction price is determined and how it is allocated to the performance obligations
  • State the timing of revenue recognition and its measurement
  • State the presentation of contracts with customers in the statement of financial position
• 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 increases in equity, other than those relating to contributions from equity participants. Income encompasses both revenue and gains.
• Revenue


  Income arising in the course of an entity's ordinary activities.
• Applicability of PFRS 15

  PFRS 15 shall be applied to contracts wherein the counterparty is a customer. Contract - An agreement between two or more parties that creates enforceable rights and obligations. 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.
• PFRS 15 shall not be applied to

  • Lease contracts (PAS 17 Leases)
  • Insurance contracts (PFRS 4 Insurance Contracts)
  • Financial instruments
  • Non-monetary exchanges between entities in the same line of business to facilitate sales to customers
• Core principle

  An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
• Steps in the recognition of revenue

  • Step 1: Identify the contract with the customer
  • Step 2: Identify the performance obligations in the contract
  • Step 3: Determine the transaction price
  • Step 4: Allocate the transaction price to the performance obligations in the contract
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
• Step 1: Identify the contract with the customer


  • The contract must be approved and the contracting parties are committed to it
  • Party's rights are identifiable
  • The payment terms are identifiable
  • The contract has commercial substance
  • The consideration is probable of collection
• If the contract does not meet the criteria above


  No revenue is recognized and any consideration received is recognized as liability
• Step 2: Identify the performance obligations in the contract


  • Performance of either party may give rise to a contract asset or contract liability
  • If a customer pays, or an entity has a right to an amount of consideration before the entity transfers a good or service to the customer, the entity shall recognize a contract liability
  • If an entity performs before the customer pays consideration, before the payment is due, the entity shall recognize a contract asset
  • Entity may use alternative descriptions other than contract asset or liability
• August 1, 2023 - Easter Co. enters into a contract of sale with Egg Co.

  • September 30, 2023 - Easter Co. delivers the goods, recognizes Contract Assets/Accounts Receivable and Sales
  • October 31, 2023 - Egg Co. pays, Easter Co. recognizes Cash and reduces Contract Assets/Accounts Receivable
• August 1, 2023 - Easter Co. enters into a contract of sale with Egg Co.

  • September 30, 2023 - Egg Co. pays, Easter Co. recognizes Cash and Contract Liability/Unearned Income
  • October 31, 2023 - Easter Co. delivers the goods, recognizes Sales and reduces Contract Liability/Unearned Income
• Step 2: Identify the performance obligations in the contract


  Each promise in a contract to transfer a distinct good or service is treated as a separate performance obligation
• Identifying distinct goods or services

  • A good or service is distinct if: (a) the customer can benefit from it, either on its own or together with other resources that are readily available to the customer (b) the good or service is separately identifiable
  • A good or service that is not distinct shall be combined with the other promises in the contract. Combined promises are treated as a single performance obligation.
• Maintenance service is an explicit performance obligation if it is promised in the contract
• Maintenance service is an implicit performance obligation if it is not promised in the contract but the entity's customary business practices, published policies and specific statements have created an implicit promise to provide the service
• Maintenance service is not a performance obligation if it is not promised in the contract and the entity's customary business practices, published policies and specific statements have not created an implicit promise to provide the service
• Step 3: Determine the transaction price


  The transaction price is 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 (e.g., some sales taxes). The consideration may include fixed amounts, variable amounts, or both.
• Step 4: Allocate the transaction price to the performance obligations


  • The transaction price shall be allocated to each performance obligation identified in a contract based on the relative stand-alone prices of the distinct goods or services promised to be transferred.
  • The stand-alone selling price is the price at which a promised good or service can be sold separately to a customer.
• Estimating the stand-alone selling price


  • Adjusted market assessment approach
  • Expected cost plus a margin approach
  • Residual approach
• Allocating transaction price to performance obligations

  • If the entity regularly sells Product A, B and C separately at P20, P40 and P60, the transaction price of P100 is allocated based on the relative stand-alone prices.
  • If the stand-alone price of Product B and C are not directly observable, the entity can estimate them using the adjusted market assessment approach or expected cost plus a margin approach.
  • If Product C is highly customized with no available past information on the separate selling price, the entity can use the residual approach to estimate the stand-alone price.
• Allocate the transaction price to the performance obligations

  1. Requirement

  2. Problem

  3. Compute for the total discount granted to the customer

  4. Allocate the transaction price to the performance obligations
• Performance obligation


  A performance obligation is satisfied when the control over a promised good or service is transferred to the customer
• Performance obligations


  • Performance obligation that is satisfied over time
  • Performance obligation that is satisfied at a point in time
• Measuring progress towards complete satisfaction of a performance obligation


  1. Output methods (e.g., surveys of work performed)

  2. Input methods (e.g., relationship between costs incurred to date and total expected costs)

  3. Straight-line basis if efforts or inputs are expended evenly throughout the performance period
• Cost-recovery approach


  If the outcome of a performance obligation cannot be reasonably measured, revenue shall be recognized only to the extent of costs incurred that are expected to be recovered
• Recognize revenue when (or as) the entity satisfies a performance obligation

  Revenue is measured at the amount of the transaction price allocated to the satisfied performance obligation
• Performance obligations satisfied over time: The customer simultaneously receives and consumes the benefits, the entity's performance creates or enhances an asset the customer controls, or the entity's performance does not create an asset with an alternative use and the entity has an enforceable right to payment
• Performance obligations satisfied at a point in time: A performance obligation that is not satisfied over time is presumed to be satisfied at a point in time
• Contract costs

  • Incremental costs of obtaining a contract - recognized as asset if recoverable and avoidable
  • Costs to fulfill a contract - recognized as asset if directly related, generate/enhance resources, and recoverable
• Determine the total year-end carrying amount of the assets recognized from the contract


  Requirement
• Determine the total expense recognized in 2021

  Requirement
• Contract liability


  Entity's obligation to transfer goods or services to a customer for which the entity has received consideration
• Contract asset


  Entity's right to consideration in exchange for goods/services transferred to a customer when conditioned on something other than passage of time
• Receivable

  Entity's right to consideration that is unconditional
• Provide the journal entries

  Requirement
• Warranty that provides customer service in addition to assurance is a performance obligation, but warranty required by law is not
• An option granted to a customer to acquire additional goods/services is a performance obligation if it gives the customer a material right
• Non-refundable upfront fee is a performance obligation only if it relates to transfer of goods/services, not administrative tasks