CHAPTER 3: REVENUE FROM CONTRACTS WITH CUSTOMER

PFRS 15 – Revenue from Contracts with Customers

 Provides the principle in reporting the nature, amount, timing, and uncertainty of revenue and cash
flows arising from an entity’s contracts with customers.
 Applies to contracts wherein the counterparty is a customer.
 A counterparty to a contract is not a customer if he agrees to participate in the entity’s
activities wherein he shares the related risks and benefits rather than to obtain the output of
the entity’s ordinary activities.
 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.
 Applies to individual contracts with customers and may also be applied to a group of similar
contracts provided, the effects on the financial statements would not differ materially when PFRS
15 is applied separately to each of the contracts within that group.

PFRS 15 does not apply to:

1. Lease contracts
2. Insurance contracts
3. Financial instruments
4. Non-monetary exchanges between entities in the same line of business to facilitate sales to
customers.

Revenue Recognition
Step 1: Identify the contract with the customer
 A contract with a customer is accounted for only when all of the following criteria are met:
a) The contracting parties have approved the contract (in writing, orally, or implied from
customary business practices) and are committed to perform their respective obligations
b) The entity can identify each party’s rights regarding the goods or services to be transferred
c) The entity can identify the payment terms for the goods or services to be transferred
d) The contract has commercial substance (cash flows is expected to change as a result of the
contract)
e) The consideration in the contract is probable of collection. Customer’s ability and intention to
pay the consideration on due date.
 A contract does not exist if each contracting party has the unilateral enforceable right to terminate
a wholly unperformed (no transfer or promised goods and has not yet received any consideration)
contract without compensating the other party.

 No revenue is recognized on a contract that does not meet the criteria above. Any consideration
received from such contract is recognized as a liability and recognized as a revenue only when
either of the following has occurred:
o The entity has no remaining obligation to transfer goods or services to the customer and
all of the consideration has been received and is non-refundable; or
o The contract has been terminated and the consideration received is non-refundable.

 The entity need not reassess the criteria above if they have been met on contract inception
unless there is an indication of a significant change in facts and circumstances. If the criteria are
not met on contract inception, the entity shall continue to assess the contract to determine if
the criteria are subsequently met.

 Combination of Contracts - Two or more contracts entered into at or near the same time with the
same customer are combined and accounted for as a single contract if:
1) The contracts are negotiated as a package with a single commercial objective
2) The amount of consideration to be paid in one contract depends on the price or
performance of the other contract
3) Some or all of the goods or services promised in the contracts are a single performance
obligation
Step 2: Identify the performance obligations in the contract
 A contract includes promises to transfer goods or services to the customer. Each promise to
transfer the following is a performance obligation to be accounted for separately.
 A distinct good or service (or distinct bundle)
 A series of distinct goods or services that are substantially same and have the same pattern of
transfer to the customer

 A promised good or service is distinct if:

a) The customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer.
b) The promise to transfer the good or service is separately identifiable from other promises
in the contract.

 Separately Identifiable
a) If it is not an input to a combined output specified by the customer.
b) Does not significantly modify another good or service promised in the contract.
c) Is not highly interrelated with other goods or services promised in the contract.

 A promised good or service that is not distinct is combined with other promised goods or
services until a bundle of goods or services that is distinct is identified. This may result to
treating all the promised goods or services in a contract as a single performance obligation.

 Performance obligations include only activities that involve the transfer of a good or service to a
customer. Performance obligations do not include administrative tasks to set up a contract.
 A promise that is implied by the entity’s customary business practices, published policies or
specific statements is also treated as a performance obligation if, at contract inception, the
promise creates a valid expectation of the customer that the entity will satisfy the implied
promise.

Step 3: Determine the transaction price

 The entity determines the transaction price because this is the amount at which revenue will be
measured.
 Excluding amounts collected on behalf of third parties (taxes).
 May include fixed amounts, variable amounts, or both.

Step 4: Allocate the transaction price to the performance obligations in the contract
 The transaction price is 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.
 Stand-alone selling price is the price at which a promised good or service can be sold
separately to a customer

 A list price or a contract price may be (but is not presumed to be) the stand-alone selling price of
a good or service.

 If the stand-alone selling price is not directly determinable, it shall be estimated using the
following methods:
*combination of methods may be used if two or more goods or services have highly variable
or uncertain stand-alone selling prices.
a) Adjusted Market Assessment Approach – the entity evaluates the market where the
goods or services are sold and estimates the price that a customer would be willing
to pay for those goods or services (may refer to competitors).
b) Expected Cost Plus a Margin Approach – the entity forecasts the expected cost of
satisfying a performance obligation and the adds an appropriate margin.
c) Residual Approach – the residual amount after deducting all the stand-alone selling
prices of the other promised goods and services in the contract from the total
transaction price.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
 Recognition – Revenue is recognized when (or as) the entity satisfies a performance obligation.
 Measurement – Revenue is measured at the amount of the transaction price allocated to the
satisfied performance obligation.
 A performance obligation is satisfied when the control over a promised good or service is
transferred to the customer. Control is the ability to direct the use of, and obtain
substantially all of the economic benefits from an asset.

 The entity determines at the contract inception whether a performance obligation will be satisfied
either:
1) Over time
 Revenue from a performance obligation that is satisfied over time is recognized over time
as the entity progresses towards the complete satisfaction of the obligation.
 A performance obligation is satisfied over time if one of the following criteria is
met:
a) The customer simultaneously receives and consumes the benefits provided
by the entity’s performance as the entity performs.
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.

 If the outcome of a performance obligation cannot be reasonably measured but

the entity expects to recover the costs incurred in satisfying the performance
obligation, revenue is recognized only to the extent of the costs incurred until such
time that the outcome of the performance obligation can be reasonably measured.

 An entity recognizes revenue for each performance obligation satisfied over time by
measuring the progress towards the complete satisfaction of the performance obligation.
 The measure of progress is updated as circumstances change over time to reflect
changes in the outcome of the performance obligation (PAS 8 applies).
 The entity uses a single method of measuring progress for each performance
obligation satisfied over time and applies that method to re-measure its progress
at the end of each reporting period. Methods of measuring progress include:

a) Output Methods – progress is measured based on direct measurements of

the value of goods or services transferred to date relative to the remaining
goods or services promised under the contract.
 Billings to the customer may be recognized as revenue if the entity has
the right to that amount and that amount corresponds directly with the
value of performance completed.
 Disadvantages: outputs used to measure progress may not directly
observable and the information required to apply them may be costly.

b) Input Methods – progress is measured based on efforts or inputs expended

relative to the total expected inputs needed to fully satisfy a performance
obligation.
 Disadvantages: there may not be a direct relationship between an
entity’s inputs and the transfer of control of an asset to a customer. The
entity may need to adjust the inputs used in the measurement.

2) At a point in time
 Revenue from a performance obligation that is satisfied at a point in time is recognized
when the performance obligation is satisfied.

 Revenue is recognized when the entity completely satisfies the performance obligation.
  Indicators of transfer of control when determining the point in time that the goods
or service is transferred to the customer:
a) The entity has a present right to payment for the asset
b) The customer has legal title to the asset (not required if the legal title is
retained for collectability purposes. Revenue may still be recognized by the
entity).
c) The entity has transferred physical possession of the asset (physical
possession may not coincide with control of an asset if it is subject to
repurchase agreement or consignment agreement; in build-and-hold
agreement control may be transferred event though the entity retains
physical possession of the asset).
d) The customer has the significant risks and rewards of ownership of the asset.
e) The customer accepted the asset.

Contract Costs
1. Incremental Costs of Obtaining a Contract
 Costs incurred in obtaining a contract with a customer that the entity would not have
incurred had the contract not been obtained.
 These costs are recognized as asset if they are expected to be recovered. However,
as a practical expedient, they are expensed when incurred if the expected
amortization period of the asset is one year or less.
 Costs that would have been incurred regardless whether the contract is obtained are
expensed, unless they are explicitly chargeable to the customer.

2. Costs to Fulfill a Contract

 Not in PAS 15.
 Costs incurred in fulfilling a contract that are outside the scope of other standards are
recognized as asset if all of the following criteria are met:
a) Costs are directly related to a contract or specifically identifiable anticipated
contract. Costs that relate directly to a contract are:
o Direct Labor (to the contract)
o Direct Materials (to the contract)
o Allocations of costs that relate directly to the contract
o Costs that are explicitly chargeable to the customer under the contract
o Other costs that are incurred only because an entity entered into the
contract.
b) The costs generate or enhance resources that will be used in satisfying performance
obligation in the future.
c) The costs are expected to be recovered.

3. Costs that are Expensed when Incurred

 General and administrative costs (unless chargeable to the customer).
 Costs of wasted materials, labor, or other resources to fulfill the contract that were not
reflected in the price of the contract.
 Costs that relate to satisfied or partially satisfied performance obligations in the contract.
 Costs for which an entity cannot distinguish whether the costs relate to unsatisfied
performance obligations or to satisfied or partially satisfied performance obligations.

4. Amortization and Impairment

 Amortization is updated for any significant change in the expected timing of transfer of the
related goods or services to the customer. Under PAS 8.
 Impairment loss is recognized in profit or loss as follows:
1. Recognize impairment loss in accordance with its corresponding standard.
2. Recognize impairment loss in accordance with PFRS 15 which is the excess of the
asset’s carrying amount over:
 The remaining amount of consideration that the entity expects to receive
in exchange for the goods or services to which the asset relates; LESS
  The costs that relate directly to providing those goods or services and that
have not been recognized as expenses.
3. The resulting carrying amount after #2 is included in the cash-generating unit to
which the asset belongs for the purpose of applying PAS 36 Impairment of Assets.

 A subsequent reversal of impairment is recognized in profit or loss. However, the reversal

should not result to an increase in the asset’s carrying amount in excess of the amount that
would have been determined (net amortization) if no impairment loss had been recognized
previously.

Presentation
 A contract is presented in the statement of financial position as a contract liability or a contract
asset when one of the contracting parties has performed.
1) Contract Liability
 An entity’s obligation to transfer goods or services to a customer for which the entity
has received consideration from the customer
 A contract liability is recognized at an earlier date:
a) The entity receives consideration before the good or services is transferred
to the customer (advance payment).
b) The entity has an unconditional right to the consideration before the good
or service is transferred to the customer (non-cancellable contract requires
payment in advance).

2) Contract Asset
 An entity’s right to consideration in exchange for goods or services that the entity has
transferred to a customer when that right is conditional on something other than the
passage of time.
 A contract asset (excluding receivables) is recognized when the good or service is
transferred to the customer before the consideration is received or becomes
due.
 A contract asset is measured, assessed for impairment, presented, and disclosed
through PFRS 9.

 PFRS 15 does not prohibit the use of alternative terms for contract asset and contract
liability so long as sufficient information is provided to enable users of the financial
statements to distinguish between receivables and contract assets.

Scenario Accounting
Consideration is received or becomes due
before goods or services are transferred to the  Recognized as contract liability
customer.
Goods or services are transferred to the
customer before consideration received:
a. Right to consideration is conditional.  Recognized as contract asset
b. Right to consideration is unconditional.  Recognized as receivable

Customers’ Unexercised Rights

 Breakage
 Results from non-refundable prepayment and is recognized as revenue in proportion to the
pattern of rights exercised by the customer when the entity expects that it will be entitled to
the breakage or when the likelihood of the customer exercising its remaining rights becomes
remote.
Additional Concepts Related to Step 2
1. Warranties
2. Principal vs Agent Considerations
3. Consignment Agreements
4. Customer Options for Additional Goods or Services
5. Customer Loyalty Programs
6. Non-Refundable Upfront Fees

Additional Concepts Related to Step 3

1. Variable Consideration
2. Discounts
3. Sale with a Right of Return
4. Existence of a Significant Financing Component in the Contract
5. Non-Cash Consideration
6. Consideration Payable to a Customer

Additional Concepts Related to Step 5

1. Bill-and Hold Agreements
2. Lay-Away Sale
3. Repurchase Agreements
4. Contract Modifications
5. Changes in Transaction Price