REVENUE 1.

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

3.)
4.) 5.)
Long-term
Franchise Consignme
Constructio
Accounting nt Sales
n Contracts
 PFRS
15
Revenue from Contracts
with Customer
Marielle R. Castaneda
BSA-4A
 ?
Before the change
When and how to recognize revenue

After the change

IAS 18 Revenue
FAS
IAS 11 Construction Contracts IASB
IFRS setter
B
FRIC 13 Customer Loyalty Programmes US GAAP setter

FRIC 15 Agreements for the Construction

IFRS 15
of Real Estate
Revenue from
FRIC 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 from Contracts with
Customers
- applies to ALL CONTRACTS WITH except for
CUSTOMER
× Lease Contracts (PAS 17)
× Insurance Contracts (PFRS 4)
× Financial Instruments and other contractual rights/ obligations
within the scope of PAS 39/PFRS 9, PFRS 10, PFRS 11, PAS 27 & PAS
28.
× Non-monetary exchanges between entities within the same
business to
facilitate sales
PFRS 15: Revenue from Contracts with Customers
 Key Differences

PAS 18/ PAS 11 PFRS 15

Separate models for: Single model for
 Goods performance obligations:
 Services  Satisfied over time
 Construction  Satisfied at a point in
contracts time

Focus on risk Focus on control

and rewards

PFRS 15: Revenue from Contracts with Customers

 Key Differences

PAS 18/ PAS 11 PFRS 15

Limited guidance More guidance:
on:  Separating elements
 Multiple element  Allocating the transaction price
arrangements  Variable consideration
 Variable  Licenses
 Options
consideration
 Repurchase agreements
 Licences
 Contract modifications
 Contract costs
PFRS 15: Revenue from Contracts with Customers
 NEED FOR CHANGE
IFR  One general
standard on revenue
US  Broad revenue
recognition concepts
S
Principles- recognition GAAP
based Rules-based
 plus numerous
 plus some limited
standards related to
guidance related to revenue recognition
certain minor topic

Thus, the accounting for revenue provided a most

fitting contrast of the principles-based and rules-
based.

PFRS 15: Revenue from Contracts with Customers

 NEED FOR CHANGE
Limited guidance
on many Difficult to apply
Significant
important topics, to complex
diversity in
such as transactions
revenue
accounting for due to lack of
recognition arrangements basis for
practices. with multiple conclusions.
elements.

Different
accounting for New types of
economically Inadequate transactions
similar disclosure emerges
transactions.

PFRS 15: Revenue from Contracts with Customers

IFRS 15 addresses those deficiencies by
specifying a comprehensive and
robust framework for the
recognition, measurement and
disclosure of revenue.

PFRS 15: Revenue from Contracts with Customers

The Boards believe this new standard will improve IFRS
and GAAP by:

a. Providing a more robust c. Simplifying the

framework for addressing
revenue recognition issues.
b. Improving comparability
of revenue recognition
practices across entities,
industries, jurisdictions, and
capital markets.
PFRS 15: Revenue from Contracts with Customers
preparation of financial
statements by reducing the
number of requirements to
which companies must refer.
d. Requiring enhanced
disclosures to help financial
statement users better
understand the amount, timing,
and uncertainty of revenue that
is recognized.
 PFRS 15 adopts an Asset-Liability
Approach

The asset-liability approach recognizes and

measures revenue based on changes in assets
and liabilities.

Core principle: A company should recognize

revenue to depict the transfer of goods or
services to customers in an amount that reflects
the consideration that the company receives, or
expects to receive, in exchange for these goods
or services.

PFRS 15: Revenue from Contracts with Customers

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

1. Contract with customers 1. Right of return

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

PFRS 15: Revenue from Contracts with Customers

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

PFRS 15: Revenue from Contracts with Customers

 Overview of the 5-Step Model
Assume that Tyler Wells orders a large cup of black
coffee costing $3 from BEAN. Tyler gives $3 to BEAN
barista, who pours the coffee into a large cup and gives it
to Step
Tyler. Step Step Step Step
1 2 3 4 5
BEAN should
BEAN BEAN's PO is The price of BEAN has
recognize $3 in
and Tyler to provide a the coffee is only one
revenue from
have a large cup of $3, and no PO, no
this
valid coffee to discounts or allocation
transaction
contract Tyler. other is
when Tyler
with one adjustments necessary.
receives the
another. are available.
coffee.
PFRS 15: Revenue from Contracts with Customers
 Step
1
- agreement between two or more
Identify the
contract
parties creating enforceable rights +
with obligations
customer
 writte  oral
Attributes n
:
 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

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

 Step
2 Performance Obligation
Identify the
performance
-promise in a contract with a customer to
obligation/s transfer to the customer either:
(PO)
Series of distinct goods/services
Good or Service (or that are substantially the same
bundle) that is distinct and have the same pattern of
transfer

-Single performance obligation

 PO can be explicit or implicit (not small individual PO)
PFRS 15: Revenue from Contracts with Customers
 Step
2 PFRS 15: Definition of Distinct
Identify the Two Criteria to be met:
performance
obligation 1. The customer can benefit from the goods or services.
(PO) 2. The promise to transfer a good or service is
separable from other promises in the contract.

Not Separable if:

1. There are significant integration of services with other
promised goods or services
2. It modifies/ customizes other promised goods or services
3. It is highly dependent/ interrelated with other promised
goods/ services.

PFRS 15: Revenue from Contracts with Customers

 Step
3 Transaction price
Determine
the
-amount of consideration to which an entity expects in
transaction
price (TP) exchange for transferring promised goods/services to a
customer excluding the amounts collected on behalf
of third parties.

How to determine the transaction price?

Variable
consideration

PFRS 15: Revenue from Contracts with Customers

 Variable
Consideration
2 Methods to Estimate:

Expected Value: Most Likely Amount:

Probability-weighted amount in a The single most likely amount in
range of possible consideration a range of possible
amounts. consideration outcomes.
 Can be based on a limited  May be appropriate if the
number of discrete contract has only two
outcomes and probabilities possible outcomes

PFRS 15: Revenue from Contracts with Customers

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:

Variable
Fixed Amount = 50,000
performance bonus
= 100,000 based on completion
date

On time: 60% × [100,000 + ($50,000 90,000

× 1.0)]
1 week late: 30% × [100,000 + (50,000 43,500
× .90)]
2 weeks late: 10% × [100,000 + (50,000 14,000
× .80)]
Expected Value 147,500
PFRS 15: Revenue from Contracts with Customers
 CONSTRAINING ESTIMATES IN
VARIABLE CONSIDERATION:

Recognize Variable
Consideration when:
1. The company has experience 2. Based on experience, it is highly
with similar contracts and are probable that there will not be a
able to estimate the cumulative significant reversal of revenue
amount of revenue previously recognized.

If these criteria are not met,

⚠ revenue recognition is
constrained.
PFRS 15: Revenue from Contracts with Customers
REVENUE CONSTRAINT...
On January 1, Hogwarts Company enters into a contract with James
Inc. to perform asset-management services for 1 year. Hogwarts
Co. receives a quarterly management fee based on a percentage
of James' assets under management at the end of each quarter.
In addition, Hogwarts Co. receives a performance-based
incentive fee of 20% of the fund's return in excess of the
return of an observable index at the end of the year.
The firm selects an output method of measuring progress toward
completion of the performance obligation. Also, the company has had
a number of these types of contracts with customers in the past.

At what point should Hogwarts Co. recognize the management fee and
the performance-based incentive fee related to James?

PFRS 15: Revenue from Contracts with Customers

Management fee
Hogwarts should record the management
based on a
fee each quarter as it performs the
percentage of assets
management of the fund over the year.
under management
Although Hogwarts has experience with
similar contracts, that experience is
not predictive of the outcome of the
Performance-based current contract, because...
Incentive fee
20% of the fund's amount of consideration highly
return in excess of susceptible to volatility in the market:
the return of an
observable index incentive fee has a large number and
high variability of possible consideration
amounts
PFRS 15: Revenue from Contracts with Customers
 Step
3 Transaction price
Determine
the
-amount of consideration to which an entity expects in
transaction
price (TP) exchange for 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
consideration significant consideration @ payable to a
financing customer
component Fair
Value

PFRS 15: Revenue from Contracts with Customers

 Journal Entries:
Illustration: VOLUME DISCOUNT
March 31, 2019
Demy offers its customers a 3% Accounts Receivable 679,000
volume discount if they purchase at Sales Revenue 679,000
least 2 million of its product during the
calendar year. On March 31, 2019, Customer meets the
Demy has made sales of 700,000 to discount threshold:
Ginny Co. In the previous 2 years, Demy Cash
sold over 3,000,000 to Ginny in the 679,000
period April 1 to December 31. Assume Accounts Receivable 679,000
that Demy prepares financial
statements quarterly. Customer fails to meet the
Cash
discount threshold:
700,000
Question: How much revenue Accounts Receivable
should Demy recognize for the first 679,000
3 months of 2019? Sales Discount Forfeited
PFRS 15: Revenue from Contracts with Customers 21,000
 Step 4
Allocation Objective
Allocate
-to allocate the TP to each PO in an amount
the TP to
the PO that depicts the amount of consideration for
transferring promised goods/services.
Based on stand-
How to allocate the TP? alone selling price

Stand-alone = the price at which the entity would

selling price sell 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

Transaction price: Allocation

PFRS 15: Revenue from Contracts with Customers

 Step 5 Performance obligation is satisfied when a
Recognize promised good or service is transferred to a
revenue customer.
when (or as)
the entity
satisfies a
PO

How can performance obligation be

satisfied?

@ the
over time point 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 Retrospectively with
-mandatory each prior reporting cumulative effect at the
effectivity date period date of initial application

 What does it mean for you/ your

business?
 FOUR IMPORTANT INDUSTRIES THAT
WILL FACE THE BIGGEST
CHALLENGES

Telecommunicatio Manufacturers Real Estate & Software

ns Property development
Developers & 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 Step
A written
Identify the contract between 3
contract Globemart, Inc. Determine
with and Clay Jensen. the
customer transaction
price (TP)

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

PFRS 15:Telecommunications Company
 Step 4
Stand- Allocated Billing
Performance alone Transactio Revenu per
Allocate Obligation Selling n price e month
the TP to price
the PO Network P9,600 P10,473 P872.75 P1,200
services
Handset 3,600 3,927 3927.00 0
Total P13,20 P14,400
Step 5 0
Recognize PO 1: Network Services (monthly plan) - Over
revenue time, as a monthly network services are provided.
when (or as)
the entity
satisfies a
PO 2: Handset - at the point of time, when handset is
PO delivered to 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
Allocate
the TP to between customization service and post
the PO delivery service is 100:10.

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
Recognize Measure the progress towards completion as of December
revenue
when (or
31, 2017.
as) the Software development (585,000/1,935,000) 30%
entity Post-delivery services (0/90,000) 0%
satisfies a
PO
Cost Progress Allocated Revenue
Performance Estimated incurre to transacti recognized
obligation total cost d to completi on price in 2017
date on
Software developmet P1,935,000 P585,00 30% P2,250,00 675,000
0 0
Post-delivery support 90,000 0 0% 225,000 0
Total P2,025,000 P585,00 n/a P2,475,00 P675,000
PFRS 15: Illustration for Software
0 0
development
 PFRS 15: REVENUE RECOGNITION
Other Revenue Recognition
5- Step Process Issues

1. Contract with customers 1. Right of return

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

PFRS 15: Revenue from Contracts with Customers

Thank you for listening...