MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

ACT130: Accounting for Special Transactions

Revenue Recognition (PFRS 15)

LESSON OBJECTIVES
At the end of this module, you will be able to:
a. Know general principles of PFRS 15;
b. Apply PFRS 15 In recognizing revenue from customers.

OVERVIEW
One of the major changes in accounting today is recognizing of revenue as a new standard, PFRS
15, superseded PAS 18 (Revenue). It must also be noted that revenue recognition is crucial
because many of the topics under this subject involves revenue recognition. It is important to
know first the basic principles and application of the newest standard on revenue recognition,
PFRS 15.

ACTIVITY
1. Based from your learnings in Business Law 1, define contracts.
2. Site some actual transactions you entered that is satisfied at a point in time and overtime.

ABSTRACTION
Core Principle under PFRS 15
An entity recognizes revenue to depict the transfer of promised goods/services to customers in
an amount that reflects the consideration to which the entity expects to be entitled om exchange
for those goods/services.

The objective of PFRS 15 is to establish the principles that an entity shall apply to report useful
information to users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer. Application of the standard is
mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier application
is permitted.

Scope
PFRS 15 applies to all contracts with customers except for:
• PFRS 16 Leases;
• PFRS 9 Financial Instruments,
• PFRS 10 Consolidated Financial Statements,
• PFRS 11 Joint Arrangements,
• PAS 27 Separate Financial Statements and
• PAS 28 Investments in Associates and Joint Ventures;
• PFRS 4 Insurance Contracts;

A contract with a customer may be partially within the scope of PFRS 15 and partially within the
scope of another standard. In that scenario:
• if other standards specify how to separate and/or initially measure one or more parts of
the contract, then those separation and measurement requirements are applied first. The
transaction price is then reduced by the amounts that are initially measured under other
standards;

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

• if no other standard provides guidance on how to separate and/or initially measure one or
more parts of the contract, then IPFRS 15 will be applied.

Summary Application of the Revenue Recognition Principles under PFRS 15

Under PFRS 15, it recognizes revenue with the help of the following steps:

STEP 1: Identify the Contract with Customer

An agreement between two or more parties that creates enforceable rights and obligations. The
contract is with a customer and the collectability of the consideration is probable.

A contract with a customer will be within the scope of PFRS 15 if all the following conditions are
met:
• the contract has been approved by the parties to the contract;
• each party’s rights in relation to the goods or services to be transferred can be identified;
• the payment terms for the goods or services to be transferred can be identified;
• the contract has commercial substance;
• it is probable that the consideration to which the entity is entitled to in exchange for the
goods or services will be collected. (PROBABLE)

If a contract with a customer does not yet meet all of the above criteria, the entity will continue to
re-assess the contract going forward to determine whether it subsequently meets the above
criteria. From that point, the entity will apply PFRS 15 to the contract.

STEP 2: Identify the Performance Obligations in the Contract

A performance obligation is a promise in a contract with a customer to transfer either:
A. A good or service (or a bundle of goods or services) that is distinct or;
B. A series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.

Each promise to deliver a distinct good or service in the contract is treated as a separate
performance obligation. We can consider a promised good distinct if (1.) 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 and (2.) the promise to transfer the good or service is separately
identifiable from other promises in the contract,.

STEP 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the
transfer of goods and services. In determining transaction price, an entity will consider past
customary business practices.

Where a contract contains elements of variable consideration, the entity will estimate the amount
of variable consideration to which it will be entitled under the contract. Variable consideration can
arise, for example, as a result of discounts, rebates, refunds, credits, price concessions,
incentives, performance bonuses, penalties or other similar items. Variable consideration is also
present if an entity’s right to consideration is contingent on the occurrence of a future event.

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

STEP 4: Allocate the Transaction Price to the Performance Obligations in the Contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price
to the performance obligations in the contract by reference to their relative standalone selling
prices. If a standalone selling price is not directly observable, the entity will need to estimate it.
PFRS 15 suggests various methods that might be used, including:
• Adjusted market assessment approach
• Expected cost plus a margin approach
• Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it
may be appropriate to allocate such a discount to some but not all of the performance obligations.

STEP 5: Recognize Revenue when (or as) the Entity Satisfies a Performance Obligation
Revenue is recognized as control is passed, either over time or at a point in time.

For performance obligations satisfied over time, revenue is recognized as the entity progresses
towards the complete satisfaction of the performance obligation. Example, a business is involved
in warranty services. Performance obligation is satisfied as time goes by or over time until the
date the warranty obligation expires.

For performance obligations satisfied at a point in time, the revenue is recognized when the entity
completely satisfies the performance obligation. Example, in a dressmaking business, the
performance obligation is satisfied at a point in time when the dress ordered is complete and
delivered to a customer, ready for use.

Revenue is measured at the amount of transaction price allocated to the performance obligation
satisfied. (Result of Step No. 4)

DISCLOSURES
1. Revenue recognized (disaggregated into categories)
2. Contract balances (opening and ending balances of receivables, contract assets, and liabilities)
3. Performance Obligations (including when the entity satisfies them and transaction price
allocated to the remaining performance obligations)
4. Significant judgements and changes in judgements
5. Assets recognized from the costs to obtain or fulfill a contract with customers (incremental
costs)

APPLICATION
1. Kinse Co. sells some equipment, the cash price of which is P100,000 for P140,000 with a
commitment to service for a period of two years, with no further charge. Revenue to be recognized
upon sale is? ANSWER: P100,000

2. On July 1, 2019, Pipteen Company handed over to a client a new computer system. The
contract price for the supply of the system and after-sales support for 12 months was P800,000
and Cindy Company estimates the cost of the after-sales support at P120,000.

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

It normally marks up such cost by 50% when tendering for support contracts. The Revenue to be
recognized in its financial statement year ended 2019 is? ANSWER: P710,000

3. One-Five Company provides service contracts to customers for maintenance of their electrical
systems. On October 1, 2019 it agrees a four-year contract with a major customer for P154,000.
Costs over the period of the contract are reliably estimated at P51,333. Under PFRS 15, how
much is the revenue should the company recognize in 2019? ANSWER: P9,625

ASSESSMENT
(NO ASSESSMENT FOR THIS MODULE YET BUT THIS TOPIC WILL BE INCLUDED IN YOUR FIRST
QUIZ)

REFERENCES
MILLAN, Z. V. (2018). Accounting for Special Transactions. Baguio City: Bandolin Enterprise.