BSA 3101 Topic 3A - Revenue From Contracts

BSA 3101 Accounting for Special Transactions Partnership Liquidation
Module 3A – Revenue from Contracts
IFRS 15 Revenue from Contracts with Customers
The objective of IFRS 15 is to establish principles that enable entities 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. IFRS 15 consolidated the differences of IFRS and US GAAP. This superseded IAS
11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18, and SIC 13.
The core principle of IFRS (PFRS) 15 is that an entity will recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration (payment) to which the entity
expects to be entitled in exchange for those goods or services.
• PFRS 15 contains guidance for transactions not previously addressed (service revenue, contract
modifications)
• PFRS 15 improves guidance for multiple-element arrangements
• PFRS 15 requires enhanced disclosures about revenue.
Overview of Revenue Recognition in Relation to PFRS 15
Revenue Recognition
The 5-Step Process Other Revenue Recognition Issues
1. Contract with customers 1. Right of return

2. Separate performance obligations 2. Bill-and-hold arrangements
3. Determining the transaction price 3. Principal-agent relationships
4. Allocating the transaction price 4. Warranties
5. Satisfying performance obligations 5. Non-refundable Upfront fees
(Installment sales, Construction 6. Repurchase agreements
contracts, and franchise) 7. Licensing - Franchise
8. Consignments
Objective of Revenue Recognition
Recognize revenue to depict the transfer of goods or services to customers in amount that reflects the
consideration that the company receives, or expects to receive, in exchange for these goods or services. All
revenue recognition starts with a contract between a seller and a customer. If properly evaluated that these
transactions weren't accompanied by written and signed agreements, they are considered contracts for
purposes of revenue recognition. The key is that, implicitly or explicitly, you entered into an arrangement that
specifies the legal rights and obligations of a seller and a customer.
Contracts between a seller and a customer contain one or more performance obligations, which are promises
by the seller to transfer goods or services to a customer. The seller recognizes revenue when it satisfies a
performance obligation by transferring the promised good or service. We consider transfer to have occurred
when the customer has control of the good or service.
Control means that the customer has direct influence over the use of the good or service and obtains its
benefits. For many contracts, following this approach is very simple. In particular, if a contract includes only
one performance obligation, we typically just have to decide when the seller delivers the good or provides the
service to a customer, and then make sure that the seller recognizes revenue at that time.
Recognize revenue in the accounting period when the performance obligation is satisfied.
Sources: Dayag, A. (2018, 2021) Advanced Financial Accounting, Millennium Books, Inc.
The 5-Step Process
Step 1: Identify the contract

A contract can be agreed in writing, orally, or through other customary business practices. An entity can only
account for revenue if the contract meets all of the following criteria.
• the parties to the contract have approved the contract and are committed to perform their respective
obligations
• the entity can identify each party's rights regarding the goods or services to be transferred
• the entity can identify the payment terms for the goods or services to be transferred
• the contract has commercial substance, and
• it is probable that the entity will collect the consideration to which it will be entitled in exchange for the
goods or services that will be transferred to the customer
Example: Jason has December 31, 20x8 as a year-end date. On September 30, 20x8, Jason signed a contract
with a customer to provide them with an asset on December 31, 20x8. Control over the asset passed to the
customer on December 31, 20x8. The customer will pay P1,200,000 on June 30, 20x9. By December 31, 20x8,
Jason did not believe that it was probable that it would collect the consideration that it was entitled to.
Therefore, the contract cannot be accounted for and no revenue should be recognized.
Step 2: Identify the performance obligations

Performance obligations - a promise to transfer to a customer:
• a good or service (o bundle of goods or services) that is distinct (separable); or
• a series of goods or services that are substantially the same and are transferred in the same way.
The distinct (separable) performance obligations within a contract must be identified. A good or service is
distinct (separable) if both of the following criteria are met:
1. The customer can benefit from the good or service in its own, or when combined with the customer's
available resources; and
2. The promise to transfer the goods or service is separately identifiable from other goods or services in
the contract.
A transfer of good or service is not separately identifiable (or unidentifiable) if the good or service:
• is not integrated with other goods or services in the contract; or
• does not modify or customize another good or service in the contract; or
• does not depend on or relate to other goods or services promised in the contract.
If a promise to transfer a good or service is not distinct (not separable or inseparable) from other goods or
services in a contract, then the goods or services are combined into a single performance obligation.
Some contracts contain more than one performance obligation. For example:
• An entity may enter into a contract with a customer to sell a car, which includes one year's free
servicing and maintenance
• An entity might enter into a contract with a customer to provide five (5) lectures, as well as to provide a
textbook on the first day of the course.
Example 1: Jackson is building a multi-unit residential area. It enters into a contract with a customer for a
specific unit that is under construction. The goods and services to be provided in the contract include
procurement, construction, piping, wiring, installation of equipment and finishing. Analysis: Although the goods
or services provided by the contractor are distinguishable, they are not distinct in this contract because the
goods and services cannot be separately identified from the promise to construct the unit. Jackson will
integrate the goods and services into the unit, so all the goods and services are accounted for as a single
performance obligation.
Example 2: SunGlobe, a telecommunications company supplies a "free" smartphone if a customer signs up to

a 24-month contract for the supply of a particular package of call and data services. It also sells the same
smartphone without the monthly contract and the same call and data services for with no smartphone provided.
Analysis: A customer can benefit from the smartphone on its own (using the services of another provider) or
the services on their own (with a different smartphone). As the smartphone and services offered as a bundle
are separately identifiable, there are two performance obligations in the 24-month contract.
Example 3: Most of the time, a warranty is assurance that a product will function as intended. In this case, then
the warranty will be accounted for in accordance with PAS 37 (Provisions, Contingent Liabilities and
Contingent Assets). Analysis: If the customer has the option to purchase the warranty separately, then it
should be treated as a distinct performance obligation. This means that a portion of the transaction price must
be allocated to it.
Example 4: A software developer, Toni E enters into a contract with a customer to transfer a software license,
perform installation and provide software updates and technical support for five years. Toni E determines that
each good or service is separately identifiable because the installation does not modify the software and the
software is functional without the updates and technical support. Analysis: The software is delivered before the
installation, updates and technical support and is functional without the updates and technical support, so the
customer can benefit from each good or service in its own. Toni E also has determined that the software
license installation, updates and technical support are separately identifiable. On this basis, there are four
performance obligations in this contract:
1. Software license
2. Installation service
3. Software updates
4. Technical support
Example 5: An entity must decide if the nature of a performance obligation is:

• To provide the specified goods or services itself (i.e. it is the principal), or
• To arrange for another party to provide the goods or service (i.e. it is an agent)
If an entity is an agent, then revenue is recognized based on the fee or commission to which it is entitled to.
Assume Maybelle's revenue includes P2,400,000 for goods it sold acting as an agent for Jackie. Maybelle
earned a commission of 20% on these sales and remitted the difference of P1,920,000 (included in cost of
sales) to Jackie. How should the agency sale be treated in Maybelle's statement of profit or loss?
Analysis/Solution: Maybelle should not have included its revenue as it is acting as the agent and not the
principal. Only the commission element of P480,000 (P2,400,000 million x 20%) can be recorded in revenue.
The following adjustment is therefore required in the books of the Agent (Maybelle) since there is an
overstatement of revenue:
Revenue(2,400,000-480,000) 1,920,000
Cost of sales 1,920,000
Step 3: Determine the transaction price

Amounts collected on behalf of third parties (such as sales tax or VAT) are excluded. The consideration
promised in a contract with a customer may include fixed amounts, variable amounts or both.
• The transfer price does not include amounts collected for third parties (i.e. sales taxes or VAT).
• The effects of the following must be considered when determining the transaction price:
o the time value of money (the time value of money does not need to be considered if the length
of the contract is less than one year);
o any non-cash consideration is measured at fair value.
o estimates of variable consideration
o any consideration payable to the customer (is treated as a reduction in the transaction price
unless the payment is entirely unrelated, e.g. for goods or services purchased from the
customer).
Time Value of Money

If there is a significant financing component, then the consideration receivable needs to be discounted to
present value using the rate at which the customer would borrow. The following may indicate the existence of a
significant financing component:
• The difference between the amount of promised consideration and the cash selling price of the
promised goods or services
• The length of time between the transfer of the promised goods or services to the customer and the
payment date.
Example 1: On January 1 20x7, Evelyn sold furniture to a customer for P480,000 with three years, interest-free
credit. The customer took delivery of the furniture on 1 January 20x7. The P480,000 is payable to Evelyn on
December 31, 20x9. Evelyn's cost of capital is 8%.
Analysis/Solution: The transaction price is P381,039 (P480,000 x (1.08)-3) because the time value of money
must be considered when determining the transaction price. Interest income will also be recognized as follows:
20x7: P381,039 x 8% = P30,483
20x8: (P381,039 + P30,483) x 8% = P32,921
20x9: ({381,039 + P30,483 + P32,921 ) x 8% = P35,555
Example 2: Sandra enters into a contract with a customer to sell equipment on December 31, 20x6. Control of
the equipment transfers to the customer on that date. The price stated in the contract is P2,000,000 and is due
on December 31, 20x8. Market rates of interest available to this particular customer are 10%.
Analysis/Solution: This transaction should be accounted for in the financial statements of Sandra for the year
ended December 31, 20x6. Due to the length of time between the transfer of control of the asset and payment
date, this contract includes a significant financing component. The consideration must be adjusted for the
impact of the financing transaction. A discount rate should be used that reflects the characteristics of the
customer i.e. 10%. Revenue should be recognized when the performance obligations is satisfied. As such
revenue, and a corresponding receivable, should be recognized at P1,652,893 (2,000,000 x 1.10-2) on
December 31, 20x6. The receivable is subsequently accounted for in accordance with IFRS 9 Financial
Instruments.
Non-cash Consideration
If the fair value of non-cash consideration cannot be estimated reliable then the transaction is measured using
the stand-alone selling price of the good or services promised to the customer.
Example 3: Emil sells a good to Gerry. Control over the good is transferred on January 1, 20x6. The
consideration received by Emil is 1,000 shares in Gerry with a fair value of P120 each. By December 31, 20x6,
the shares in Gerry have a fair value of P600 each. Analysis/Solution: The revenue should be recognized from
this transaction in the financial statements of Emil. The contract contains a single performance obligation.
Consideration for the transaction is non-cash. Non-cash consideration is measured at fair value. Revenue
should be recognized at P120,000 (1,000 shares x P120) on January 1, 20x6. Any subsequent change in the
fair value of the shares received is not recognized within revenue but instead accounted for in accordance with
PFRS (IFRS) 9 Financial Instruments.
Variable Consideration
If the consideration promised in a contract price includes a variable amount, the variable consideration must be
estimated depending on the outcome of a future event. Variable consideration may be attributable to:
 An entire contract; or
 A specific part of a contract (e.g. performance obligations or part of the distinct goods or services
promised in a single performance obligation.
Estimating Variable Consideration: When an amount to be received depends on some uncertain future event,
the seller still should include the uncertain amount in the transaction price by estimating variable consideration
using either:
 Expected Value: the sum of possible amounts multiplied by its probability-weighted amount in a range
of possible consideration amounts:
 Most Likely Amount: The single most likely amount in a range of possible consideration outcomes.
If only two outcomes are possible, the most likely amount might be the best indication of the amount the seller
will likely receive.
Example 4: Sandy&Edwin Computers enters into a contract with ReSA CPA Review School to install a
CCTV camera system in which signals are monitored, primarily for surveillance and security purposes. On
January 1, 20x7, ReSA Review School pays an up-front fixed fee of P50,000 for eight months of featured
access. ReSA Review School also will pay Sandy&Edwin a bonus of P30,000 if ReSA can access the cameras
in a 24-hour situation wherein it can be viewed in any location during the eight-month period. Sandy&Edwin
estimates a 70% chance that it will achieve the usage target and receive the bonus.
Analysis/Solution: Sandy&Edwin would record the following entry for the receipt of the cash on January 1,
2017:
Cash 50,000
Deferred revenue 50,000
Subsequent entries to recognize revenue depend on whether Sandy&Edwin estimate the transaction price as
the expected value or the most likely amount.
Alternative 1: Expected Value. The expected value would be calculated as a probability-weighted transaction
price:
P80,000 (P50,000 fixed fee+P30,000 bonus) x 70% = P56,000
P50,000 (P50,000 fixed fee only) x 30% = P15,000
Expected value of the contract price at inception P71,000
Alternative 2: Most Likely Amount. Because there is a greater chance of qualifying for the bonus than of not
qualifying for the bonus, a transaction price based on the most likely amount would be P50,000 + P30,000, or
P80,000.
Assume that Sandy&Edwin bases the estimate on the most likely amount, P80,000. In each successive month
Sandy&Edwin would recognize, one month's revenue based on a total transaction price of P80,000. Because it
previously recorded P50,000 as deferred revenue, at the end of each month, Sandy&Edwin would reduce
deferred revenue by one eight of the P50,000 as well as recognizing a bonus receivable for one eight of the
P80,000 bonus it expects to receive:
Deferred revenue (P50,000/8) 6,250
Bonus receivable (P30,000/8) 3,750
Service revenue 10,000
After eight months, Sandy&Edwin's deferred revenue account would have been reduced to a zero balance,
and the bonus receivable account would have a balance of P30,000 (P3,750 x 8). At that point, Sandy&Edwin
would know if the usage of eight months had reached the bonus threshold satisfaction as to camera's
functionality and would record one of the following two journal entries:
If Sandy&Edwin receives the bonus:
Cash 30,000
Bonus receivable 30,000
If Sandy&Edwin does not receive the bonus:

Bonus receivable 30,000
Examples of variable consideration:

1. Volume discounts
2. Refunds or rebates (e.g., for late completion)
3. Rights of return
4. Incentives
5. Royalties or performance bonuses or customer referral bonuses
6. Entertainment and Media - Royalties
7. Health care - Medicare and Medical reimbursements
8. Price concession
9. Telecommunication - rebates
10. Construction - Incentive payments
Refunds/Rebates. If a product is sold with a right to return it then the consideration is variable. The entity must
estimate the variable consideration and decide whether or not to include it in the transaction price. The refund
liability should equal the consideration received (or receivable) that the entity does not expect to be entitled to.
Example 5: Noel enters into 50 contracts with customers. Each contract includes the sale of one product for
P120,000. The cost to Noel of each product is P48,000. Cash is received upfront and control of the product
transfers on delivery. Customers can return the product within 30 days to receive a full refund. Noel can sell
the returned products at a profit. Noel has significant experience in estimating returns for this product. It
estimates that 48 products will not be returned.
Analysis/Solution: The fact that the customer can return the product means that the consideration is variable.
Using an expected value method, the estimated variable consideration is (48 products x P120,000). The
variable consideration should be included in the transaction price because, based on Noel's experience, it is
highly probable that a significant reversal in the cumulative amount of a revenue recognized (P120,000) will not
occur. Therefore, revenue of P5,760,000 and a refund liability of P240,000 (P120,000 x 2 products expected to
be returned) should be recognized. Noel will derecognize the inventory transferred to its customers. However,
it should recognize an asset of P96,000 (2 products x 48,000), as well as a corresponding credit to cost of
sales, for its right to recover products from customers on setting the refund liability.
Consideration Payable to the Customer. If consideration is paid to a customer in exchange for a distinct
good service, then it is essentially a purchase transaction and should be accounted for in the same way as
other purchases from suppliers. Assuming that the consideration paid to a customer is not in exchange for a
distinct good or service, an entity should account for it as a reduction of the transaction price.
Example 6: Dante enters into a contract with a major chain of retail stores. The customer commits to buy at
least P4,000,000 of products over the next twelve (12) months. The terms of the contract require Dante to
make a payment of P200,000 to compensate the customer for changes that it will need to make its retail stores
to accommodate the products. By December 31, 20x8, Dante has transferred products with a sales value of
P800,000 to the customer.
Analysis/Solution: The payment made to the customer is not in exchange for a distinct good of service.
Therefore, the P200,000 paid to the customer is a reduction of the transaction price. The total transaction price
is being reduced by 5% (P200,000/P4,000,000). Therefore, Dante reduces the transaction price of each good
by 5% as it is transferred. By December 31, 20x8, Golden Gate should have recognized revenue of P760,000
(P800,000 x 95%).
Step 4: Allocate the transaction price to the performance obligation

The total transaction price should be allocated to each or separate performance obligation in proportion to
stand-alone selling price of the goods or services.
Stand-alone selling-price – the price at which entity would sell a promised good or service separately to a
customer.
• The best evidence of stand-alone selling price is the observable price of a good or service when it is
sold separately.
• If a stand-alone selling price is not directly observable, then the entity estimates the stand-alone selling
price.
o The allocation is made at the beginning of the contract and is not adjusted for subsequent
changes in the stand-alone selling price.
There are three ways to allocate transaction price:
1. Adjusted market assessment approach – determine how goods or services will be sold and estimate the
price those customers are willing to pay. This may include the price of the competitors for similar goods or
services with price adjustments to reflect normal costs and profit. The seller considers what it could sell the
product or services for in the market in which it normally conducts business, perhaps referencing prices
charged by competitors Therefore, the following guidelines should be noted:
• Based on the relative fair values of the separate performance obligations in proportion to the stand-alone
selling prices.
• If not available, companies should use their best estimate of what the good or service might sell for as a
stand-alone unit.
Example: Franklin enters into a contract with a customer to transfer a software license, perform installation,
and provide software updates and technical support for five years in exchange for P28,800,000. Franklin has
determined that each good or service is a separate performance obligation. Franklin sells the license,
installation, updates and technical support separately, so each has a directly observable stand-alone selling
price:
Software License P18,000,000
Installation Service 7,200,000
Software Updates 4,800,000
Technical Support 6,000,000
Total P36,000,000
Analysis/Solution: Allocate the P28,800,000 transaction price to the four performance obligations.
Software License(28,800,000 x 18/36) P14,400,000
Installation Service(28,800,000 x 7.2/36) 5,760,000
Software Updates(28,800,000 x 4.8/36) 3,840,000
Technical Support(28,800,000 x 6/36) 4,800,000
Total P28,800,000
2. Estimated cost plus a margin approach - project the estimated costs of satisfying a performance
obligation and add a normal profit. The seller estimates its costs of satisfying a performance obligation and
then adds an appropriate profit margin.
Example: Val Combate sells a machine and one year's free technical support for P100,000. The sale of the
machine and the provision of technical support have been identified as a separate performance obligation. Val
Combate usually sells the machine for P95,000 but it has not yet started selling technical support for this
machine as a stand-alone product. Other support services offered by Val Combate attract a mark-up of 50%. It
is expected that the technical support will cost Val Combate P20,000
Analysis/Solution: The selling price of machine is P95,000 based on observable evidence. There is no
observable selling price for the technical support. Therefore, the stand-alone selling price needs to be
estimated.
A better approach for estimating the selling price of the support would be an expected cost plus margin (or
mark-up) approach. Based on this, the selling price of the service would be P30,000 (P20,000 x 150%). The
total of stand-alone selling prices of the machine and support is P125,000 (P95,000+30,000). However, total
consideration receivable is only P100,000. This means that the customer is receiving a discount for purchasing
a bundle of goods and services of P25,000 or 20% (25,000/125,000) of total stand-alone selling price of
P125,000.
PFRS 15 assumes that discounts relate to all performance obligations within a contract, unless evidence exists
to the contrary. Therefore, the transaction price of P95,000 will be allocated as follows:
Machine: P100,000 x P95,000/P125,000 = P76,000
Technical support: P100,000 x P30,000/P125,000 = P24,000
The revenue will be recognized when (or as) the performance obligations are satisfied.
3. Residual approach - the standalone selling price is highly variable or uncertain as to its occurrence, then a
company may estimate the standalone sales price by reference to total transaction price less the sum of the
observable standalone selling prices the goods or services made in the contract.
The seller estimates an unknown (or highly uncertain) stand-alone selling price by subtracting the sum of the
known or estimated stand-alone selling prices from the total transaction price. The residual approach is
allowed only if the stand-alone selling price is highly uncertain, either because:
a. the seller has not previously sold the good or service and has not yet determined a price for it, or
b. the seller provides the same good or service to different customers at substantially different prices.
Example: Antolin Rosales Company enters into a contract to build or construct (including maintenance) and
operates high rise condominium (buildings) for a period of 25 years, commencing upon completion of the
construction of the said condominiums. There is a fixed fee for build and operate and any progress payments
made are non-refundable. All items that are deliverables (such as air-conditioning units, prefabricated cabinets,
etc.) have a standalone value. There is probable evidence of the selling price for the building and maintenance
but not for operating the condominium. It is determined that the transaction price must be allocated to the three
performance obligations: building, maintaining and operating the condominium buildings.
Analysis/Solution: The following items should be taken into consideration by Antolin Rosales Company:
1. The performance obligations relate to building construction, maintenance of the building and operate the
condominium (buildings),
2. As pointed out, Antolin Rosales can determine standalone values for the building, and the maintenance of
building.
3. The company then can make a best estimate of the price for operating the condominium (buildings), using
the adjusted market assessment approach or expected cost plus a margin approach.
4. Antolin Rosales next applies the relative fair value method at the inception of the transaction to determine
the proper allocation to each performance obligation.
5. Once the allocation is been properly determined, Antolin recognizes revenue independently for each
performance obligation using regular revenue recognition criteria.
6. If, alternatively, the standalone selling price for operating the condominium (building) is highly variable or
uncertain, Antolin Rosales may use residual approach. In this case Antolin uses the fir values of the high rise
building and the maintenance agreements and subtracts their fair value from the total transaction price to arrive
at a residual value for operating the condominiums.
Discounts. If a customer is offered a discount for purchasing a bundle of goods and services, then the
discount should be allocated across all performance obligations within the contract in proportion to their stand-
alone selling prices (unless observable evidence suggests that this would be inaccurate.) A discount should
only be allocated to a specific component of the transaction if that component is regularly sold separately at a
discount. *Refer to example at the end of discussion
Step 5: Recognize revenue when/as performance obligations are satisfied

• Recognize revenue when (or as) a performance obligation is satisfied by transferring a promised good
or service (an asset) to the customer.
• An asset is transferred when (or as) the customer gains control of the asset.
• The performance obligation will be satisfied over time or at a point in time.
For each performance obligation identified. an entity must determine at contract inception whether it satisfies
the performance obligation:
• at a point in time/single point in time, or
• over time.
Satisfied at a Point in Time/Single Point in Time

 A performance obligation that is not satisfied over time is satisfied at a point in time.
 Revenue should be recognized at the point in time when the customer obtains control of the asset.
 Indicators of the transfer of control include:
• The customer has an obligation to pay for an asset
• The customer has legal title to the asset
• The entity has transferred physical possession of the asset
• The customer has the significant risks and rewards of ownership
• The customer has accepted the asset
Example 1: DJ Builders is building a multi-unit residential complex. It enters into a contract with a customer for
a specific unit that is under construction. The contract has the following terms:
 The customer pays a deposit upon entering the contract that is refundable if the entity fails to complete
the unit in accordance with the contract.
 The remainder of the purchase price is due upon completion of the unit.
 If the customer defaults on the contract before completion, DJ only has the right to retain the deposit.
Analysis/Solution: The performance obligation is satisfied at a point in time because it is not a service contract,
the customer does not control the unit as it is created and the entity does not have an enforceable right to
payment for performance completed to date (i.e. the entity only has right to the deposit until the unit is
completed).
Example 2: On March 31, 20x8, Ambo enters into a contract to construct a specialized factory for a customer.
The customer paid an upfront deposit which is only refundable if Ambo fails to complete construction in line
with the contract. The remainder of the price is payable when the customer takes possession of the factory. If
the customer defaults on the contract before completion of the factory, Ambo only has the right to retain the
deposit.
Analysis/Solution: In assessing whether revenue is recorded over time, it is important to note that the factory
under construction is specialized. Therefore, the asset being created has no alternative use to the entity.
However, Ambo only has an enforceable right to the deposit received and therefore does not have a right to
payment for work completed to date. Consequently, Ambo must account for the sale of the unit as a
performance obligation satisfied at a point in time, rather than over time. Revenue will most likely be
recognized when the customer takes possession of the factory (although a detailed assessment should be
made of the date when the customer assumes control.)
Satisfied Over Time

 A performance obligation is satisfied over time if one of the following criteria is met:
• The customer receives and consumes the benefits of the goods or services while the contract is
being fulfilled (e.g. for a monthly payroll processing service).
• Performance creates or enhances an asset that the customer controls during that creation or
enhancement.
• Performance does not create an asset with which the supplier has an alternative use for and the
supplier has an enforceable right to payment for performance completed to date (e.g. construction
contract).
 Revenue is recognized over time by measuring progress towards complete satisfaction of the
performance obligation.
 Revenue for a performance obligation satisfied over time can only be recognized if progress can be
reasonably estimated.
 Revenue is recognized to the extent of costs incurred if there is no reasonable estimate of progress but
costs are expected to be recoverable.
Example 1: DJ Builders is building a multi-unit residential complex. It enters into a contract with a customer for
a specific unit that is under construction. The contract has the following terms:
• The customer pays a non-refundable security deposit upon entering the contract.
• The customer agrees to make progress payments during construction.
• If the customer fails to make the progress payments, the entity has the right to all of the contract
consideration if it completes the unit.
• The terms of the contract prevent the entity from directing the unit to another customer.
Analysis/Solution: This performance obligation is satisfied over time because:
• The unit does not have an alternative future use to DJ Builders because it cannot be directed to another
customer.
• DJ Builders has a right to payment for performance to date because it has a right to all of the contract
consideration if it completes the unit.
Example 2: On January 1, 20x8, Jaja enters into a contract with a customer to provide monthly payroll
services. Jaja charges P14,400,000 per year.
Analysis/Solution: The payroll services are a single performance obligation. This performance obligation is
satisfied over time because the customer simultaneously receives and consumes the benefits of the payroll
processing. This is evidenced by the fact that the payroll services would not need to be re-performed if the
customer changed its payroll service provider. Jaja must therefore recognize revenue from the service over
time, in the year ended June 20x8, they would recognize revenue of P7,200,000 (6/12 x P14,400,000).
Statement of Financial Position Presentation:

• A contract asset or contract liability should be presented in the statement of financial position when
either party has performed in a contract.
• Contract asset =Rights received > Performance obligation
Contract liability =Rights received < Performance Obligation
PFRS (IFRS) 15 is not prescriptive about the treatment of contract assets/liabilities.
Contract Assets
Contract asset is an entity's right to consideration in exchange for goods or services that the entity has
transferred to the customer (i.e. the entity performs before the customer pays). Contract assets are of two
types:
• Unconditional rights to receive consideration because the company has satisfied performance
obligation with a customer. Entities should report unconditional rights to received consideration as a
receivable on the statement of financial position. A right of consideration is unconditional if only the
passage of time is required before payment is due.
• Conditional rights to receive consideration because the company has satisfied one performance
obligation but must satisfy another obligation in the contract before it can bill the customer
As alternatives to the term "contract asset", the standard also allows the terms receivable and work-in-
progress to be used. If revenue exceeds cash received, this could be included within trade receivables. If costs
to date exceed cost of sales, this could be included within inventory, as work-in-progress.
Illustration: Contract Assets and Receivable

On January 1, 20x8, Elizabeth enters into a contract, with Recio for the sale of two excavators for P700,000
each. The contract requires one excavator to be delivered on February 1, 20x8 and states that the payment for
the delivery of the first excavator is conditional on the delivery of the second excavator. The second excavator
is delivered on June 1, 20x8.
On February 1, 20x8, Elizabeth recognizes a contract asset and revenue when it satisfies the performance
obligation to deliver the first excavator:
Contract asset 700,000
Revenues 700,000
A receivable is not recognized on February 1, 20x8, because Elizabeth does not have an unconditional right to
the consideration until the second excavator is delivered.
On June 1, 20x8, Anderson recognizes a receivable and revenue when it satisfies the performance obligation
to deliver the second excavator:
Accounts Receivable 1,400,000
Contract asset 700,000
Revenue 700,000
Illustration: Contract Assets

On January 1, 20x7, Renato Company enters into a contract to transfer Product X and Product Y to Tampol
Co. for P200,000. The contract specifies that payment of Product X will not occur until Product Y is also
delivered. In other words, payment will not occur until both Product X and Product Y are transferred to Tampol.
Renato determines that standalone prices are P60,000 for Product X and P140,000 for Product Y. Renato
delivers Product X to Tampol on February 1, 20x7. On March 1, 20x7, Renato delivers Product Y to Tampol.
On February 1, 20x7. Renato records the following entry:

Contract Asset 60,000
Sales Revenue 60,000
On February 1, 20x7, Renato does not record an accounts receivable because it does not have an
unconditional right to receive the P200,000 unless it also transfers Product Y to Tampol. When Renato
transfers Product Y on March 1, 20x7, it makes the following entry:
Accounts receivable 200,000
Contract Asset 60,000
Sales Revenue 140,000
Contract Liabilities
Contract Liability is a company's obligation to transfer goods or services to a customer for which the company
has received consideration from the customer or consideration is due from the customer (i.e. the customer
pays or owes payment before the entity performs.)
If the cash received exceeds the revenue recognized to date, there will be a contract liability (acting effectively
as deferred income). A contract liability is generally referred to as Unearned Sales Revenue, Unearned Service
Revenue, or any appropriate account title.
If a contract is loss making, there will be a provision recorded to recognize the full loss under the onerous
contract, as per PAS(IAS) 37. This can either be termed as a contract liability or a provision.
Illustration: Contract Liability and Receivable

On January 1, 20x8, Carol into a non-cancellable contract with Castano for the sale of an excavator for
P700,000. The excavator will be delivered to Castano on April 1, 20x8. The contract requires Castano to pay
the P700,000 in advance on February 1, 20x8 and Castano makes the payment on March 1, 20x8.
On February 1, 20x8, Carol recognizes a receivable because it has an unconditional right to the consideration
i.e. the contract is non-cancellable:
Contract liability 700,000
On March 1, 20x8, when Castano makes the payment Carol recognizes the cash collection:
Cash 700,000
On April 1, 20x8, Carol recognizes revenue when the excavator is delivered to Castano:
Contract liability 700,000
Revenue 700,000
Illustration: Contract Liability

On March 1, 20x7, Evelyn Company enters into a contract to transfer a product to Chua Inc. on July 31, 20x7.
It is agreed that Chua will pay the full price of P20,000 in advance on April 1, 20x7. The contract is non-
cancelable. Chua, however, does not pay until April 15, 20x7, and Evelyn delivers the product on July 31,
20x7. The cost of the product is P15,000.
There is no entry is required on March 1, 20x7 for the following reasons:

• Neither party has performed on the contract.
• Neither party has an unconditional right as of March 1, 20x7.
On receiving the cash on April 15, 20x7, Evelyn records the following entry:
Cash 20,000
Unearned sales revenue 20,000
On satisfying the performance obligation on July 31, 20x7, Evelyn records the following entry to record the sale
and cost of goods sold:
Unearned sales revenue 20,000
Sales 20,000
Cost of sales 15,000

Inventory 15,000
Contract Modifications
There might be change in contract terms while it is ongoing. Entities should determine:
• whether a new contract (and performance obligation)
• whether it is a modification of the existing contract
Separate Performance Obligation. Account for as a new contract if both of the following conditions are
satisfied:
 Promised goods or services are distinct (i.e., company sells them separately and they are not
interdependent with other goods and services), and the concept of "distinct" is that the objective of the
assessment to transfer goods or services to a customer is to determine whether the nature of the
promise, within the context of the contract, is to transfer each of those goods or services individually, or
instead, or to transfer combined item or items to which the promised goods or services are inputs.
 The company has the right to receive an amount of consideration that reflects the standalone selling
price of the promised goods or services.
Illustration. San Miguel Beer (SMB) Corp. has a contract to sell 100,000 products to a customer for P90 million
(P900 per product) at various points in time over a six-month period. After 60,000 products have been
delivered, SMB Corp. modifies the contract by promising to deliver more products for an additional P17.1
million or P855 per product which is the standalone selling price of the products at the time of the contract
modification). SMB regularly sells the products separately. The above new contract, SMB recognizes additional
total revenue of P53,100,000 computed as follows:
Original contract [(100,000 units-60,000 units) x P900] P36,000,000
New product (20,000 units x P855) 17,100,000
Total revenue after modification P53,100,000
In this situation, the contract modification for the additional products is, as a result, a new and separate
contract, which does not affect the accounting for the original contract.
Prospective Modification. An entity should account for effect of change in period of change as well as future
periods if the change affects both, not change previously reported results.
Illustration. For SMB the amount recognized as revenue for each of the remaining products would be a
blended price of P885, computed as shown in the previous illustration.
Products not delivered under the original contract (40,000 x P900) P36,000,000
Products to be delivered under contract modification (20,000 x P900) 17,100,000
Total remaining revenue P53,100,000
Revenue per remaining unit (P53,100,000/60,000) = P885 blended price
Comprehensive Illustrations:
1. Anton Video Tech sells the Play Station Portable (PSP), a gaming console that allows users to play video
games individually or in multiplayer environments over the internet.
 PSP game-box includes the physical PSP game-box module as well as a one-year subscription to the
Kimdrei Video Games Center multi-user platform of Internet-based games and other applications.
 Anton Video Tech sells individual one-year subscriptions to the Kimdrei Video Games platform for
P400.
 Anton Video Tech sells individual PSP game-box modules for P7,600.
 As a package deal, Anton Video Tech sells the PSP game-box (module plus subscription) for P7,700.
On January 1, 20x7, Anton Video Tech delivers 200 PSP game-box to Nathan at a price of P7,700 per system.
Anton Video Tech would recognize revenue if these two items were sold as a package deal for a single price.
January 1, 20x7, Anton records the following journal entry at the time of the sale to Nathan Computers with
multiple performance obligations. Therefore, the total transaction price of P1,540,000 (P7,700 per system x
200) would be allocated as follows:
PSP [1,540,000*(7,600/8,000)] P1,463,000
Subscription [1,540,000*(400/8000)] 77,000
Anton Video Tech, have the P1,463,000 of revenue associated with the PSP game-box recognized when those
modules are delivered to Nathan Computers on January (point in time), but the P77,000 of revenue associated
with the subscriptions is recognized over (over time) the one-year subscription term.
Accounts receivable 1,540,000
Revenue 1,463,000
Cost of sales xx
Inventory xx
December 31, 20x7, In each of the 12 months (over time) following the sale. Anton Video Tech records the
following entry to recognize subscription revenue:
Subscription revenue 6,417
(77,000/12=6,417)
After 12 months Anton Video Tech will have recognized the entire P77,000 of subscription revenue, and the
deferred revenue liability will have been reduced to zero.
2. Asser Maritime Industries, Inc. is a manufacturer of bridge simulator used in the maritime school. The
company's products range from varied range of machineries and equipment. The selling price of their units
varies depending on the unit involved with a range of P5,000,000 to P50,000,000 and are quoted inclusive of
installation and training, if there is a need. The installation does not involve any modification as to the original
specifications. Asser, Inc. has the following arrangement with Tamayo's Maritime College:
 Tamayo purchases bridge simulator from Asser at a price of P33,950,000 and prefer Asser to do the
installation and Tamayo agreed on such arrangements.
 The price of the installation service is estimated to have a fair value of P700,000
 The fair value of the training sessions is estimated at P350,000
 Tamayo is obligated to pay Asser, Inc. the P33,950,000 upon the delivery and installation of the bridge
simulator.
 Asser delivers the bridge simulator on September 1, 20x7 and completes the installation on November
1, 20x7.
Training related to the bridge simulator starts once the installation is completed and lasts for 4 months. The
bridge simulator has a useful life of 15 years. The following items should be taken into consideration by Asser
Maritime Industries, lnc.:
 The first condition for separation into a standalone unit for the bridge simulator is met. That is, the
bridge simulator, installation, and training are distinct and not interdependent - they are three separate
products or services, and each of these items has a standalone selling price.
 The total revenue of P33,950,000 should be allocated to the three components based on their relative
fair values.
 The fair value of the bridge simulator should be considered P33,950,000, the installation fee is
P700,000, and the training is P350,000. The total fair value to consider amounted to:
Bridge simulator [33,950,000*(33,950,000/35,000,000)] 32,931,500
Installation service[33,950,000*(700,000/35,000,000)] 679,000
Training sessions[33,950,000*(350,000/35,000,000)] 339,500
Total 33,950,000
 Asser makes the following entry on November 1, 20x7, to record both sales revenue and service
revenue on the installation, as well as unearned service revenue:
Cash 33,950,000
Sales revenue 32,931,500
Unearned revenue 339,500
 Assuming the cost of the bridge simulator is P23,765,000 the entry on November 1, 20x7 to record cost
of goods sold is as follows:
Cost of goods sold 23,765,000
Inventory 23,765,000
As indicated by the above entries, Asser, Inc. recognizes revenue from the sale of the bridge simulator once
the installation is completed on November 1, 20x7. In addition, it recognizes revenue for the installation fee
because these services have been performed.
Asser, lnc. recognized the training revenues on a straight-line basis starting on November 1, 20x7, or P84,875
(P339,500/4 months) per month for four (4) months. The journal entry on December 31, 20x7 to recognize the
training revenue of two (2) months in 20x7 is as follows:
(84,875*2 months)
Therefore, Asser, Inc. recognizes revenue on December 31, 20x7, in the amount of P33,780,250 (P32,931,500
+ P679,000 + P169,750).
Asser, Inc. makes the following journal entry on December 31, 20x8 to recognize the training revenue in 20x8,
assuming adjusting entries are made at year-end:
(339,500-169,750)
3. Example: Edwin Carino Enterprise provides the following information relative to the following four items
being sold as a package:
Selling Price Bundled Standalone Selling Price
Product 1 P2,000 P2,200
Product 2 5,000 5,000
Product 3 4,000 5,000
Product 4 4,500 5,500
Total P15,500 P17,700
Analysis/Solution: The entity should be applied to products 1, 3 and 4 as these specific products caused the
presumed discount of P2,200 (P17,700-P15,500). The transaction price will be applied as is; the discount of
P2,200 will not be applied prorate to the 4 products:
Transaction Price:
Product 1 P2,000
Product 2 5,000
Product 3 4,000
Product 4 4,500
Total P15,500

BSA 3101 Topic 3A - Revenue From Contracts

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BSA 3101 Accounting for Special Transactions Partnership Liquidation

Module 3A – Revenue from Contracts

IFRS 15 Revenue from Contracts with Customers

Overview of Revenue Recognition in Relation to PFRS 15

The 5-Step Process Other Revenue Recognition Issues

1. Contract with customers 1. Right of return

Objective of Revenue Recognition

The 5-Step Process

Step 1: Identify the contract

Step 2: Identify the performance obligations

Example 2: SunGlobe, a telecommunications company supplies a "free" smartphone if a customer signs up to

Example 5: An entity must decide if the nature of a performance obligation is:

Step 3: Determine the transaction price

Time Value of Money

If Sandy&Edwin does not receive the bonus:

Examples of variable consideration:

Step 4: Allocate the transaction price to the performance obligation

There are three ways to allocate transaction price:

Step 5: Recognize revenue when/as performance obligations are satisfied

Satisfied at a Point in Time/Single Point in Time

Satisfied Over Time

Statement of Financial Position Presentation:

PFRS (IFRS) 15 is not prescriptive about the treatment of contract assets/liabilities.

Illustration: Contract Assets and Receivable

Illustration: Contract Assets

On February 1, 20x7. Renato records the following entry:

Illustration: Contract Liability and Receivable

Illustration: Contract Liability

There is no entry is required on March 1, 20x7 for the following reasons:

Cost of sales 15,000

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