PFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Objective
The objective of IFRS 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.
ON AUG. 15, 2017, the Securities and Exchange Commission approved the adoption of
Philippine Financial Reporting Standards (PFRS) 15, Revenue from contracts with
customers, which became effective for annual reporting periods beginning on or after Jan.
1, 2018.
 International Financial Reporting Standard (IFRS) 15, Revenue from contract with customers,
was issued in May 2014 by the International Accounting Standards Board (IASB)
 IFRS 15 was adopted by the FRSC in 2016 as PFRS 15
 PFRS 15 replaces PAS 18, Revenue, PAS 11, Construction Contracts, and related interpretations
effective January 1, 2018
 Contains the accounting principles for all revenue arising from contracts with
customers Is the new global framework for revenue recognition.
 Entities that sell products and services in a bundle or multiple deliverables or those engaged
in major projects could see significant change in the timing of revenue recognition.
 Entities likely to be affected by this new revenue standard include those engaged in
telecom, software, engineering construction and real estate.
PFRS 15 applies to individual contracts with customers. However, as a practical expedient, PFRS 15
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 the group.
PFRS does not apply to the following:
 Lease contracts (PFRS 16-Leases);
 Insurance contracts (PFRS 17- Insurance Contracts);
 Financial instrument; and
 Non-monetary exchanges between entities in the same line of business to facilitate sales
to customers.
i. e. PFRS 15 is not applicable to a contract between two oil companies that agree to exchange
oil to fulfill customer demands in different locations on a timely basis.
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: [IFRS 15:7]
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; if no other standard provides guidance on
how to separate and/or initially measure one or more parts of the contract, then IFRS 15 will be applied.
Core Principle
The principle of the new revenue standard can be divided into two:
1. An entity should recognize revenue in a manner that depicts the pattern of transfer of good or
service to a customer
2. The amount recognized as revenue should reflect the consideration to which the entity expects to
be entitled in exchange for good or service .
Depending on whether certain criteria are met, revenue is recognized:
a. At a point in time or at particular date when control of the good or service is transferred to
the customer.
b. Over time or over a certain period in a manner that depicts the entity’s
performance. Key definitions:
Contract. An agreement between two or more parties that creates enforceable rights and obligations.
Customer. A party that has contracted with an entity to obtain goods or services that are an output of the
entity’s ordinary activities in exchange for consideration.
Income. Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants.
Performance obligation. A promise in a contract with a customer to transfer to the customer either:
 a good or service (or a bundle of goods or services) that is distinct;
 or a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.

Revenue. Income arising in the course of an entity’s ordinary activities.

Transaction price. The amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf of third
parties.
Under PFRS 15 , an entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity
expects to be entitled to. An entity must apply the five-step model to comply with the new
revenue recognition standard:

Step 1: Identify the contract(s) with customers

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

Step 1: Identify the contract with the customer

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;

 and it is probable that the consideration to which the entity is entitled to in

exchange for the goods or services will be collected.

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.

Generally, contracts should be accounted for separately.

In some cases, contracts should be combined as one if any of the following is satisfied:
 The contracts are treated as a single package.
 The consideration in one contract depends on the good or service of another contract.
 The goods or services in the contract relate to a single performance obligation.

Step 2: Identify the performance obligations in the contract

A performance obligation is a promise to deliver a good or service in a contract with customer.

A promise constitutes a performance obligation if the promised good or service is distinct.
A promised good or service is distinct if it meets both of the following criteria:
 the customer can benefit from the good or services on its own or in conjunction with other
readily available resources;
 and the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
Distinct good or service
1. Sale of finished goods produced by a manufacturer.
2. Sale of merchandise inventory by a retailer.
3. Constructing, manufacturing or developing asset on behalf of customer, as in long-
term construction contract.
 4. Granting license or franchise.
5. performing a contractually agreed-upon task for a customer, as in bookkeeping service
or payroll processing service.

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. When making this determination, 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.

Factors that may affect the transaction price are:

 Variable consideration- this is included in the transaction price when it is highly probable that a
significant reversal of revenue or decrease in revenue win not occur.
Example: An entity has a contract to sell through a distributor. The distributor has the right to
return if it cannot sell the product and the entity recognizes revenue when the distributor resells
the product to ultimate consumers.
Under PFRS 15, the entity can recognize revenue when goods are sold to the distributor based on
the number of units sold less the units to be returned.

 Time value of money. If the contract has a significant financing component, the consideration
should be adjusted to time value of money. This is disregarded if the contract is less than one
year. Revenue is measured based on the cash selling price.
The difference between the total consideration and cash selling price is accounted for as interest
income.
 Noncash consideration. This is measured at fair value. If the fair value cannot be reliably
estimated, the stand-alone selling price of the promised good or service is used.
 Consideration payable to the customer. The entity needs to determine if consideration payable to
the customer may result in a reduction of the transaction price. Examples include vouchers,
coupons and volume rebate.

Step 4: Allocate the transaction price to the performance obligations in the contracts
The transaction price is allocated to each performance obligation on the basis of relative stand-alone
selling price of each good or service.
Stand alone selling price is the price that the entity would sell a promised good or service separately to a
customer
The best evidence of a stand-alone selling price is an observable price of good or service when sold on a
stand-alone basis or when sold separately.
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. PRFS 15
suggests various methods that might be used, including:
 Adjusted market assessment approach
- means the entity may refer to prices from competitors for similar good or service
adjusted for specific cost and margin
 Expected cost plus a margin approach
- means the entity may forecast expected cost to satisfy the performance
obligation adjusted for an appropriate margin or profit.
 Residual approach (only permissible in limited circumstances)
- may be used only when either the selling price of the good or service is highly
variable or is uncertain. Under this approach, the stand - alone selling price is the difference
between the total transaction price and the sum of the observable stand-alone selling prices of the
other goods or services in the contract.

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Revenue is recognised as control is passed, either over time or at a point in time.
Control of an asset is defined as the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset.
 This includes the ability to prevent others from directing the use of and obtaining the
benefits from the asset.
 The benefits related to the asset are the potential cash flows that may be obtained directly
or indirectly.
These include, but are not limited to:
 using the asset to produce goods or provide services;
 using the asset to enhance the value of other assets;
 using the asset to settle liabilities or to reduce expenses;
 selling or exchanging the asset;
 pledging the asset to secure a loan;
 and holding the asset.
Revenue recognition over time. Revenue is recognized over time when any of the following is satisfied:
  the customer simultaneously receives and consumes all of the benefits provided by the entity
as the entity performs;
example: routine or recurring payroll processing services.
 the entity’s performance creates or enhances an asset that the customer controls as the asset
is created or enhanced;
example: constructing an asset on a customer site
 or 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.
Example: constructing a specialized asset that only the customer can use or constructing as asset
in accordance with customer order.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue
will therefore be recognised when control is passed at a certain point in time.
Revenue recognition at a point in time. Factors that may indicate the point in time at which control
passes include:
 the entity has a present right to payment for the 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 related to the ownership of the asset;
 and the customer has accepted the
asset. Sale of goods.
When goods are sold in the ordinary course of business, the revenue is recognized unquestionably at the
point of sale. This is the point when the entity has transferred to the customer the significant risk and
reward of ownership of the asset, or legal title passes to the customer at the point of sale.
The point of sale is usually the point of delivery which may be actual or constructive. It is delivery that
transfers the title or ownership from the seller to the buyer.
Sale with a right of return
PFRS 15, paragraph B21, provides that an entity shall recognize the following with respect to a sale with
a right of return:
a. Revenue equals tot the total sale price less the sale price of the expected return.
b. Refund liability equal to the sale price of the expected return.
c. A recover asset and the corresponding reduction of cost of goods sold equal to the cost of the
expected return.
Consignment arrangement
Consignment is a method of marketing goods in which the entity called the consignor transfer physical
possession of certain goods to a dealer or distributor called the consignee that sells the goods on behalf of
the consignor.
The consignor shall not recognize revenue upon delivery of the goods to the consignee until the goods are
sold by the consignee. The reason is that the product is controlled by the consignor and the consignee
does not have an unconditional obligation to pay for the product.
Bill and hold arrangement
Bill and hold arrangement is a contract under which an entity bills a customer for a product but the entity
retains possession of the product.
Depending on the terms of the contract, revenue shall be recognized when the customer obtains control or
takes title of the product even though the product remains in an entity’s physical possession.
Example. A customer may request an entity to enter into such contract because of lack of space for the
product or because of delays in the customer’s production schedule.
All of the following criteria must be met for the recognition of revenue in a bill and hold arrangement:
 The customer has requested for the arrangement
 The product must be identified separately as belonging to the customer
 The product must be ready for physical transfer to the customer anytime.
 The entity cannot have the ability to use the product or to direct it to another customer.