CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS (AE 14)

LEARNING MATERIAL

UNIT NUMBER / HEADING: UNIT 1 - MODULE 5.1 / IFRS 15 – REVENUE

FROM CONTRACT WITH CUSTOMERS

INTRODUCTION

IFRS 15 is the new global framework for revenue recognition.

Entities sell products and services in a bundle or multiple deliverables or
those engaged in major projects could see significant change in 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.
Revenue is income in the ordinary course of business activities.
Income is increase in economic benefit during the accounting period in the
form of an inflow or enhancement of asset or decrease in liability that
results in an increase in equity, other than contribution from equity
participants.
PFRS 15 applies to all contracts with customers, except:
a. Leases under IFRS 16
b. Insurance contracts under IFRS 17
c. Financial instruments under IFRS 9

LEARNING OUTCOMES

At the end of the unit, students will be able to

 Discuss the core principle of revenue recognition
 Enumerate the five-step model for revenue recognition
 Define a contract, performance obligation and transaction price
 Describe the revenue recognition at a point in time or over time
 ACTIVATING PRIOR LEARNING
1. Explain the Revenue Recognition Principle.
2. Enumerate the common account titles used in recording income.
3. Describe how Accrual Basis of Accounting relates to the Revenue
Recognition Principle.

PRESENTATION OF CONTENTS

RECOGNITION AND MEASUREMENT

Generally, revenue is recognized when the entity has transferred promised
goods or services to the customer. IFRS 15 sets out five steps for the
recognition process:
The Five-Step Model:
IFRS 15 provides a guidance about contract combinations and contract
modifications, too.
Contract combination happens when you need to account for two or more
contract as for 1 contract and not separately. IFRS 15 sets the criteria for
combined accounting.
Contract modification is the change in the contract’s scope, price or both.
In other words, when you add certain goods or services, or you provide some
additional discount, you are effectively dealing with the contract
modification.
IFRS 15 sets different accounting methods for individual contract
modification, depending on certain conditions.
Revenue recognition over time
Revenue is recognized over time when any of the following is satisfied:
a. The customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs.

For example, routine or recurring payroll processing services.

 b. The entity’s performance creates or enhances an asset that the
customer controls as the asset is created or enhanced.

For example, constructing an asset on a customer site.

c. The entity’s performance does not create an asset with an alternative

use of the entity and the entity has an enforceable right to receive
payment for performance completed to date.

For example, constructing a specialized asset that only the customer

can use or constructing an asset in accordance with customer order.

Revenue recognition at a point in time

The following factors would indicate revenue recognition at a point in time:
a. The entity has the right to receive payment for the asset and for which
the customer is obliged to pay.
b. The customer has legal title to the asset.
c. The entity has transferred physical possession of the asset to the
customer.
d. The customer has the significant risks and rewards of ownership of
the asset.
e. The customer has accepted the asset.

Contract costs
IFRS 15 provides a guidance about two types of costs related to the contract:
1. Costs to obtain a contract
Those are the incremental costs to obtain a contract. In other words,
these costs would not have been incurred without an effort to obtain a
contract – for example, legal fees, sales commissions and similar.
These costs are not expensed in profit or loss, but instead, they
are recognized as an asset if they are expected to be recovered (the
exception is the contract costs related to the contracts for less than 12
months).
2. Costs to fulfill a contract. If these costs are within the scope of IAS
2, IAS 16, IAS 38, then you should treat them in line with the
appropriate standard. If not, then you should capitalize them only if
certain criteria are met.
COMMON TYPES OF TRANSACTIONS

Warranties
If a customer has the option to purchase a warranty separately from a
product to which it relates, it constitutes a distinct service and is accounted
for as a separate performance obligation. This would apply to a warranty
which provides the customer with a service in addition to the assurance that
the product complies with agreed-upon specifications.

Principal Vs. Agent

Am entity must establish in any transaction whether it is acting as principal
or agent.
It is principal if it controls the promised goods or services before it is
transferred to the customer. When the performance obligation is satisfied,
the entity recognizes revenue in the gross amount of the consideration to
which it expects to be entitled for those goods or services.
It is acting as an agent if its performance obligation is to arrange for the
provision of goods or services by another party. Satisfaction of this
performance obligation will give rise to the recognition of revenue in the
amount of any fee or commission to which it expects to be entitled in
exchange for arranging for the other party to provide its goods or services.

Repurchase Agreements
Under a repurchase agreement, an entity sells an asset and promises, or
has the option, to repurchase it. Repurchase agreements generally come in
three forms:
a. An entity has an obligation to repurchase the asset (a forward
contract).
b. An entity has the right to repurchase the asset (a call option).
c. An entity must repurchase the asset if requested to do so by the
customer (a put option).
In the case of a forward contract or a call option the customer does not
obtain control of the asset, even if it has physical possession. The entity will
account for the contract as:
a. A lease in accordance with IFRS 16, if the repurchase price is below
the original selling price; or
 b. A financing arrangement if the repurchase price is equal to or greater
than the original selling price. In this case the entity will recognize
both asset and corresponding liability.

Consignment Arrangement
Consignment is a method of marketing goods in which the entity called the
consignor transfers physical possession of certain goods to a dealer or
distributor called consignee that sells the goods on behalf of the consignor.
When consigned goods are sold by the consignee, a report called account
sales is given to the consignor together with a cash remittance for the
amount of sales minus commission and other expenses chargeable to the
consignor.

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.
For 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.
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.

PRESENTATION
Contracts with customers will be presented in an entity’s statement of
financial position as a contract liability, a contract asset or receivable,
depending on the relationship between the entity’s performance and
customer’s payment.
A contract liability is recognized and presented in the statement of financial
position where a customer has paid an amount of consideration prior to the
entity performing by transferring control of the related good or service to the
customer.
When the entity has performed but the customer has not yet paid the
related consideration, this will give rise either a contract asset or a
receivable. A contract asset is recognized when the entity’s right to
consideration is conditional on something other than the passage of time,
for instance future performance. A receivable is recognized when the entity’s
right to consideration is unconditional except for the passage of time.
When revenue has been invoiced, a receivable is recognized. Where revenue
has been earned but not invoiced, it is recognized as a contract asset.

DISCLOSURE
The objective is for an entity to disclose sufficient information to enable
users of financial statements to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with
customers. The following amounts should be disclosed unless they have
been presented separately in the financial statements in accordance with
other standards:
a. Revenue recognized from contracts with customers, disclosed
separately from other sources of revenue.
b. Any impairment losses recognized on any receivables or contract
assets arising from an entity’s contracts with customers, disclosed
separately from other impairment losses.
c. The opening and closing balances of receivables, contract assets and
contract liabilities from contract with customers.
d. Revenue recognized in the reporting period that was included in the
contract liability balance at the beginning of the period.
e. Revenue recognized in the reporting period from performance
obligations satisfied in previous periods (such as changes in
transaction price).

APPLICATION
1. Briefly discuss the 5-step model for revenue recognition.
2. Differentiate revenue recognition at a point in time vs. revenue
recognition over time.
3. Enumerate the common types of transactions where IFRS 15 is
applicable.

FEEDBACK
Choose the best answer for each question:
1. Which is within the scope of IFRS 15?
a. Lease
b. Insurance contract
c. Financial instrument
 d. All of these are beyond the scope of IFRS 15
2. What is the core principle of PFRS 15?
a. Revenue is recognized when earned
b. Revenue is recognized at a point in time or over time
c. Revenue is recognized when collected
d. Revenue is recognized in a manner that depicts the transfer of good
or service to a customer and the revenue reflects the consideration
to which an entity expects to be entitled.
3. The revenue recognition in accordance with the core principle is
applied following
a. Four-step model
b. Five-step model
c. Three-step model
d. Any model
4. Which statement is true about a contract?
a. A contract is an arrangement between two or more parties that
creates enforceable rights and obligations
b. Enforceability of the rights and obligations in a contract is a matter
of law
c. A contract can be in writing, oral or implied by customary business
practice
d. All of these are true
5. A contract with a customer must meet all of the following criteria,
except
a. The contract is approved by all parties
b. The rights and obligations of the parties and payment terms are
identified
c. The contract has a commercial substance
d. It is not probable that the consideration will be collected
6. A performance obligation is
a. A promise to deliver a distinct good in a contract with a customer
b. A promise to deliver an indistinct good in a contract with a
customer
c. The consideration to which an entity is expected to be entitled
d. An executed contract
7. The transaction price
a. Is the amount of consideration in a contract
b. May include variable or a non cash consideration
c. May be affected by the time value of money if the contract contains
a significant arrangement
d. All of these describe a transaction price
8. The transaction price is allocated to the performance obligations
based on relative
a. Stand-alone selling price
b. Fair value
 c. Adjusted market price
d. Residual value
9. When shall an entity recognize revenue from contract with a customer
a. When it is probable that the future economic benefits will flow to
the entity
b. When or as the entity satisfies the performance obligation by
transferring control of a good or service to a customer
c. When the entity collected the consideration from the customer
d. When the entity and the customer signed the contract
10. Revenue shall be recognized at a point in time under all of the
following, except
a. The customer has legal title to the asset
b. The customer has physical possession of the asset
c. The entity has not transferred the significant risk and reward of
ownership
d. The entity has the right to receive payment for the asset

References:

 Valix, C. T., Peralta, J.F & Valix C. A. M. (2020). Conceptual

Framework and Accounting Standards. Manila, Philippines: GIC
Enterprises & Co.. Inc.
 Ballada, W., & Ballada S. (2020). Conceptual Framework and
Accounting Standards. Manila, Philippines: DomDane Publishers.
 https://www.ifrsbox.com/ifrs/ifrs-15/
 https://www.ifrsbox.com/ifrs-15-revenue-contracts-customers/