College of Accountancy

REVENUE FROM CONTRACTS WITH CUSTOMERS (PFRS 15)

Learning Objectives:
1. Identify the standards superseded by PFRS 15.
2. State the objective and scope of PFRS 15.
3. Enumerate the steps in the five-step model framework.
4. Explain the steps in the five-step model framework.
5. Explain the accounting for contract costs.
6. Explain the presentation of major accounts in the financial statements.

Lesson 1: Standards Superseded by PFRS 15

• IAS 11 Construction contracts

• IAS 18 Revenue
• IFRIC 13 Customer Loyalty Programs
• IFRIC 15 Agreements for the Construction of Real Estate
• IFRIC 18 Transfers of Assets from Customers
• SIC-31 Revenue - Barter Transactions Involving Advertising Services
Lesson 2: Objective and Scope of PRFS 15
Objective
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.
Scope
PFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except
for:

• Leases within the scope of PAS 17 Leases;

• Financial instruments and other contractual rights or obligations within the scope of
PFRS 9 Financial Instruments,
• PFRS 10 Consolidated Financial Statements,
• PFRS 11 Joint Arrangements,
• PAS 27 Separate Financial Statements
• PAS 28 Investments in Associates and Joint Ventures;
• Insurance contracts within the scope of PFRS 4 Insurance Contracts; and
• Non-monetary exchanges between entities in the same line of business to facilitate sales
to customers or potential customers.
Partial Application of PFRS 15
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;
• if no other standard provides guidance on how to separate and/or initially measure one or more
parts of the contract, then PFRS 15 will be applied.
Lesson 3: Five-Step Model Framework
The core principle of 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 to which the entity
expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-
step model framework:
1. Identify the contract(s) with a customer

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2. Identify the performance obligations in the contract

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

Application of this guidance will depend on the facts and circumstances present in a contract with
a customer and will require the exercise of judgment.
Lesson 4: Steps in the Five-Step Model Framework
Step 1: Identify the contract(s) with a customer
Contract - An agreement between two or more parties that creates enforceable rights and
obligations. It can be written, oral, or implied by an entity’s customary business practice.
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.
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 (i.e., the risk, timing or amount of the entity’s
future cash flows is expected to change as a result of the contract); 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.
No revenue is recognized on a contract that does not meet the criteria above. Any
consideration received from such contract is recognized as a liability and recognized as revenue
only when either of the following has occurred:
✓ The entity has no remaining obligation to transfer goods or services to the customer and
all, or substantially all, of the consideration has been received and is non-refundable; or
✓ The contract has been terminated and the consideration received is non-refundable.
Multiple Contracts
In case there are more than one contract, each contract is accounted for separately.
However, two or more contracts entered into at or near the same time with the same
customer (or related parties of the customer) shall be combined and accounted for as a single
contract if:
✓ The contracts are negotiated as a package with a single commercial objective;
✓ The amount of consideration to be paid in one contract depends on the price or
performance of the other contract; or
✓ Some or all of the goods or services promised in the contracts are a single performance
obligation.
Negotiating multiple contracts at the same time is not sufficient evidence to demonstrate
that the contracts represent a single arrangement.
Step 2: Identify the performance obligations in the contract
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

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✓ a series of distinct goods or services that are substantially the same and that have the same pattern
of transfer to the customer.
Performance obligations do not include administrative task to set up a contract.
Identifying Performance Obligation
At the inception of the contract, the entity should assess the goods or services that have been
promised to the customer, and identify as a performance obligation:
1. a good or service (or bundle of goods or services) that is distinct; or
2. a series of distinct goods or services that are substantially the same and that have the same pattern
of transfer to the customer.
Distinct Good or Service (Separate Performance)
A good or service is distinct if both of the following criteria are met:
✓ 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.
Customer can benefit:
A customer can benefit from a good or service if the good or service could be
used, consumed, sold for an amount that is greater than scrap value or otherwise held in a
way that generates economic benefits. The fact that the entity regularly sells a good or
service separately indicates that a customer can benefit from the good or service on its
own or with other readily available resources.
Separately identifiable:
A promise to transfer a good or service is separately identifiable if the good or
service:
✓ is not an input to a combined output specified by the customer.
✓ Does not significantly modify another good or service promised in the contract.
✓ Is not highly interrelated with other goods or services promised in the contract.
For example, the customer’s decision of not purchasing a good or service does
not affect the other promised goods or services in the contract.
Factors for consideration as to whether a promise to transfer goods or services to
the customer is not separately identifiable include, but are not limited to:
✓ the entity does provide a significant service of integrating the goods or services with
other goods or services promised in the contract;
✓ the goods or services significantly modify or customize other goods or services
promised in the contract;
✓ the goods or services are highly interrelated or highly interdependent.

A promised good or service that is not distinct shall be combined with other
promised goods or services until a bundle of goods or services that is distinct is
identified. In some cases, this may result to treating all the promised goods or services in
a contract as a single performance obligation.
Series of Distinct Good or Service (Single Performance)
A series of distinct goods or services is transferred to the customer in the same pattern if both of
the following criteria are met:
• each distinct good or service in the series that the entity promises to transfer
consecutively to the customer would be a performance obligation that is satisfied over
time; and

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• a single method of measuring progress would be used to measure the entity’s progress
towards complete satisfaction of the performance obligation to transfer each distinct good
or service in the series to the customer.
If the criteria above are met, goods and services that are part of the series of distinct goods or
services are accounted for as a single performance obligation.
Illustration: Goods and Services are not Distinct
Case:
An entity, a contractor, enters into a contract to build a hospital for a customer. The entity
is responsible for the overall management of the project and identifies various goods and services
to be provided, including engineering, site clearance, foundation, procurement, construction of
the structure, piping and wiring, installation of equipment and finishing.
Test whether promised goods or services are distinct:
Criteria 1 - The customer can benefit from the good or services on its own or in conjunction with
other readily available resources.
The promised goods and services are capable of being distinct in accordance with this
criterion. The customer can benefit from the goods and services either on their own or together
with other readily available resources. This is evidenced by the fact that the entity, or competitors
of the entity, regularly sells many of these goods and services separately to other customers. In
addition, the customer could generate economic benefit from the individual goods and services by
using, consuming, selling or holding those goods or services.
Criteria 2 - The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
However, the goods and services are not distinct within the context of the contract in
accordance with this criterion. That is, the entity’s promise to transfer individual goods and
services in the contract are not separately identifiable from other promises in the contract. This is
evidenced by the fact that the entity provides a significant service of integrating the goods and
services (the inputs) into the hospital (the combined output) for which the customer has
contracted.
Conclusion – Because both the criteria are not met, the goods and services are not distinct. The
entity accounts for all goods and services in the contract as a single performance obligation.
Step 3: Determine the transaction price
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.
In determining the transaction price, past customary business practices are considered.
The transaction price includes:
✓ An estimate of any Variable Consideration using either the:
o Probability weighted expected value, or
o Most likely amount
whichever better predicts the entity’s entitlement.
✓ The effect of the time value of money if there is financing components in the contract
✓ The fair value of any non-cash consideration
Variable Consideration
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

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consideration is also present if an entity’s right to consideration is contingent on the occurrence of a

future event.
The standard deals with the uncertainty relating to variable consideration by limiting the amount
of variable consideration that can be recognized. Specifically, variable consideration is only included in
the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a
significant revenue reversal in the future when the uncertainty has been subsequently resolved.
Estimate of Variable Consideration

Probability Weighted Expected Value Most Likely Amount

This considers the sum of probability
weighted amounts for the range of possible
outcome.
This is appropriate estimate if the entity has
large number of contracts with similar
characteristics.
This considers only the single most likely
amount from the range of possible consideration
amounts.
This is appropriate to use if the contract has
only few possible outcomes.

Illustration:
Global Telecommunication Corporation agrees to sell XYZ Company voice minutes over a
period of one year. XYZ Company promises to pay P0.20 per minute for the first 100,000 minutes. If the
minutes purchased exceeded 100,000 minutes, then the price falls to P0.15 per minute for all minutes
purchase. If the minutes exceeded 150,000 minutes, then the price shall fall to P0.10 per minute for all
purchased. In effecting the agreement, price shall be reduced retrospectively.
Based on Global’s experience with similar agreements, it estimates the following outcome:

Less than 100,000 minutes 100,000 up to 150,000 minutes Exceeding 150,000 minutes
60% 30% 10%

The estimated transaction price under expected value method is P0.175 per minute.

P0.20 x 60% P0.12

P0.15 x 30% 0.045
P0.10 x 10% 0.01
Total P0.175

Step 4: Allocate the transaction price to the performance obligations in the contract
Allocation is applicable is when the 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.
Where consideration is paid in advance or in arrears, the entity will need to consider whether the
contract includes a significant financing arrangement and, if so, adjust for the time value of money.
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.
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

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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.
Determining Satisfaction of Performance Obligation
At the inception, the entity shall determine whether the identified performance obligations will be
satisfied either:
a. Over time; or
b. At a point in time
A performance obligation is satisfied over time if one of the following criteria is met:
✓ The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
Example: If the contract with the customer is discontinued and the customer enters into a contract
with another entity to fulfil the remaining performance obligation, the other entity would not need to
substantially re-perform the work that the entity has completed to date.
✓ The entity’s performance creates or enhances an asset (e.g., work in progress) that the customer
controls as the asset is created or enhanced.
✓ 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.
Alternative use:
1. An asset does not have an alternative use to the entity if the entity is restricted contractually
from directing the asset for another use during or after the asset’s completion.
In the absence of a contractual restriction, the entity is still restricted from directing the asset
for another use if the entity would incur significant losses to direct the asset for another use
because it needs to rework the asset at a significant loss (e.g., the asset has design
specifications that are unique to the customer or is located in a remote area).
Enforceable right to payment for performance completed to date:
2. An entity has an enforceable right to payment for performance completed to date if the entity
is entitled to an amount that compensates the entity for any performance completed in the
event that the customer or another party terminates the contract for reasons other than the
entity’s failure to perform as promised.
3. The amount referred to in (b) above shall be sufficient for the entity to recover the costs
incurred in satisfying the performance obligation plus reasonable profit margin. The
compensation for a reasonable profit margin need not equal the profit margin expected if the
contract was fulfilled as promised.
The recognition of revenue for contracts with performance obligation satisfied over time requires
measurement of progress. The revenue recognized will be based on the entity’s measurement of its
progress towards the complete satisfaction of the obligation in the contract.
If an entity cannot demonstrate that a performance obligation is satisfied over time, it is presumed
that the performance obligation is satisfied at a point in time.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time.
Revenue will therefore be recognized when control is passed at a certain point in time. Factors that may
indicate the point in time at which control passes include, but are not limited to:
• the entity has a present right to payment for the asset;

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• 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.
Illustration:
Case 1: Asset has no alternative use to the entity
An entity enters into a contract with a customer, a government agency, to build a specialized
satellite. The entity builds satellites for various customers, such as government and commercial entities.
The design and construction of each satellite differ substantially, on the basis of each customer’s needs
and type of technology that is incorporated into the satellite.
Test to determine whether the performance obligation is satisfied over time or at a point in time:
One of the criteria is that ‘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.’

Assessment of the case:

The entity must consider whether the satellite in its completed state will have an
alternative use to the entity. Although the contract does not preclude the entity from directing the
completed satellite to another customer, the entity would incur significant costs to rework the
design and function of the satellite to direct that asset to another customer. Consequently, the
asset has no alternative use to the entity because the customer-specific design of the satellite
limits the entity’s practical ability to readily direct the satellite to another customer.
Conclusion:
Since the entity has no alternative use of the asset, assuming the entity has an enforceable
right to payment for performance completed to date, the performance obligation is satisfied over
time.
Case 2: Enforceable right to payment for performance completed to date
An entity enters into a contract with a customer to build an item of equipment. The payment
schedule in the contract specifies that the customer must make an advance payment at contract inception
of 10% of the contract price, regular payments throughout the construction period (amounting to 50% of
the contract price) and a final 40% of the contract price after construction is completed and the equipment
has passed the prescribed performance tests. The payments are non-refundable unless the entity fails to
perform as promised. If the customer terminates the contract, the entity is entitled only to retain any
progress payments received from the customer. The entity has no further rights to compensation from the
customer.
Test to determine whether the performance obligation is satisfied over time or at a point in time:
One of the criteria is that ‘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.’
Assessment of the case:
The entity should consider whether it has an enforceable right to payment for
performance completed to date if the customer were to terminate the contract for reasons other
than the entity’s failure to perform as promised. Even though the payments made by the customer
are non-refundable, the cumulative amount of those payments is not expected, at all times
throughout the contract, to at least correspond to the amount that would be necessary to
compensate the entity for performance completed to date. This is because at various times during
construction the cumulative amount of consideration paid by the customer might be less than the

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selling price of the partially completed item of equipment at that time. Consequently, the entity
does not have a right to payment for performance completed to date.
Conclusion:
Because the entity does not have a right to payment for performance completed to date,
the entity’s performance obligation is not satisfied over time. Accordingly, the entity does not
need to assess whether the equipment would have an alternative use to the entity. The entity also
concludes that it does not meet the other criteria thus, the entity accounts for the construction of
the equipment as a performance obligation satisfied at a point in time.
Case 3: Assessing whether a performance obligation is satisfied at a point in time or over time
An entity is developing a multi-unit residential complex. A customer enters into a binding sales
contract with the entity for a specified unit that is under construction. Each unit has similar floor plan and
is of a similar size, but other attributes of the units are different (for example, the location of the unit
within the complex).
Situation 1: Entity does not have an enforceable right to payment for performance completed to date
The customer pays a deposit upon entering into the contract and the deposit is refundable only if
the entity fails to complete construction of the unit in accordance with the contract. The remainder of the
contract price is payable on completion of the contract when the customer obtains physical possession of
the unit. If the customer defaults on the contract before completion of the unit, the entity only has the
right to retain the deposit.
Conclusion:
The entity does not have an enforceable right to payment for performance completed to
date because, until construction of the unit is complete, the entity only has a right to the deposit
paid by the customer. Therefore, the entity’s performance obligation is not satisfied over time but
rather satisfied at a point in time.
Situation 2: Entity has an enforceable right to payment for performance completed to date
The customer pays a non-refundable deposit upon entering into the contract and will make
progress payments during construction of the unit. The contract has substantive terms that preclude the
entity from being able to direct the unit to another customer. In addition, the customer does not have the
right to terminate the contract unless the entity fails to perform as promised. If the customer defaults on
its obligations by failing to make the promised progress payments as and when they are due, the entity
would have a right to all of the consideration promised in the contract if it completes the construction of
the unit. The courts have previously upheld similar rights that entity developers to require the customer to
perform, subject to the entity meeting its obligations under the contract.
Conclusion:
The asset (unit) created by the entity’s performance does not have an alternative use to
the entity because the contract precludes the entity from transferring the specified unit to another
customer. The entity does not consider the possibility of a contract termination in assessing
whether the entity is able to direct the asset to another customer.
The entity also has a right to payment for performance completed to date because if the
customer were to default on its obligations, the entity would have an enforceable right to all of the
consideration promised under the contract if it continues to perform as promised.
Therefore, the terms of the contract and the practices in the legal jurisdiction in that there
is a right to payment for performance completed to date. Consequently, the criterion that ‘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’ is met and the entity has
a performance obligation that is satisfied over time. The entity shall recognize revenue over time
by reference to the measure of its progress towards the complete satisfaction of the performance
obligation.

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In the construction of a multi-unit residential complex, the entity may have many
contracts with individual customers for the construction of individual units within the complex.
The entity would account for each contract separately. However, depending on the nature of the
construction, the entity’s performance in undertaking the initial construction works (i.e., the
foundation and the basic structure), as well as the construction of common areas, may need to be
reflected when measuring its progress towards complete satisfaction of its performance
obligations in each contract.
Situation 3: Entity has an enforceable right to payment for performance completed to date
The same facts as in Situation 2 apply to Situation 3, except that in the event of a default by the
customer, either the entity can require the customer to perform as required under the contract or the entity
can cancel the contract in exchange for the asset under construction and the entitlement to a penalty of a
proportion of the contract price.
Conclusion:
Notwithstanding that the entity could cancel the contract (in which case the customer’s
obligation to the entity would be limited to transferring control of the partially completed asset to
the entity and paying the penalty prescribed), the entity has a right to payment for performance
completed to date because the entity could also choose to enforce its rights to full payment under
the contract. The fact that the entity may choose to cancel the contract in the event the customer
defaults on its obligations would not affect that assessment, provided that the entity’s rights to
require the customer to continue to perform as required under the contract (i.e., pay the promised
consideration) are enforceable.
Lesson 5: Contract Costs
Contract cots include:
✓ Incremental costs of obtaining a contract
✓ Costs to fulfill a contract
Incremental Costs of Obtaining a Contract
Incremental costs of obtaining a contract are costs incurred in obtaining a contract with a
customer that the entity would not have incurred had the contract not been obtained (e.g., sales
commission).
- Such costs are recognized as asset if the entity expects to recover them.
- Cost that would have been incurred regardless of whether the contract was obtained are
recognized as expense, unless those costs are explicitly chargeable to the customer regardless of
whether the contract is obtained.
As a practical expedient, incremental costs of obtaining a contract are recognized as expense
when incurred if the expected amortization period of the asset is one year or less.
Cost to Fulfill a Contract
Cost incurred in fulfilling a contract that are within the scope of other standards (e.g., PAS 2
inventories, PAS 16 PPE, or PAS 38 Intangible Assets) are accounted for in accordance with those
standards.
Cost incurred in fulfilling a contract that are outside the scope of other standards are recognized
as asset if all of the following criteria are met:
✓ the costs relate directly to a contract (or a specific anticipated contract);
✓ the costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and
✓ the costs are expected to be recovered.
These include costs such as direct labor, direct materials, and the allocation of overheads that
relate directly to the contract.

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The asset recognized in respect of the costs to obtain or fulfil a contract is amortized on a
systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset
relates.
Lesson 6: Presentation in the Financial Statements
Contracts with customers will be presented in an entity’s statement of financial position as a
contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s
performance and the customer’s payment.
A contract liability is presented in the statement of financial position where a customer has paid
an amount of consideration prior to the entity performing by transferring the related good or service to the
customer.
Where the entity has performed by transferring a good or service to the customer and the
customer has not yet paid the related consideration, a contract asset or a receivable is presented in the
statement of financial position, depending on the nature of the entity’s right to consideration. A contract
asset is recognized when the entity’s right to consideration is conditional on something other than the
passage of time, for example future performance of the entity. A receivable is recognized when the
entity’s right to consideration is unconditional except for the passage of time.
Contract assets and receivables shall be accounted for in accordance with PFRS 9. Any
impairment relating to contracts with customers should be measured, presented and disclosed in
accordance with PFRS 9. Any difference between the initial recognition of a receivable and the
corresponding amount of revenue recognized should also be presented as an expense, for example, an
impairment loss.
PFRS 15 does not prohibit the use of alternative terms for “contract asset” and “contract liability”
so long as sufficient information is provided to enable users of the financial statements to distinguish
between “receivables” and “contract assets.” For example, the “Advances from customers” account may
be used in leu of contract liability when the consideration becomes due (rather than received) before the
goods or services are transferred to the customer.
Illustration:
Case 1: Contract Liability and Receivable
On January 1, 20x1, ABC Co. enters into a contract to install a gate for a customer on March 31,
20x1. The contract requires the customer to pay a consideration of P1,000 in advance on January 31,
20x1. The customer pays the consideration on March 1, 20x1. The installation was finished on March 31,
20x1.
Requirement:
Provide the journal entries under each of the following scenarios: (a) the contract is cancellable and (b)
the contract is non-cancellable. (ignore contract costs)
Answers:

Scenario (a): Cancellable Scenario (b): Non-cancellable

January 1, 20x1 No Entry No entry

January 31, 20x1 No Entry Receivable 1,000

Contract liability 1,000

March 1, 20x1 Cash 1,000 Cash 1,000

Contract Liability 1,000 Receivable 1,000

March 31, 20x1 Contract Liability 1,000 Contract liability 1,000

Revenue 1,000 Revenue 1,000

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Notes:
• No entry is made on January 1, 20x1 (contract inception) because neither party has performed his
obligation in the contract.
• A receivable is recognized on January 31, 20x1 under Scenario (b) because ABC Co. has an
unconditional right to consideration (i.e., the non-cancellable contract requires payment on this
date). ABC Co. is entitled to the consideration whether the customer pursues or cancels the
contract. A corresponding contract liability is recognized for ABC’s obligation to install the gate
for which the amount is due from the customer.
• No receivable is recognized under Scenario (a) because ABC Co. does not have an unconditional
right to consideration (i.e., the contract is cancellable).
• Under Scenario (a), a contract liability is recognized when the advance payment is received
(March 1, 20x1), i.e., the payment is received before the gate is installed.
• Under Scenario (b), a contract liability is recognized at the earlier of the date the entity obtains an
unconditional right to the consideration (January 31, 20x1) and the date the advance payment is
actually received (March 1, 20x1).
• Revenue is recognized only March 31, 20x1 when the performance obligation is satisfied (i.e., the
gate is installed).
Case 2: Contract Asset
On January 1, 20x1, ABC Co. enters into a contract with a customer for the installation of roof
tiles. The expected number of roof tiles to be installed is 1,000 units. The contract price is P100 per roof
tile installed, however, the customer shall pay the total consideration only when all of the 1,000 roof tiles
have been installed.
ABC assesses that the performance obligation will be satisfied over time because:
✓ ABC’s performance creates or enhances an asset that the customer controls as the asset is created
or enhanced; and
✓ ABC does not have an alternative use for the asset created and ABC has an enforceable right to
payment for performance completed to date (i.e., ABC is entitled to consideration in the event the
contract is terminated for reasons other than its failure to perform as promised).
As of January 31, 20x1, 800 roof tiles have been installed. The remaining 200 tiles have been
installed on February 7, 20x1. The customer fully pays the consideration on February 9, 20x1.
Requirement: Provide the journal entries. (ignore contract cost)
Answers:

January 1, 20x1 No Entry

January 31, 20x1 Contract asset (800 units x P100) 80,000
Revenue 80,000

February 7, 20x1 Receivable (1,000 units x P100) 100,000

Contract asset 80,000
Revenue (800 units x P100) 20,000

February 9, 20x1 Cash 100,000

Receivable 100,000

Notes: Contact asset is recognized on January 5 (rather than ‘receivable’) because ABC Co. does not have
an unconditional right for the consideration, i.e., payment is due only when all of the roof tiles have been
installed.

• Revenue is recognized as ABC Co. progresses towards the complete satisfaction of the
performance obligation (i.e., as the roof tiles are installed).
• Receivable is recognized on February 7 because ABC Co. obtains an unconditional right for the
consideration, i.e., payment is due because all of the roof tiles have already been installed.

End

Page 11 of 11
Instructor: Orlando L. Ananey