IFRS 15: Revenue from Contracts with Customers

● IFRS 15 = a five step method in recognizing revenue

= accounts superseded by this Standard are obsolete:
➔ IAS 11 (Construction Contracts)
➔ IAS 18 (Revenue)
➔ IFRIC 13 (Customer Loyalty Programmes)
➔ IFRC 15 (Agreements for Construction of Real Estate)
➔ IFRIC 18 (Transfers of Assets from Customers)
➔ SIC 31 (Revenue-Barter Transactions Involving Advertising
Services)

Step 1: Identify the contract

● Contract = an agreement between two or more parties that created unenforceable rights
(right to collect) and obligations (settle debts)
○ Rights = Assets
○ Obligations = Liabilities

● Criteria for Contracts

1. Contract has commercial substance (w/ relative fair value)
2. Entity can identify the payment methods
3. The parties to the contract have approved the contract (mutual consent)
4. The entity can identify each party’s rights regarding regarding goods or services
to be rendered
5. It is probable that the entity will collect the consideration to which it is entitled

● NOTE:
1. Performance of either party gives rise to a contract asset or liability.
2. If a customer pays or the entity has an amount of consideration before the entity
transfers goods or services to the customer, the entity shall recognize
contract liability.
3. If the entity performs before the customer pays consideration or before
payment is due, the entity shall recognize contract asset, excluding any
amount presented as receivable
4. Entity may use alternative descriptions other than contract asset or liability

Contract Asset vs Receivable

● Contract Asset = entity’s right to consideration in exchange for goods or services

transferred to a customer
○ “Basta may trinansfer ka sa customer, may contract asset ka na kahit hindi mo
pa pinepeform yung obligation mo”
 ○ Example: You have the obligation to transfer 10,000 units of TV sets.You have
already transferred 5,000 units.
■ Do you already have a contract asset? YES, pertaining to that 5,000
units transferred to the customer.
■ Can you consider that a receivable? NO, since the agreed number is
10,000 units but only 5,000 units have only been transferred. There is still
a condition needed to fulfill (the 5,000 units)
■ Once the remaining 5,000 units have been transferred, that is when it will
be part of receivables (unconditional)

● Receivable = entity’s right to consideration that is unconditional

Situation: On January 1, 2021, X Company is obligated to deliver the goods to Company Z

through a contract amounting to 400,000 pesos with a cost of 250,000.

1. What if on January 30, X delivered the goods to Z. Z paid on February 28 for the
delivered goods.

Jan 30 Contract Asset/ Accounts Receivable* 400,000

Sales 400,000

Cost of Sales 250,000

Merchandise Inventory 250,000

Feb 28 Cash 400,000

Contract Asset/Accounts Receivable 400,00

*Either CA or AR can be used since you only have one obligation (deliver the goods).
Since the obligation has been fulfilled, you now have the right to collect payment from
customer (AR)

2. What if on January 20, Z paid X in advance for goods to be delivered. On January 30, X
delivered the goods to Z.

Jan 20 Cash 400,000

Contract Liability/ DR/ UI* 400,000

Jan 30 Contract Liability/ DR/ UI 400,000

Sales 400,00

Cost of Sales 250,000

Merchandise Inventory 250,000

*As per note 4, entities may use alternative descriptions.

 ● DR = Deferred Revenue
● UI = Unearned Income

Situation: On January 1, 2021, X Company is obligated to deliver 100,000 items of goods to

Company Z through a contract amounting to 400,000 with a cost of 250,000.

1. On January 30, X delivered 50,000 items to Z. On February 10, X delivered the

remaining 50,000 items. On February 28, Z paid X for the delivery of goods.

Jan 30 Contract Asset 200,000

Sales 200,000

Cost of Sales 125,000

Merchandise Inventory 125,000

*No AR debited yet since there is still an obligation.

* 200,000 = (400,000/100,000)*50,000
* 125,000 = (250,000/100,000)*50,000

Feb 10 Accounts Receivable 400,000

Sales 200,000
Contract Asset 200,000

*Eliminate contract asset and debit accounts receivable.

Cost of Sales 125,000

Merchandise Inventory 125,000

Feb 28 Cash 400,000

Accounts Receivable 400,000

Step 2: Identify the separate performances of obligations

● Whether obligations are:

○ Distinct = two obligations
■ Example: Delivering chairs and tables

○ Not distinct
■ Example: Delivering chairs and tables in one package

Step 3: Determination of transaction price

 ● Consider the effects of the following

1. Variable considerations
➔ Occurs when part of the contract depends on the outcome of a future
event (example: set expenses for 50 pax but 66 people came; additional
expenses)
➔ The entity shall estimate the amount of variable consideration
➔ Methods of estimating variable consideration:
◆ Expected Value Approach
● Used if an entity has a large number of contracts with
similar characteristics
● Applied when more than two possible amount is available
(problem is silent)
◆ Most likely amount approach
● Appropriate if the contract has only two possible outcomes
● Higher chance or probability of happening

* Check Illustrative Problem 1 and 2

2. Existence of a significant financing component

➔ Consider the time value of money (money diminishes purchasing power)
➔ Transaction price order of priority:
1. Cash price equivalent
2. PV of Future Net Cash Inflows

3. Non-cash considerations
➔ Transaction price is equal to the FV of non-cash considerations received

4. Consideration payable to customer

➔ Customer at some point is also your supplier
➔ If consideration paid is greater than its fair value, the difference is
deducted from the transaction price
➔ If consideration paid is less than or equal to its fair value, there is no
accounting problem (IGNORE)
➔ If fair value is 0, the whole consideration paid is deducted from the
transaction price

Step 4: Allocate transaction price to the separate performance obligation

● Does not apply to contracts with single performance obligations.

 ● Allocation basis relative fair value or stand-alone selling price of each performance
obligation.
● If the stand-alone selling price is not directly observable, an entity shall estimate the
stand-alone selling price.
● Methods of estimating stand-alone selling price:
○ Adjusted market assessment approach = looks at market price of fellow
competitors in the market (market value, average selling price in market)
○ Cost plus a margin approach (cost is always 100% the add the margin)
○ Residual approach

Step 5: Recognize revenue when each performance of obligation is satisfied

● Ways on satisfying performance obligations:

○ Satisfaction over the period of time = more than one obligation, all obligations
must be satisfied before recognizing revenue
○ Satisfaction at a point of time = “isang bagsakan ng pagsatisfy/perform ng
performance obligation”