AFAR.

03 REVENUE RECOGNITION

REVENUE FROM CONTRACTS WITH CUSTOMERS

References/Pronouncements
PFRS 15 – Revenue from Contracts with Customers
PIC Q&A No. 2020-02 – Conclusion on PIC QA 2018-12E: On certain materials delivered on site but not
yet installed
PIC Q&A No. 2020-03 – Q&A No. 2018-12D: Step 3 – On the accounting of the difference when the
percentage of completion is ahead of the buyer’s payment.
PIC Q&A No. 2020-04 – PFRS 15 – step 3 – Requires an entity to Determine the Transaction Price for
the Contract (Addendum to PIC Q&A 2018-12D)
PIC Q&A No. 2020-05 – PFRS 15 – Accounting for Cancellation of Real Sales (Supersedes Q&A 2018-
14)
PIC Q&A No. 2018-12 – PFRS 15 – Implementation Issues affecting the Real Estate Industry
PIC Q&A No. 2016-04 – Application of PFRS 15 “Revenue from Contracts with Customer” on Sale of
Residential Properties under Pre-Completion Contracts.

INCOME VS. REVENUE

Income is increases in assets, or decreases in liabilities that result in increases in equity, other than those
relating to contributions from holders of equity claims.
Revenue is the income arising in the course of an entity’s ordinary activities.

SCOPE
PFRS 15

 PO satisfied overtime
 PO satisfied at a point in time
o Sale of Services
o Sale of Goods
o Royalties
o Franchise
o Construction Contracts

PFRS 9

 Dividends
 Interest

PFRS 16

 Lease Income
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Other Income

 Government Grants
 Investment Property
PFRS 4/17

 Insurance Contract

1. Identify the Contract(S)

Contract is an agreement between two or more parties creating enforceable rights and obligation.

Attributes of Contract
1. Approval
2. Rights and Obligation identified
3. Commercial Substance
4. Payment terms identified
5. Collectability

Combination of Contracts
An entity shall combine two or more contracts entered into at or near the same time with the same
customer (or related parties of the customer) and account for the contracts as a single contract if one or
more of the following criteria are met:
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 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
 The goods or services promised in the contracts (or some goods or services promised in each of
the contracts) are a single performance obligation.

2. Identify the Performance Obligation

A performance obligation is a promise to transfer to the customer either;
 A distinct good or service
 A series of distinct goods or services that are substantially the same and have the same
pattern of transfer.
No transfer = No performance obligation

DISTINCT

 Separate utility to the customer

 Separately Identifiable
o Not integrated with other goods or services in the contract; or
o Does not modify or customize another goods or services in the contract; or
o Does not depend on or relate to other goods or services promised in the contract.

CUSTOMER OPTIONS FOR ADDITIONAL GOODS OR SALES

1. Material Right
You would not receive that option without entering the contract
Considered as separate performance obligation
E.g., buy 1 take 1, SMAC

2. Not a material right

Option to buy additional goods or services is stand alone selling price.

3. Determine the Transaction Price

The transaction price ais the amount of consideration in a contract to which an entity expects to
be entitled in exchange for transferring promised goods or services to a customer.
1. Fixed
2. Variable
3. Both
 Variable consideration (discounts, rebates, refunds, credits, price concessions, incentives,
performance bonuses, penalties or other similar items)
Consider if it is highly probable that it will not result into a reversal in the future.
o Expected Value
o Most Likely amount
 Non-cash consideration
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o At fair value
 Time value of money
Interest
o Significant financing component
 remove in determining transaction price
 Separate
o Insignificant financing component
 No need to separate
o Practical expedient (par 63)
 Consideration payable to a customer
Coupon or Voucher
o Exchange for distinct goods or services
 Part of revenue
o Not for exchange for distinct goods or services
 Reduction in transaction price

4. Allocate the transaction Price to the Performance Obligations

 Directly Observable
o Stand-alone selling prices
 Not directly observable
o Estimated cost plus margin approach
o Adjusted market assessment approach
o Using a residual technique

5. Recognize Revenue
 When the performance obligation is satisfied
 PO is satisfied when the promised good or service is transferred to a customer
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TRANSFER OF CONTROL of Goods or Services to Customers

Indicators of Control
 Present right to payment
 Legal title
 Physical Possession
 Significant risks and rewards of ownership
 Customer acceptance

VAT IS NOT PART OF THE TRANSACTION PRICE

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FS PRESENTATION (SFP)
CONTRACT ASSET
Before payment or before payment is due, you’ve already satisfied the performance obligation.
Performance obligation is already satisfied
Contract Asset xxx
Revenue xxx

RECEIVABLE
Entity’s right to consideration is unconditional, dependent on passage of time.
Performance obligation is already satisfied
Receivable xxx
Revenue xxx

CONTRACT LIABILITY
Customer pays a consideration or entity has a right to amount of consideration that is conditional
Before satisfaction of Performance obligation.
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Cash xxx
Contract Liabilities xxx

PIC Q&A No. 2020-03

On the accounting of the difference when the percentage of completion is ahead of the buyer’s payment.
POC > Payment
60% > 50%
10% - weather Contract asset or receivable for as long as you’ll record it consistently.

FS PRESENTATION (SCI)
CONTRACT REVENUE
CONTRACT COST

Contract Modification
Change Order/ Variation

CONTRACT COST
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Cost to obtain Contract – Commission

Capitalized and amortized
Practical expedient – 1 year or less, expensed

Cost to fulfill a contract

Cover by other standard – apply the applicable standard
Not covered by standard

 Directly related
 Generates or enhances resources
 Cost expected to be recovered

COST DIRECT TO A CONTRACT

1. Direct Labor
2. Direct Materials
3. Allocations of costs that relate directly to the contract or to contract activities
4. Costs that are explicitly chargeable to the customer under the contract
5. Other costs that are incurred only because an entity entered into the contract.
COST THAT ARE EXPENSED
1. General and administrative costs
2. Costs of wasted materials, labor or other resources to fulfil the contract that were not reflected in
the price of the contract
3. Costs that relate to satisfied performance obligations (or partially satisfied performance
obligations) in the contract (i.e. costs that relate to past performance
4. Costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance
obligations or to be satisfied performance obligations (or partially satisfied performance
obligations).

EXPECTED LOSS (PAS 11)

Old standard which superseded by PFRS 15
Recognition of expected losses
36. When it is probable that total contract costs will exceed total contract revenue, the expected loss shall
be recognized as an expense immediately.
37. The amount of such a loss is determined irrespective of:
1. Whether work has commenced on the contract
2. The stage of completion of contract activity
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3. The amount of profits expected to arise on other contracts which are not treated as a
single construction contract in accordance with paragraph 9.

EXPECTED LOSS (PFRS for SME)

23.26 When it is probable that total contract costs will exceed total contract revenue on a contract, the
expected loss shall be recognized as an expense immediately with a corresponding provision for an
onerous contract (see section 21).
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OTHER REVENUE RECOGNITION ISSUES

Right of Return

 An arrangement in which an entity transfers control of a product to a customer and also grants the
customer the right to return the product for various reasons ( such as dissatisfaction with the
product) and receive any combination of the following:
o A full or partial refund of any consideration paid
o A credit that can be applied against amounts owed, or that will be owed, to the entity
o Another product in exchange

Not expected to be returned – recognize revenue

Expected to be returned – revenue not recognized

Warranty
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What if warranty is required by law? – PAS 37

Principal-Agent Relationship

In determining whether you’re the principal or you’re the agent, these are the considerations:

 Primary responsible for Goods or Services

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 Inventory risk
 Establishing Prices
 Customer Credit risk
o Yes – Principal
o No – Agent

Licensing
A license establishes a customer’s rights to the intellectual property (IP) of an entity.
IP is a work or invention that is the result of creativity
Licenses of IP may include, but are not limited to, licenses of any of the following:

 Software and technology

 Motion pictures, music and other forms of media and entertainment
 Franchises
 Patents, trademarks and copyrights

Right to Access (RTA)

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 Customer cannot control

o The contract requires, or the customer reasonably expects, that the entity will undertake
activities that significantly affect the intellectual property to which the customer has
rights
o The rights granted by the license directly expose the customer to any positive or negative
effects of the entity’s activity
o Those activities do not result in the transfer of a good or a service to the customer as
those activities occur.
 May be evidenced by sales-based or usage-based royalty
o Recognize revenue when (as) the later of the following events occurs
 The subsequent sale or usage occurs
 The PO to which some or all of the sales-based or usage-based royalty has been
allocated has been satisfied (or partially satisfied).
 Recognized over time
Right to Use (RTU)

 Customer control
 Recognized at a point in time

Franchise (Business in a Box)

Involves the grant from the business owner (franchisor) to the applicant (franchisee), the legal rights to
obtain the trade name, market the service or goods and operare the business with an equivalent of one-
time fee.
Examples:

 Jollibee Franchise
 McDonalds Franchise
 Potato Corner Franchise

1. Initial Franchise Fee

 It refers to the contractual consideration for the franchise and initial services to be rendered by the
franchisor.
 Initial services rendered by the franchisor prior to the opening (i.e., pre-opening) of the
franchisee’s operations usually include the following:
o Assistance in site selection for the construction of the building
o Architectural planning and design fees
o Building and leasehold improvements and other relevant site work necessary
o Provision of bookkeeping and advisory services
o Provision of employee and management training
o Provision of quality control
o Provision of advertising and promotion.
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2. Continuing Franchise Fee

 Represents continues payment to the franchisor for providing specific future services, such as
advertising, and for continued use of intangible rights by the franchisee.
 Also known as sales-based or usage-based royalty.

Franchise Cost

 Direct Cost – contract cost (cost to obtain or cost to fulfil)

 Indirect cost – expensed outright

Non-refundable Up-front Fees

Repurchase Agreements (REPO)

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Consignment

Bill-and-Hold Arrangements
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Others

 Customer Incentives
o Buy 3, Get 1 Free
o Loyalty Programs
o Discount coupons
 Accounting – separate PO (i.e., material right)
 Gift Cards/Certificates
 Accounting
Cash
Contract Liability
#
Contract Liability
Revenue

CONSTRUCTION CONTRACTS (PFRS 15)

A contract specifically negotiated for the construction of an asset or a group of interrelated assets or a
combination of assets that are closely interrelated or interdependent in terms of their design, technology
or their ultimate purpose or use.
CLASSIFICATION

 Fixed Price Contract

 Cost Plus Contract
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OVER TIME
Methods for Measuring Progress
Output Methods

 Recognize revenue on the basis of direct measurements of the value to the customer of the goods
or services transferred to date relative to the remaining goods or services promised under the
contract.
 Examples: surveys of performance completed to date, appraisals of results achieved, milestones
reached, time elapsed and units produced or units delivered.
Input Methods

 Recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a
performance obligation (for example, resources consumed, labor hours expended, costs incurred,
time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that
performance obligation,
 If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be
appropriate for the entity to recognize revenue on a straight-line basis.
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OTHERS

 Pre-selling (PIC Q&A 2018-12)

o Reservation
o Contract to Sell (CTS)
o Deed of Absolute Sale
 Uninstalled Materials (PIC Q&A 2020-02)
o Customized – part of CITD
o Not customized – part of ECTC
 POC > Buyer’s Payment (PIC Q&A 2020-03)
o Contract Asset under PFRS 15.107
o Receivable under PFRS 15.108

REVENUE RECOGNITION CONCEPS (SME)

Reference/Pronouncement
Section 23 – PFRS for SME
SCOPE
Revenue from
1. The sale of goods
2. The rendering of services
3. Construction contracts in which the entity is the contractor
4. The use by others of entity assets yielding interest, royalties or dividends.
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OUT OF SCOPE

 Lease agreements;
 Dividends and other income arising from investments that are accounted for using the equity
method
 Changes in Fair Value of Financial Assets and Financial Liabilities or their disposal
 Changes in the fair value of investment property
 Initial recognition and changes in the fair value of biological assets related to agricultural
 Initial recognition of agricultural produce

Measurement of Revenue

 An entity shall measure revenue at the fair value of the consideration received or receivable.
o Consideration received
 Cash
 Non-cash
 Fair Value / Market Value
o Consideration receivable
 Interest-bearing (with reasonable interest rate)
 Face amount
 Interest-bearing (with unreasonable interest rate)
 Present value
 Non-interest bearing
 Present value

CONTRACT REVENUE

 Fixed Price
 Penalty
 Incentives
 Cost Escalation
 Claims
 Change Order

Sale of Goods
An entity shall recognize revenue from the sale of goods when all the following conditions are satisfies
1. The entity has transferred to the buyer the significant risks and rewards of ownership of the
goods
2. The entity retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold
3. The amount of revenue can be measured reliably
4. It is probable that the economic benefits associated with the transaction will flow to the entity
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5. The costs incurred or to be incurred in respect of the transaction can be measured reliably.
Sale of Services
Outcome can be estimated reliably
1. The amount of revenue can be measured reliably
2. It is probable that the economic benefits associated with the transaction will flow to the entity
3. The stage of completion of the transaction at the end of the reporting period can be measured
reliably
4. The costs incurred for the transaction and the costs to complete the transaction can be measured
reliably.
 Use POC method
Outcome cannot be estimated reliably
1. Recognize revenue only to the extent of contract costs incurred that it is probable will be
recoverable
2. Recognize contract costs as an expense in the period in which they are incurred
 Use cost recovery method or zero-profit method

Use by Others of Entity’s Assets

An entity shall recognize revenue arising from the use by others of entity assets when

 It is probable that the economic benefits associated with the transaction will flow to the entity
 The amount of the revenue can be measured reliably
An entity shall recognize revenue on the following basis

 Interest – effective interest method

 Royalties – accrual basis
 Dividends – when the shareholder’s right to receive is established, date of declaration

Franchise