te Chapter 3 eg ( Revenue from Contracts with Cy stom Rtg Related standard: PERS 15 Revenue from Contracts with Cust i lated s Omer “Learning Objectives . 1, State the five steps in the recognition of revenue, 2 Describe how performance obligations are ientitieg ii contract. ; ; i in 3, Describe how the transaction price is allocateg tb performance obligations. _ State the timing of revenue recognition and its measurem, 5. State the presentation of contracts with customers in tte statement of financial position. Introduction PERS 15 provides the principles in reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from aa entity’s contracts with customers. > Income - “is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity Participants.” (Conceptual Framework) Income encompasses boli revenue and gains. 7 > Revenue - is income arising in the course of an entity's ordinary activities. PERS 15 applies to contracts wherein the counterparty is? customer. 4 * Contract - “an agreement between two or more parties thi i creates enforceable rights and obligations.” (PFRS ws Appendix) A contract can be written, oral, or implied by an ent! 4 customary business Practice, itenoie| | | revel from Contracts with Customers 93 ae Customer ~ is “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.” (PERS ssAppendix A) , A counterparty to a contract is not a customer if he agrees articipate in the entity's activities wherein he shares the ad risks and benefits (eg, co-developing an asset) rather than ‘nthe output of the entity’s ordinary activities. PERS 15 applies to individual contracts with customers, sowever, a8 practical expedient, PFRS 15 may also be applied to group of similar contracts; provided, the effects on the financial statements would not differ materially when PFRS 15 is applied tely to each of the contracts within that group. PERS 15 does not apply to the following: Lease contracts (PFRS 16 Leases); Insurance contracts (PFRS 17 Insurance Contracts); Financial instruments; and Non-monetary exchanges. between entities in the same line of business to facilitate sales to customers. For example, 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. related | to oblall separal Boge Core principle 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 in exchange for those goods or services. Revenue recognition Anentity applies the following steps when recognizing revenue: Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract———_ ee 4 3 Step 5: Recognize revenue when (or as) the entity rt performance obligation ify the contract with the customer 4: Identi : Step a customer is accounted for only when all of 4 A contract with 7 following criteria The epntracting parties have approved the contract (in writin x impliedly from customary business practices) an, dan committed to perform their respective obligations; re b. The entity can identify each party's rights regarding the 004 or services to be transferred; s c. The entity can identify the payment terms for the goods or services to be transferred; ad. The contract has commercial substance (i.e., the risk, timing o, amount of the entity’s future cash flows is expected to change asa result of the contract); and e. The consideration in the contract is probable of collection, When assessing collectability, the entity considers only the customer's ability and intention to pay the consideration on due date. (PERS 15.9) are met: a. orally 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: a. “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 b. The contract has been terminated and the consideration received is non-refundable.” (PFRS 15.15) The entity need not reassess the criteria above if they hav? been met on contract inception unless there is an indication of # significant change in facts and circumstances, for example, when the customer's ability to pa * a rerjorates bs tly deterio? significantly. Pay subsequentlyRevenue from Contracts with Cust 95, If the criteria are not met on contract inception, the entity shall continue to assess the contract to determine if the criteria are subsequently met. PFRS 15 is applied over the duration of the contract (i.e., the contractual period) in which the contracting parties have present enforceable rights and obligations. A contract does not exist if each contracting party has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party. A contract is wholly unperformed if the entity has not yet transferred any promised good or service to the customer and has not yet received or not yet entitled to receive any consideration. Combination of contracts Two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) are combined and accounted for as a single contract if: a. The contracts are negotiated as a package with a single commercial objective; b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract; or c. Some or all of the goods or services promised in the contracts are a single performance obligation. (PFRS 15.17) Illustration: Identifying the contract with the customer ABC Co. sells industrial printing equipment to a customer for P5,000,000. The customer pays a P 1,000,000 nonrefundable deposit and issues a long-term note for the balance. The customer obtains control of the equipment at contract inception. Additional information: * The customer intends to open a publishing business. The equipment acquired from ABC Co. will be the main asset of the business. The business is located in an area where the market for publishing businesses is overly congested. The customer will need to compete with large and long-time7 w established companies to geta market share and the ee has little experience in the publishing industry. Mey «The customer intends to repay the loan primarily from in derived from the publishing business. The custome, hag other significant source of income that can be useq ti Ny the loan, © repay hi : «The financing arrange ment is on a Non-recourse basis, Analysis: ‘ . The customer's ability and intention to pay the balance of the consideration is in doubt because of the following reasons; The customer intends to pay the balance of the consideration (which is significant) primarily from income derived from the publishing business, which faces a high risk of failure because of high levels of competition and the customer lads a. experience. | b. The customer lacks other sources of income that can be used to) pay the balance. | c. The financing arrangement is on a non-recourse basis, meaning, | if the customer defaults, ABC Co: can repossess the equipment but cannot seek further compensation even if the collateral does not fully cover the unpaid balance. Conclusion: ABC Co. shall not recognize any revenue from the contract. ABC Co. shall treat the P1,000,000 nonrefundable deposit, and ay subsequent collections, as deposit liability. Revenue shall be recognized only when the collectability of the consideration becom probable or when either of the following occurs: a. ABC Co. has no remaining obligation to transfer a4 equipment to the customer and all, or substantially all, of the consideration has been received and is non-refundable; of aoe contract has been terminated and the considerati® teceived is non-refundable,Revenue from Contracts with Customers 7 Step 2: Identify the performance obligations in the contract ‘A contract includes promises to transfer goods or services to the customer. Each promise to transfer the following is a performance obligation to be accounted for separately: a. A distinct good or service (or a°distinct bundle of goods or services); OT b. A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer (PFRS 15.22) A promised good or service is distinct if: a. The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; and b. The promise to transfer the good or service 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: : a. is not an input to a combined output specified by the customer. b. 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 Prouised goods or services in the contract.a A promised good or service that is not dlsting combined with other promised goods OF Services until a bundle, goods or services that is distinct is identified. In some Cases, th may result to treating all the promised B00ds or services ind contract as a single performance obligati jon. A promise that is implied by ie entity’s Customa business practices, published policies or specific statements is alsy treated as a performance obligation if, at contract inception, the " promise creates a valid expectation of the customer that the entity will satisfy the implied promise. Performance obligations include only activities that involve the transfer of a good or service to a customer, Performance obligations do not include administrative tasks to set up a contract. Examples of promised goods or services: a. Sale of goods produced by a manufacturing entity; b. Resale of goods purchased by a trading entity (e.g., a retailer); c. Resale of rights to goods or services purchased by an entity; d. Performing a contractually agreed-upon task(s) by a service- oriented entity; e. Constructing, manufacturing or developing an asset on behalf of 2 customer; f. Providing a service of standing ready to provide goods ot services (e.g., unspecified updates to software that ate provided on a when-and-if-available basis) or of making 800ds or services available for a customer to use as and whet the customer decides; . 8. Providing a service of arranging for another party to transfet Goods or services to a customer (e.g, acting as an agent a another party); h. Granting rights to future th (eg., an . i e 800ds or services to be provided in es at a customer can resell or provide to its custome entity selling a product to a retailer_ promisesRevenue from Contracts with Customers 99 transfer an additional good or service to an individual who purchases the product from the retailer); Granting licenses; and Granting options to purchase additional goods or services (when those options provide a customer with a material right). (PFRS 15.26) i. je Jilustration: Determining whether goods or services are distinct (Based on IFRS 15 Illustrative Examples, 1249 to 1E58) ABC Co., a software developer, enters into a contract with a customer to transfer a software license, perform an installation service and provide unspecified software updates and technical support for a two-year period. Additional information: « ABC Co, regularly sells the license, installation service and technical support separately. « The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support. Analyses: Each of the promised goods and services are distinct because of the following reasons: a. The customer can benefit from each promised good or service either on its own or together with the other promised goods or services. | - Each of the promised goods or services can be sold separately. 7 * ~ The software remains functional even without the updates and technical support. b. Each promised good or service is separately identifiable. - The installation service does not significantly modify the software. : - As such, the software and the installation service are separate outputs rather than inputs used to produce a combinedoutput. Conclusion: ‘ There are four performance obliga 1, the software license; tions in the contract; 3. software updates; and 4. technical support i | 2. an installation service; | | | (Variation: “If the installation service significantly modify or customize the ' software to add significant new functionality to enable the software to interface with the other customized software applications used by the customer, then there will be thre, performance obligations in the contract as follows: | 1, customized installation service (including the software license, 2. software updates; and |_'3. technical support Step 3: Determine the transaction price c The entity determines the transaction price because this is the amount at which revenue will be measured. . Pisasgction Price ~ is “the amount of consideration to which a entity expects to be entitled in exchange for transferring Promised goods or services to a customer, excluding amourls collected on’ behalf of third part " (PFRS 15.Appendix A) f of third parties (e.g,, some sales ta%) a Je Consideration may include fixed amou® variable amounts, or both._Revenue from Contracts with Customers 101 step 4: Allocate the transaction price to the obligations The transaction price is allocated to each performance obligation identified in a contract based on the relative stand-alone prices of the distinct goods or services promised to be transferred, Performance «Stand-alone selling price is “the price at which a promised good or service can be sold separately to a customer.” (rrRs15.appe A) A list price or a contract price may be (but is not presumed to be) the stand-alone selling price of a good or service. If the stand-alone _ selling, price is not directly determinable, it shall be estimated — maximizing the use of observable inputs and applying estimation methods consistently in similar circumstances. The following methods may be used to estimate the stand- alone selling price: a. Adjusted market assessment approach — the entity evaluates the market where the goods or services are sold and estimates the price that a customer would be willing to pay for those goods or services. This may also include referring to competitors’ prices for similar goods or services and adjusting those prices as necessary to reflect the entity's costs and margins. b. Expected cost plus a margin approach — the entity forecasts the expected cost of satisfying a performance obligation and then adds an appropriate margin. Residual approach — the stand-alone selling price of'a good or servicé is the residual amount after deducting all the stand- alone selling prices of the other promised goods and services in the contract from the total transaction price. A combination of methods may be used if two or more 800ds or services have highly variable or uncertain stand-alone selling prices.ii transaction price tration: Allocating the ie ei Product X, Product Y, and Product Z to a cy, to for a lump sum price of 90,000. The products will be deliveres : a different points in time. Case 1: Relative stand-alone prices are determinable ABC Co. regularly sells Products X, Y and Z separately at py i 1,000, 40,000 and P60,000, respectively. Requirement; Allocate the transaction price to the Performance obligations. Solution: Product Stand-alone prices Allocation As allocated” 7 20,000 (90,000 x 20/120) 15,000 ry. 40,000 (90,000 x 40/120) 30,000 Z 60,000 (90,000 x 60/120) 45,000 Total 120,000 . 90,000 The differences between the stand-alone prices and the allocated amounts shall be treated as sales discount. Case 2: Relative stand-alone prices are not determinable ABC Co. does not regularly sell the products separately. Therefore, the stand-alone selling prices of the products are not directly observable. In estimating the relative stand-alone prices ABC Co. has gathered the following information: 2. The prices at which other competitors regularly sell product Similar to Product X and Product Y are P25,000 and 45,000 respectively, ABC Co’ cost of producing Product Y is P60,000. ABC © regularly marks-up its products at 20% above cost. Requirement: Alloca ite the tr 7 é forinan® obligations, ‘ansaction price to the per!Revenue from Contracts with Customers 403 Solution: Estimation Estimated As Product ___method prices Allocation allocated Adjusted market assessment 25,000 (90,000 x 25/142) 15,845 Adjusted market assessment 45,000 (90,000 45/142) 28,521 Expected cost plus Z ~~ amargin : (260,000 x 120%) 72,000___(90,000x 72/142) 45,634 Total 142,000 90,000 Case 3: Relative stand-alone prices are not determinable ABC Co. regularly sells separately Product X and Product Y at 20,000 and 40,000. However, Product Z is a highly customized product. It is the first of its kind in the market and ABC Co. has no available past information on the separate selling price for this product. Requirement: Allocate the transaction price to the performance obligations. Solution: Product Estimation method As allocated x N/A 20,000 Y N/A 40,000 Z Residual approach (90,000 - 20,000 — 40,000) 30,000 Total 90,000 Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Recognition ‘ ba Revenue is recognized when (or as) the entity satisfies a performance obligation.complete satisfaction of the Measurement dat the amount of the transaction price i: Revenue is measure’ ten: 2 to the satisfied performance obligi ction of performance obligations ce obligation is satisfied when the controj over 4 ised good or service is transferred to the customer. ees js the ability to direct the use of, and obtain substantially all of the economic benefits from, an asset. It includes the ability to prevent others from obtaining those benefits. Contra) exists even if only momentarily when goods or services a received and used. Benefits include the potential cash inflows or savings in cash outflows that can be obtained directly or indirectly in many ways, such as by: 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 reduce expenses; . selling or exchanging the asset; pledging the asset to secure a loan; and holding the asset. (PFRS 15:33) Satisfa A performan: mop aege The entity determines at the contract inception whether a performance obligation will be satisfied either: a. Over time; or b. Ata point in time eee obligations satisfied over time ‘i panies paar obligation that is satisfied over time me AS the entity progresses towards He obligation. A performanc igation f I e obligation is satisfi time if one & the following criteria is ie satisfied over time if a. The customer simultaneo; Provided by the antliye usly receives and consumes the benefits Performance as the entity performs.om. Revenue, Revere [OO wm Contracts with Customers . es fo i 105 Examples: i, Routine or recurring services in-which the receipt and simultaneous consumption by the customer of the benefits of the entity's performance can be readily identified. Tf the contract with the customer is discontinued and the customer enters into a contract with another entity to fulfill the remaining performance obligation, ‘the other entity would not need to substantially re-perform the work that the entity has completed to date. b. The entity’s performance creates or enhances: an asset (eg., work in progress) that the customer controls as the asset is created or enhanced. c. 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. Alte i. rnative use: 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. s 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 cost or the asset can only be sold at a- significant loss (eg. the asset has design specifications that are unique to the customer or is located in a remote area).q 106 San, © Enforceable right f payment for performance completed to ay, ii, An entity /ias an enforceable right 0 payment ‘for Perfor completed to date if the entity is entitled to an amoung he entity for any performance com, al t compensates d Pleteg 4 the event that the customer or another Party termina, reasons other than the entity’s failure, o ii, the contract for perform as promised. 2 The amount referred to in (ii) above shall be Sufficient fo the entity to recover the costs incurred in sat eI performance obligation plus a reasonable profit margin The compensation for a reasonable profit margin need not equal the profit margin expected if the contract was fulfilled as promised. (PERS 15.35 -37) iii. Examples of performance obligations satisfied over time: a. rendering of cleaning, security, maintenance, and other similar services that are provided over-a specified period of time and that the customer simultaneously receives and consumes the - related benefits as the entity performs d. construction of an asset, such as a building, that the customer controls as the asset is constructed _ Measuring progress towards complete satisfaction of a performance obligation . An entity recognizes revenue for each performance obligation satisfied over time by measuring the progress towards. the complete satisfaction of that performance obligation. The entity uses a single method of measuring progress for each performance obligation satisfied over time and applies that method to remeasure its Progress at the end of each reporting » period. Appropriate methods of measuri i : eas s de: a. Output methods ee b. Input methodsRevenue from Contracts with Customers ree eee 107 a eee Output methods Under output methods, progress is measured based on d measurements of the value of the goods or services ttohaferred't ; date relative to the remaining goods or services promised inde the contract. Examples: a. Surveys of performance completed to date pb. Appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered ; As a practical expedient, billings to the customer may be recognized as revenue if the entity has the right to that amount and that amount corresponds directly with the value of performance completed (e.g., a service contract in which an entity bills a fixed amount for each hour of service provided). The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may be costly. Input methods Under input methods, progress is measured based on efforts or inputs expended relative to the total expected inputs needed to fully satisfy a performance obligation. Examples: a. costs incurred . Tesources consumed labor hours expended |. machine hours used time elapsed eaos If efforts or inputs are expended evenly throughout the perférmance period, revenue may be recognized on a straight-line basis, ‘A weakness of input methods is that there may not be a direct telationship between an entity’s inputs and the transfer of control of an asset to a customer. In such cases, the entity may need to adjust the inputs used in the measurement.‘ 7 15 in the measure O ress i sure of Pros! ranges in the 1 f : oe gress 1S updated as © ircumstances neasure of Pro’ fi : on 0 ae reflect any changes in the outcome of the Perform Vey time to e accounted for as a chain ay sersifl ch changes ar uit aan inate in,accordance with PAS 8. Be in accounting &' measure of progress : oI a performance obligation. satisfied over fing if the progress towards the complete satisfac of the performance obligation can be reasonably measure If the outcome of a performance obligation cannot j. reasonably measured but the entity expects to recover the cogs incurred in satisfying the performance obligation, -revenué jg recognized only to the extent of the costs incurred until such time tha, the outcome of the performance obligation can be reasonably measured. Reasonable Revenue for recognized only Performance obligations satisfied at a point in time A performance obligation that is not satisfied over time is presumed to be satisfied at a point in time. Revenue from a performance obligation that is satisfied at a point in time is recognized WHEN the performance obligation is " satisfied. The entity considers the following indicators of transfer of control when determining the point in time at which the promised good or service is transferred to the customer: a. The entity has a present right to payment for the asset. b. The customer has legal title to the asset. ; control sie the entity is not precluded from transfert tele i to the customer if the entity retains the legs fas Protect the collectability of the transaction pri Tevenue may nevertheless be recognized. The enti ‘y has transferred physical possession of the assetEz Revenwe from Contracts with Custonte However, physical possession may not coincide with control of an asset if the sale is subject to a repurchase agreement or the sale is in fact a consignment agreement. Conversely, ina bill-and-hold arrangement, control may be transferred to the customer even though the entity retains physical possession of the asset. d. The customer has the significant risks and rewards of e. E a. Qi Remember the following: ownership of the asset. . The customer has accepted the asset. xamples of performance obligaiions satisfied at a point in time: rendering of installation, one-time repair, and similar services that the customer obtains the related benefits only after the service has been completely rendered sale of assets for which the customer obtains control of only. after the asset is transferred Revenue recognition Step 1: Identify the contract with | The contract is with a customer | the customer and (among others) the . collectability of the consideration is probable. Step 2: Identify the performance | Each promise to deliver a distinct obligations in the contract | good or service in the contract is ; treated as a separate performance obligation. Step 3: Determine the transaction | The transaction price is the amount price that the entity expects to be : entitled to in exchange for satisfying a ~—_—performance obligation.ee —- [Step 4: Allocate the transaction | price to the performance The transaction price is ay the performance obj located ; Bationg 4, © on the relative stand-ato, d igati Ne prj obligations the distinct goods or servieng of Step 5: Recognize revenue when | - _ For epee obligatogs (or as) a performance satis! “ Over Lime, reveniyg i obligation is satisfied recognized as the entity progresses towards the complete satisfaction of th, performance obligation, ~ For performance obligations satisfied at a point in time, revenue is recognized when the entity completely satisiog the performance obligation, Revenue is measured at the amount of transaction price allocated to the performance obligation satisfied. Illustration: The 5-step Method On January 1, 20x1, Entity A enters into a contract with a customer for the sale of a machine and related one-year maintenance services for a total contract price of 1,000,000. Entity A regularly sells these items separately. If they were to be purchased separately, their stand-alone selling prices are as follows: ~ _ €900,000 for the machine; and ~ 300,000 for the one-year maintenance services Entity A transfers the machine, and collects the tot contract price, on February 1, 20x1, The maintenance services sa on that date, *% Revenue recognition: Step 1: Identify the contra The contract qualifies f because all the require) ct with the customer i % Or accounting in accordance with PERS ‘ments are met.Revenue from Contracts with Customers 11 mre step 2: Identify the performance obligations in the contract There are two performance obligations in the contract — 4, transfer of machine; and 2, rendering of maintenance services. Each of these is a distinct good or service because: a. the customer can benefit from the machine and the maintenance services on their own. This is evidenced by the fact that they are sold separately. b. the promises to transfer the machine and provide the maintenance services are separately identifiable. Step 3: Determine the transaction price The transaction price is #1,000,000. Step 4: Allocate the transaction price to the performance obligations The transaction price is allocated to the performance obligations based on their relative stand-alone selling prices as follows: Stand-alone selling prices Allocation As allocated Machine 900,000 (1M x 900/1,200) 750,000 Maintenance services __ 300,000 (1M x 300/1,200) 250,000 1,200,000 : 1,000,000 Step 5: Recognize revenue ‘when (or as) a performance obligation is satisfied The promise to transfer the machine is a performance obligation Satisfied at a point in time because it does not meet any of the conditions for a performance obligation satisfied over time. The promise to provide the maintenance services is a Performance obligation satisfied over time because the customer Simultaneously receives and consumes the benefits from the Maintenance services as they are rendered. Accordingly:112 oy ) | revenue of P750,000 on February 1 transferred to the customer. ” 0 revenue from the maintenance rt over the one-year contract period as the services are inde " roviding the maintenance service, Te If the costs of P' expended evenly throughout the performance period, Engi may recognize revenue ona straight-line basis, i.e., 829 $333 mend per month (250,000 + 12 months). _« Entity A recognizes when the machine 1S e Entity A recognizes APPLICATIONS OF BASIC CONCEPTS: Step 1: Identify the contract with the customer | Concept: | PERS. 15 applies to contracts wi | non-monetary exchanges between _ business to facilitate sales to customers. | ith customers. It does not apply tp entities in the same line of Application: ABC Co. and XYZ, Inc. are provincial distributors of oil. ABC's principal place of business is located in Town One while XYZ's principal place of business is located in Town Two. However, each of the distributors operates in both towns. During the year, a bridge connecting these two towns has been damaged. Wary of the disruption of their business operations, ABC and XYZ agreed to exchange inventories of oil so that each cculd maintain its operations in both towns. Case #1: Dissimilar goods AB Peace oo rene ange its inventory of “premium” oil in Town Z's inventory of “diesel” oil in Town Two. ABCS “premium” oil has a fai ~ F isidvalnécerosioun. a noe eee Hie oil has?revenue from Contracts with Customers . 13 Question: How much revenue shall ABC recognize from the inventory exchange? Answer: None, The transaction is treated as an exchange (see Intermediate Accounting Part 1B on exchanges of PPE). Revenue shall be recognized only when the inventory received is sold to customers. Case #2: Similar goods ABC agreed to exchange its inventory of “diesel” oil in Town One with XYZ’s inventory of “diesel” oil in Town Two. ABC's “diesel” oil has a fair value of PIM while XYZ’s “diesél” oil has a fair value of P998,000. Question: How much’ revenue shall ABC recognize from the inventory exchange? Answer: None. See explanation in Case #1. Step 2: Identify the performance obligations in the contract “Concept: Each promise in a contract to transfer a distinct good ot | service is a performance obligation to be accounted for separately. la good or service is distinct if (a) the customer can benefit from the good or | service’ either on its own or together with other resources that are readily | available to the customer; and (b) the good or service is separately identifiable from other promises in the contract. . 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 teadily available resources. 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, This may result to treating all the promised goods or services in 2 contract as a single performance obligation.| activities that involve the tran nelude only Pert pligations ir a Env ce Performance obligations ner. Performance obligations do nog j,..% good or service to a cus eed adm tive tasks to set up a contract. os cd | oa Application: Sale subject to installation Fact Patiern: ABC Co. manufactures and sells security devices. All sales of ‘tandard devices are subject to installation. ABC Co. does ny perform installation services for security devices sold 4, competitors. Moreover, ABC. Co. discourages customers from in installing security devices purchase engaging other entities. y from ABC Co. as this would void the product's warranty. Case#i: - On April 1, 20x1, ABC Co. sells a standard security device toa customer. The customer is billed on that date. However, the installation is completed on April 16, 20x1. Analysis: ‘The promise to install the device is not a performance obligation because it is not a distinct service: a. The customer cannot benefit from the installation either on its own or together with other resources that are readily available to the customer (i.e., the installation service is not regularly sold separately); and ; b. The installation service is not separately identifiable from the " promise to transfer the device. The installation is an input © _ the combined output (of an installed device) specified in contract and the installation is highly interrelated with th Sve canes son of at aug Be n, and vice versa). Therefore, the promises to transfer the device and © ‘install i i : all it are combined and treated as a single performance abligatior Jya 115 Revenue front Contacts with Customer eee ———________lb Revenue is recognized on Apri 16, 20x1 when the installation is completed. : Case #2: On May 1, 20x, ABC Co. sells a non-standard security device to a customer. The customer is billed on that date. The contract does not require ABC Co. to install the device because the installation is simple and the customer can do it himself, Neither does ABC Co. have a past practice nor a published policy of installing such device. However, on May 3, 20x1, a sales representative of ABC Co. helped the customer install the device because the customer had trouble understanding the instruction on the device’s user's manual, Analysis: The installation is not a performance obligation because it not included in the contract, whether explicitly or implicitly. Revenue is recognized on May 1, 20x1. Case #3: On June 1, 20x1, ABC Co. sells a standard security device to a customer. To induce sale, ABC Co. offers the customer free three- month maintenance services. ABC Co. regularly sells maintenance services separately from security devices. The customer is billed on June 1, 20x1. However, the installation is completed on June 7, 20x1. Analysis: ¢ The promise to install the device is not a performance’ obligation because it is not a distinct service (see explanation in Case #1). However, the promise to provide the free maintenance services is a performance obligation because it is a distinct service: "a. The ‘customer cannot benefit from the maintenance services either on its own or together with other resources that are readily available to the customer {i.e., the maintenance services are regularly sold separately); and116 ~~ e services are separately identifiable fron, c i i : e sfer the device and install it. The maintenay le the combined output Specifieg ce s : ir 7 ce services do not signifi, 1, the maintenanc® cant) the Gai other promises in the contract, ang modify the interrelated with the othe er ‘ ighly i 7 ices are not hig! maintenance serv! i Ec ceraoet healt (the customer 5 decisit quiring the services does not affect the device op iis p. The maintenan promises to tram services are not art input to promises maintenance installation). ABC Co. allocates the “transaction price to the following serformance obligations: : oe P BF e device (as a single performanc 1. Transfer and installation of th : mount allocated is recognized as revenue on obligation) - the a June 7 after the installation is completed; and mount allocated is recognized as 2, Maintenance services — the a d revenue over the 3-month period as the services are provided, Case #4: On December 1, 20x1, ABC received an order for a special security device. It is the first time ABC Co. will be producing this kind of device. Aside from the regular installation, the contract also requires ABC Co. to provide free maintenance services for a 6- month period after the device is installed and to rectify at no further cost any faults found in the device during that period. Because the device is highly customized, ABC Co. does not have any past experience on the maintenance of such device and has 10 past information on the costs of its rectification. However, ABC Co. is expecting numerous changes that would need to be made the device after it is installed, The changes may cause significant modification to the device or its installation. : aEe. _ Revenue from Contracts with Customers Analysis: ‘The promises to (a) maintain the device and (b) rectify faults on the device are not performance obligations because the customer cannot benefit from them separately (ie., they are not regularly’ sold as separate services) and they are not separately identifiable from the other promises in the contract, ie, each of the maintenance and rectification: a. isan input to the combined output of transferring a device that functions in accordance with agreed upon specifications; b. may cause significant modification to the device or its installation; and c. ishighly interrelated to the device (ie., each is affected by the entity’s decision of not purchasing the device). Accordingly, ABC Co. shall treat the promises of transferting the device, installing it, providing maintenance services, and rectifying faults as a single performance obligation. Revenue shall be recognized after the 6-month period, wherein ABC Co. is contractually bound to rectify faults, has elapsed. Step 3: Determine the transaction price “Concept: The transaction price (and consequently, revenue) excludes | Application: ABC Co. is required to file quarterly sales tax returns with a tax bureau’ by the 20 day following the end of the calendar quarter. However, if sales taxes collected in a month exceed P1,000, such taxes should be remitted immediately by the 20% day of the month following the month of such collection. Sales taxes are computed as 3% of sales. ABC records sales taxes collected as sales revenue and sales taxes paid as charges against sales revenue. ABC's sales -Tevenue ledger shows the following:_.. SS e Debit Credit 41,200 January 200 oa i 1,21 bel February a 40 March 28,84 1,200 100,9 Requirement: Compute for the sales revenue and. saleg th payable in ABC's first quarter interim financial statements, a) Solution: Unadjusted sales revenue (inappropriately including sales taxes) 100.49 Divide by: (100% + 3% sales tax rate) 103% Sales revenue (transaction price excluding sales taxes) ery Multiply by: Tax rate '% Total sales taxes collected Za Sales taxes remitted 200 174 Sales taxes payable Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation | Basie concept: Performance obligations are classified as either (@) satisfied over time or (b) satisfied at a point in time. a) Revenue from a performance obligation satisfied over time is recognized over time AS the entity progresses towards the complete satisfaction of the obligation. b) Revenue from a performance obligation satisfied at a point in time is recognized WHEN the entity satisfi : } tine 5 the | Concept: Re performance obligation satisfied 0 c ede — from a performance obligation satisfied ove! “complete sati Tie time by measuring the progress toward Compete Salistaction of that performance obligation Application: ABC Co, is a syste engaged to develop ABC was Hing ant | 'ms developer. During the yea", an automated system for the bil_— event from Contracts with Customers 119 collection of an electric cooperative for a total contract ri 6,000,000. As of December 31, 20x1, the system is omy. 780 complete, However, ABC Co, had already billed the elient for of of the contract price or 5,400,000 and collected 4,860,000 therefrom, after 10% retention by the client to be reverted to ABC at the close-out date of the contract, Question: How much revenue shall ABC recognize during, the year? Answer: P4,200,000 (6M transaction price x 70% completion) Progress billings and collections on those billings do not affect the measurement of progress. Concept: Subscriptions to publications and similar items | Contracts involving, subscriptions to publi | normally, pérformance obligations satisfied over time, Revenue is tions and similar items are, | recognized as follows: > The transaction price is allocated to the number of items covered by the contract based on their relative stand-alone selling prices. | The allocated amounts are recognized as revenue as each item is | dispatched. |» When the items involved have the same relative stand-alone | selling prices, revenue is recognized on a straight-line basis over the period in which the items are dispatched. _ Application: ABC Co. sells 12-month mail order subscriptions for its magazine. Payments for subscriptions are received in advance. However, subscriptions received during the month are held for mail starting on the following month. The magazines have the same relative stand-alone selling prices. ABC received 1,200,000 subscriptions evenly during the last quarter of the year. Requirements: Compute for the following: 4 Total subscriptions revenue for the last quarter.120 b. Unearned revenue from the subscriptions receive, din he lag quarter. Solutions: iptions revenue irement (a): Sul : tol ceived evenly duting, the quarter Total subscriptions re 1,200 49 Divide by: Months in a quarter : i —3 Average collection per mouth — aay Collections in October > : 40049, Multiply by: Number of magazines mailed to subscribers di cvenue, iptions received in October , Revenue from subscription: ae Collections in November 400,000 Multiply by: Number of magazines mailed to subscribers pa Revenue from subscriptions received in November 3338 ee Collections in December 400,000 Multiply by: Number of magazines mailed to subscribers on Revenue from subscriptions received in December Total subscriptions revenue for the quarter 100,000 © Notes: a Subscriptions received during the month are held for mail starting on the following month. Thus: * Subscribers who paid in October receive 2 out. of 2 subscriptions during the quarter (i.e., Nov. and Dee. issues)- @ Subscribers who paid in November receive 1 out of 2 subscriptions during the quarter (i.e., Dec. issue). ‘* Subscribers who paid’ in December receive none. The fit magazine that they will receive period, is the January issue of the nextvenue from Contracts with Customers _ Rewer from CO — Requirement (0): Uncarned revenue otal collections during the quarter 1,200,000 Total revenue for the quarter (100,000) Unearned revenue 1,100,000 Concept: Tuition fees The performance obligation for tuition fees is satisfied over time cognized over the period of instruction. Therefore, revenue is Applica tion: ABC Preschool, Inc. operates ten months per school year, For the current school year, ABC made a total assessment of tuition fees of 10,000,000. Question: When should ABC recognize revenue from tuition fees? Answer: Ratably over the 10-month period of instruction. | Concept: Revenue for a performance obligation satisfied over time is | recognized only if the progress towards the complete satisfaction of the performance obligation can be reasonably measured. |If the outcome of a performance obligation cannot be reasonably | measured but the entity expects to recover the costs incurred in | satisfying the performance obligation, revenue shall be recognized | only to the extent of the costs incurred until such time that the | outcome of the performance obligation can be reasonably measured. Application: ABC Co. is a systems developer. During the year, ABC was engaged to develop a specialized anti-money laundering system for a bank at a total contract price of P6,000,000. This is the first time that ABC will be developing such system. As of year-end, the system is not yet complete and ABC is uncertain as to the outcome Of the systems development. Total costs incurred to date amounted to P3,000,000.—Rter3 2 a1: an costs incurred. How much te. Case 0 recovel the cos! eve : ABC expects t recognized for the vr P3,000,000 (ea yeal r al to the costs incurred to date) Anse’ Case #2: 1 the costs incurred if the system j, ABC doe: not develo} the year? recovel s not expect to i y ily. How much revenue is recognized fo, ped satisfactor Answer: None a ao _ os Concept: Advertising commissions | > Media commissions are performance obligations satisfied at d point in time. Therefore, revenue is recognized when the related ‘advertisement or commercial appears before the public. > Production commissions are performance obligations satisfied over time, Therefore, revenue is recognized by reference to the stage of completion of the project. > Application: On March 1, 20x1, ABC Advertising Co. signed a contract to make a TV commercial for a client at a contract price of P5,000,000. The client was billed on contract date but the contract price ws collected only on April 1, 20x1. The advertisement was aired on TV on April 3, 20x1. tion: Question: When should ABC recognize revenue from the contract? Answer: April 3, 20x1 Concept: Admission fees - Examples: Fees collecte banquets, and other 5; d for cone $)| . erts and other artistic performan®™ pecial events, cee | \a even from Contract ustomers é 123 If the fee covers a “one-time event.” the performance obligation is » bs i satisfied al a point in lime. Therefore, revenue is recognized when | | the event takes place, | } ifthe fee covers represents a subscription to a “number of ation is satisfied over time. events,” the performance oblig, Therefore, the Lransaction price is allocated to the events and recognized as revenue as each event is performed. If the events have the same stand-alone selling prices, revenue may be ight-line basis over the period(s) where the recognized ona s events take place. Application 1: One-time event ABC Production Co. organized a concert in the first quarter of 20x1. Sales of concert tickets from January to March 20x1 amounted to P1,000,000. The.concert was held on April 1, 20x1. Question: When should ABC recognize revenue from the contract? Answer: April 1, 20x1 Application 2; Series of events The Baguio Beans is a major league basketball team. The team has. 60 home games during a regular season. The regular season starts in November and ends in April of the following year. From November to December 20x1, Baguio Beans sold 3,000 regular season tickets for P1,200 each. As of December 31, 20x1, 12 home games have been played. Requirement: How much revenue is recognized for three months ended December 31, 20x1? Solution: Number of tickets sold 3,000 Selling price per ticket ——1.200 Total 3,600,000 Multiply by: Games played over Total games in a season 12/60 —720,000 Revenue from ticket sales - Dec. 31, 201yy mg Lee, Concept: Uncertainty on collectability of revenue already re wh Pe eatlectabilty of an amount already recognized certain, the uncollectible amount is co a rec + Me § recognize Me amount of 4.) % Tey Mh ly ioe " becomes UNC ; : PENSE, rather than as an adjustment to the oy a originally recognized, Application: Daring the year, ABC Co. sells goods to a customer for P10 5 pay. able as follows: 20% down payment and the balance ig Payaby in 8 equal monthly installments. The goods transfer 10 the customer at contract inception. All of the criteria under PERS 5 are met at contract inception. However, the customer defaulteq after paying 3 monthly installments. At the end of the eportng period, ABC Co. assessed that only 40% of the unpaid balance wi be collected from the customer. Question: How much revenue is recognized for the period? Ar 100,000. The uncollectible amount is recognized a expense (e.g., impairment loss or bad debts expense), rather than as adjustment to the amount of revenue originally recognized. Contract costs Contract costs include: | a. Incremental costs of obtaining a contract | b. Costs to fulfill a contract : Incremental costs of obtaining a contract , Incremental costs of obtaining a contract are “costs incurred it obtaining a contract w: ith a customer that the entity would 1} have incurred had the contract not been obtained (e.g commission).” (PERS 15.92) - ete These costs are recognized as asset if they are expect be recovered. However, ypense 7 45 a practical expedient, they are &ee Revenue from Contracts with Customers 125 Reven —. when incurred if the expected amortization period of the asset is one year oF less. Costs that would have been incurred regardless of whether the contract is obtained are expensed, unless they are explicitly chargeable to the customer. ts to fulfill a contract s incurred in fulfilling a contract that are within the scope of other standards (e.g,, PAS 2 Inventories, PAS 16 PPL, or PAS 38 sets) are accounted for in accordance with those Intangible Ass standards. Costs 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 are directly related to a contract or specifically identifiable anticipated contract. b. The costs generate or enhance resources that will be used in satisfying performance obligations in the future; and c. The costs are expected to be recovered. (PFRS 15.95) ay Costs that relate directly to a contract (or a specific anticipated contract) include any of the following: a. Direct labor (e.g., salaries and wages of employees who provide the promised services directly to the customer); b. Direct materials (e.g., supplies used in providing the promised services to a customer); c. Allocations of costs that relate directly to the contract or to contract activities (e.g., costs of contract management and supervision, insurance and depreciation of tools and equipment used in fulfilling the contract); 4. Costs that are explicitly chargeable to the customer under the contract; and ® Other costs that are incurred only because an entity entered into the contract (e.g, payments to subcontractors). (Rs 15.07 (e.g. paym9 are expensed when incurred: ¢ following cost : . General a administrative costs (unless those a. General a cost xplicitly chargeable to the customer under the contract, ate e y cha ° aes un f b. Costs of wasted materials, labor or other resources tg ful * Gontract that were not reflected in the price ofthe contayal™ = Costs that relate to satisfied or partially satisfied Petoriny ‘ Nee obligations in the contract (ie, costs that relate tg Past performance); and : a d. Costs for which an entity cannot distinguish whether the Costs relate to unsatisfied performance obligations or to g; istied oy partially sa (PERS 15.98) isfied performance obligations. Amortization and impairment Contract costs that are recognized as asset are amortized on systematic basis that is consistent with the transfer of the related goods or services to the customer. The amortization is updated for any significant change in the expected timing of transfer of the related goods or services to the customer. Such a change is accounted for as a change in accounting estimate in accordance with PAS 8. Impairment loss is recognized in profit or loss as follows: First, recognize impairment loss in accordance with another Standard (e.g., PAS 2, PAS 16 and PAS 38); Next, recognize impairment loss in accordance with PERS 15, which is the excess of the asset's carrying amount over: the remaining amount of consideration that the entity expects to receive in exchange for the goods or services which the asset relates; [ess 1. a. | the costs that relate directly to providing those goods 0 Services and that have not been recognized as expenses: 3. Lastly, the resulting carrying amount after applying ‘Step 2'# ‘ncluded in the cash-generating unit (CGU) to which the a tongs for the purpose of a lying PAS 36 Impairment Assets to that CGU, PPlying PAS 36 Imp (PPRS 15.103)A subsequent reversal of impairment is recognized in t or loss. However, the reve I should not result to an profil ' ' nerease int the assets carrying amount in excess of the amount i Id have been determined (net of amortization) if no airment loss had been recognized previously, that wou! imp’ [ilustration 1: Incremental costs of obtaining a contract RS 15 Illustrative Examples, E189 tw E191) (Based " ABC Co, @ consulting firm, wins a competitive bid to provide asulting services to a new customer. ABC Co. incurred the ratowing costs to obtain the contract: External legal fees for due diligence 15,000 Travel costs to deliver proposal 25,000 Commissions to sales employees 10,000 ABC Co. also pays discretionary annual bonuses to saies supervisors based on annual sales targets, overall profitability of the entity and individual performance evaluations. Total bonuses earned by sales employees to date amounts to P2,000. It is probable that this amount will not reverse by year-end. Requirement: Determine the costs that qualify as asset and the costs that will be expensed outrigit. Solution: Asset Expense External legal fees for due diligence 15,000 Travel costs to deliver proposal 25,000 Commissions to sales employees 10,000 Accrued year-end bonuses 2,000 Totals 10,000 * Notes: * The sales commissions incurred in obtaining the contract are Tecognized as asset because these will be recovered throughconsulting services, The tl 5 from the . future fees from ’ aeliea a amortized over the period the consulting SerViggg be ; Sat provided. ol coal ate ¢ fe external legal fees and travel costs are expensed Oui : youl ent because they would have been incurred regardless pecaus the contract was obtained. The year-end bonuses are expensed because they incremental costs of obtaining the contract. Of whet Ae hyp Mlustration 2: Costs to fulfill a contract ABC Co. enters into a contract to provide after-sales support fo, customer for three years. The contract is renewable for Subsequent one-year periods. ABC Co.'s past experience shows tiat, oy average, clients make two contract renewals. Before Providing the service, ABC Co. is required to set up a workplace. Control over the workplace is not transferred to the client, but will be used by ABC Co. to provide the service. ABC Co. incurred the following setup costs: a. Computers, telephones and other hardware — 1,000,000 b. Internet and telephone connection 6,000 c. Software acquired for the client 250,000 d. Local area network (LAN) setup and testing 50,000 The LAN costs enhance resources that will be used in providing the services, In addition, ABC Co. incurred P20,000 training costs of employees who will be directly involved in providing the services Requirement: Determine the costs th; at qualify as asset and the cos that will be expensed outright. _Solutio on — : a Asset Expense & other hardware (PAS 16) 1,000,000 Internet and telephone connection om Software acquired for the client (PAS 38) 250,000 Computers,1 Contracts with Customers 129 eve LAN setup and testing (PFRS 15) 50,000 Training costs 20,000 Totals 1,300,000 26,000 The LAN setup and testing costs will be amortized over 5 years (.e., over the contract term of 3 years plus the anticipated contract renewals of 2 subsequent one-year periods). Presentation ‘A contract is presented in the statement of financial position as a contract liability or a contract asset when one of the contracting parties has performed. An unconditional right to consideration is presented separately as a receivable. Contract liability — is “an entity's obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.” (PFRS 15.Appendix A) Acontract liability is recognized at the earlier of the date: a. The entity receives consideration before the good or service is transferred to the customer (ie., advance payment). b. The entity has an unconditional right to the consideration before the good or service is transferred to the customer (e.g., a non- cancellable contract requires payment in advance). (PFRS 15.106) Contract asset - is “an entity's right to consideration in exchange for goods of services that the entity has transferred to a customer when that right is conditioned on something other than the passage -of time (for example, the entity’s future performance).” A contract asset (excluding amounts recognized as a teceivable) is recognized when the good or service is transferred to the customer before the consideration is received or becomes due, A contract asset is measured, assessed for impairment, Presented and disclosed in accordance with PFRS 9.wo 5 right to consideration van entity” ae is unconditional jf only is Receivable - is “eration i unconditional. A right to consideral ment of that consi, oe passage of time is required before Pay’ Msideration | is ‘ect to refund in the future” 5 due, even if the amount is subject ture, hes 15.108) Receivables are accounted for under PFRS 9. On init recognition, any difference between the A de ot of receivable in accordance with PERS 9 - © Correspondin, amount of revenue recognized is recognized as expense eg, impairment loss). ; . : PERS 15 does not prohibit the use of alternative terms for and “contract: liability” so long as sutficien: vided to enable users of the financial statemenis “receivables” and “contract assets.” “contract asset’ information is pro to distinguish between GQ Remember the following: Scenario. > Consideration is received or becomes due before goods or services are transferred to the Accountiny 1 Recognize a contract liabili customer. > Goods or services are transferred to the customer before consideration is received: a. Right to consideration is © Recognize a contract asset. conditional. b. Right to consideration is & Recognize a receivable. unconditional. “ Mlustration 1: Contract liability and Receivable (Based on IFRS 15 Illustrative Examples, 1E198 to 1E200) eit phere ABC Co. enters into a contract to transfer # the customer 6 Tastee bei 31, 20x1. The contract requif™® January 31, 20x1. me @ consideration of P1,000 in advance 1 2OxL The product tome? PaVs the consideration on Met ‘ct transfers to the customer on March 31, 20%te _Revenu fo Requirement: Provide the journal entries under each of the following scenarios: (A) the contract is cancellable and (B) the syntract is on-cancellable, ‘ scennrio A: Cancellable Scenario B: Non-cancellable | x Jan. 1.2001 | _No entry | ~ | Jan.31, 2041 Receivable..........4..1,000 Contract liability...........1,000 | Mar i200 panoe een | Cash. Contract liability. Receivable ‘Mar.31, 20x1 ‘Mar. 31, 20x1 Contract liability Contract liability. Revenue... Revenue.. * Noentry is made on Jan. 1, 20x1 (date of receipt of sales order) because neither party has performed his obligation in the contract. lan. 31, 20x17 * A receivable is recognized on Jan. 31, 20x1 under Scenario B because ABC Co. has an unconditional right to consideration (ie, the non-cancellable contract requires payment on this date). ABC Co. is entitled to the consideration whether the customer pursues or cancels the contract. No receivable is recognized under Scenario A because ABC Co. does not have an unconditional right to consideration (ie,, the contract is cancellable).Mar. 1, 20x1 * Under Scenario A, a cont ; advance payment is received (Mar. 1). / Under Scenario B, a contract liability iS recognize i earlier of the date the entity obtains an unconditional ti the consideration (Jan. 31) and the date the advance is actually received (Mar. 1). liability is: re ‘Copnized When 4 he ty Payteny Mar, 31, 20: * Revenue is recognized only on March 31 when performance obligation is satisfied (i.e, the goods transferred to the customer). the ate Illustration 2: Contract asset On January 1, 20x1, ABC Co. enters into a contract with a customer for the delivery of 1,000 units of a product. The contract price is P10 per unit. However, because ABC Co,’s inventory is low, the parties agreed to the following: a. 200 units will be delivered on January 5 and the balance on February 1. b. The customer pays the total consideration only when all of the 1,000 units have been delivered. Requirement: Provide the journal entries, Assume the deliveries and payment were made as planned. Solution: Jan. 1, iy Noentry fn. 5. | Contract asset (200 units x P10) 2,000 i Revenue we Mes: Cash (1,000 units x P10) 10,000 Contract asset Revenue (800 units x P10) weeoenue from Contracts with Customers 133 & Notes: « Contract asset is recognized on Jan. 5 (rather than ‘receivable’ because ABC Co. does not have an unconditional right for the consideration, ie, payment is due only when all of the units are delivered. + Revenue is recognized as the units are delivered to the customer. Customers’ unexercised rights A prepayment received from a customer is recognized as ‘a contract liability because it represents the entity’s obligation to transfer, or to stand ready to transfer, goods or services in the future. On the other hand, the prepayment gives the customer the right to receive those goods or services in the future. Revenue is recognized only when the entity transfers those goods or services. However, there may be cases wherein a customer.may not ° exercise all its contractual rights. Those unexercised rights. are often referred to as breakage. A breakage that results from a non-refundable prepayment is recognized as revenue in proportion to the pattern of rights exercised by the customer when the entity expects that it will be entitled to the breakage or when the likelihood of the customer exercising its remaining rights becomes remote. ADDITIONAL CONCEPTS RELATED TO STEP 2 Step 2: Identify the performance obligations in the contract Warranties It is common for an entity to provide a customer a warranty for a product or service sold, whether in accordance with the contract, the law, or the entity’s customary business practices. For example, ~ San entity gives a customer the right to return a defective ptoduct in exchange for a functioning product. The nature of a warranty can vary significantly across , industries and contracts. Warranties may provide the customer:Cha ass nan 4 Dlg malate’ ill functi that the related product will function as the a, a. Assurance intended b it compli pcauuse os with agreed-upon specificag baa ‘ations, or 7 p, Service in addition to the assurance in (a) above. >, Servi a are accounted for as follows: anty that provid the customer service iN addition assurance that the product 0 specifications is a performances f the transaction price Warranties >» A wart complie ¢ obligation. Accordingly, shall be allocated to it. Tis Is with agreedsing, rtion 0 usually the case if the warranty is sold or negotiated as q separate product. that is not sold as a separate However, 2 warranty ct is nonetheless treated as a performance obligation it wided service in addition to assurance that h agreed-upon specifications. der the following when assessing if 1 with a service in addition to produ the customer is pro the product complies wit ‘The entity shall consi a warranty provides a custome! the assurance that the product complies with agreed-upon specifications: Whether the warranty is required by Iaw — a warranty required by law is not a performance obligation because such requirements typically exist to protect customers from the risk of purchasing defective products. b. The length of the warranty coverage period — the longet the coverage period, the more likely that the warranty is@ performance obligation because it is more likely that @ service will be provided in addition to the assurance that ‘ ne cia te with agreed-upon specifications: el pai that the entity promises to perfor” Penne i‘ ity necessarily needs to perform in or det gibi . assurance, that a product complies with performance aa likely do not give rise (0? freight for defecive'ion (eg, the entity shouldes ive units to be returned). a.evenne from Contracts with Customers 135 » A warranty that neither provides the customer service in addition to assurance that the product complies with agreed- upon specifications nor is sold separately is not a performance obligation. Such warranty is accounted for under PAS 37 Provisions, Contingent Liabilities and Contingent Assets. A warranty that is both an asstirance-type and a service- type shall be treated as a single performarice obligation if the entity cannot reasonably account for them separately, A law that requires an entity to pay compensation if its products cause harm or damage does not give rise to a performance obligation. For example, a manufacturer might sell products in a jurisdiction in which the law holds the manufacturer liable for any damages that might be caused by a consumer using, a product for its intended purpose. Similarly, an entity’s promise to indemnify the customer for liabilities and damages arising from claims of patent, copyright, trademark or other infringement by the entity's products does not give rise to a performance obligation. The entity shall account for such obligations in accordance with PAS 37. Illustration 1: Warranties (Based on IFRS 15 Illustrative Examples, [E223 to 1E229) ABC Co,, a manufacturer, provides its customer a warranty with the purchase of a product. The warranty provides assurance that the product complies. with agreed-upon specifications and will operate as promised for one year from the date of purchase. The contract also provides the customer with the right to receive up to 20 hours of training services on how to operate the product at no additional cost. Requirement: Identify the performance obligations. Analyses: * Each of the product and the training service is distinct because (a) the customer can benefit from them separately either on their| aes gh own or together with other resources that are readily ay, Vi to the customer and (b) each is separately identifiable trom tt mises in the contract. Therefore, the product ang trainj” aie are separate performance obligations. j iy « The warranty does not provide service os addition assurance that the product complies with agree specifications. Therefore, the warranty is not a g erformance obligation. ect Recording, ABC Co. allocates the transaction price 9, nly the (1) product and (2) training services. 0 the upg Parate Illustration 2: Warranties ; ABC Co. sells goods to a customer. The contract requires ABC-¢) to remediate any ‘unsatisfactory performance, which is no, governed by normal warranty provisions. Accounting: > If ABC Co. can reliably estimate the outcome of the contrat and the warranty provides the customer service in addition to assurance that the product complies with agreed-upon specifications, ABC Co. shall account for two performance obligations (the goods and the warranty). ABC Co. shall allocate the transaction price to these obligations and recognize revenue when (or as) these obligations are satisfied. » If ABC Co. cannot reliably estimate the outcome of the contract, ABC Co, shall treat the contract as a single performance obligation, Consequently, ABC Co. shall not recognize any revenue until after the time period for which ABC Co. is contractually bound to remediate any defects on the produd sold has elapsed. This is because only after ther that ABC Co. transfers control over the goods to the customer. Principal versus Agent considerations When another party'is involved in a customer, the entity principal or an agent. Providing goods or services to Shall determine whether it-is acting #*137 The entity is a principal if it controls the good or service gefore the good or service is transferred to the customer. However, the entity is not necessarily a principal if it obtains legal title of 4 product only momentarily before legal title is transferred to the customer. A. principal may personally satisfy a performance obligation or it may engage another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf. When the performance obligation is satisfied, the principal recognizes revenue at the gross amount of consideration. The entity is an agent if its performance obligation is to arrange the provision of goods or services by another party. When the performance obligation is satisfied, the agent recognizes revenue at the commission or fee to which itis entitled. The following are indicators that an entity is an agent (and therefore does not control the good or service before it is provided to a customer): a. Another party is primarily responsible for fulfilling the contract; b. The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping or on return; c. The entity does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited; d. The entity's consideration is in the form of a commission; and e. The entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party's goods or services. Illustration 1: Arranging for the provision of goods or services (Based on IFRS 15 Illustrative Examples, IE231 to 1E233) ABC Co. operates a website that enables customers to purchase 800ds from a range of suppliers who deliver the goods directly to the customers. When a good is purchased via the website, ABCcommission based on the sales Price yment between the supplier ay, By set by the supplier. ABC Co, - thy Utes Co. is entitled to a 10% Co’s website facilitates pa at prices that are customer non-refundable payment from customers before op, ders rther obligations to te processed. ABC Co. has no furth gi the CUstome, after arranging a sale. Analysis: ABC Co. is an agen service before it is provided to a custo above are present). t because it does not control the goog ,, mer (i.e, indicators‘ jog ABC Co.'s performance obligation is to arrange for the Provision of) goods by the supplier. When this performance obligation js satisfied, ABC Co. recognizes revenue in the amount of the commission to which it is entitled. Illustration 2: Promise to provide goods or services (Based on IFRS 15 Illustrative Examples, E234 to 1E238) ABC Co. enters into a contract with a customer for equipment with unique specifications. ABC Co. and the customer develop the specifications for the equipment. ABC Co. then communicates the specifications to a supplier which ABC Co. subcontracts to manufacture the equipment. | The supplier shall deliver the equipment directly to the customer. Upon delivery, ABC Co. shall’ pay the supplier the agree! subcontract price. ABC Co. and the customer negotiate the selling price, of which the customer is given a 30-day credit term. ABC Co.’s profit is bas* on the difference between the selling price negotiated with customer and the subcontract Price charged by the supplier. The conti é customer ed sere Goo ae the customer res ek remedies for defects in the equipment from1 ae |). 4 revenue from Contracts with Customers ee) supplier under the supplier's warranty. However, ABC Co. is responsible for any corrections to. the equipment required resulting from errors in specifications. i ‘Analysis: "ABC Co. is a principal because it controls the equipment before it is provided to the customer. This is evidenced by the following: a. ABC Co. is primarily responsible for fulfilling the contract because, although the manufacturing is subcontracted, * RC Co. is ultimately responsible for ensuring that the equipment meets the specifications for which the customer has contracted. b. ABC Co. has inventory risk because of its responsibility for corrections to the equipment resulting from errors in specifications, even though the supplier has inventory risk during production and before shipment. . c. ABC Co. has discretion in establishing the selling price with the customer, d, ABC Co.’s consideration is not in the form of a commission. e. ABC Co. has credit risk for the amount receivable from the customer. . When the performance obligation is satisfied, ABC Co. recognizes revenue at the gross amount of the selling price negotiated with the customer. Illustration 3: Promise to provide goods or services (Based on IFRS 15 Illustrative Examples, 1E239 to 1E243) ABC Co. agrees to, purchase a specific number of tickets from major airlines at reduced prices and resells them at a higher price. ABC Co. must pay for those tickets regardless of whether it will be able to resell them. ABC Co. determines the prices at which the ~ tickets are resold to customers. Customers pay as they purchase tickets; therefore ABC Co. has no credit risk.| | the customers in resolving, complaints assists (Ale SVEN, see ABC Co. also oe by the airlines. However, cach jy," the service i fulfilling obligations aspodalte with the ti is responsible smnedies toa customer for dissatisfaction With q including '€ 'e service. Le - : fe principal because it controls the tickets before they ABC Co. 18 “ns «. This is evidenced by the following. are ee vim responsible for fulfilling the ing ane i providing the right to fly: although, NOL the flighy itself, which will be provided by the airline. b. ABC Co. has inventory risk because the tickets are Purchase before they are sold to the customers and ABC Co. is expose to loss resulting from the failure to resell the tickets for more a. than their cost. : : ABC Co. has discretion in establishing the selling price with the customer. d. ABC Cos consideration is not in the form of a commission, but instead depends on the sales price it sets and the costs of the tickets that were negotiated with the airline. ABC Co. recognizes revenue at the gross amount of the selling price of the tickets as the tickets are resold to the customers. Illustration 4: Arranging for the provision of goods or services (Based on IFRS 15 Illustrative Examples, 1E244 to [E248) ABC Co. sells vouchers that entitle customers to significant discounts on future meals at specified restaurants. ABC Co. dots not purchase the vouchers in advance but rather purchases them only upon customer request. ABC Co. and the restaurant: the vouchers will be sold of the voucher Price Wher s jointly determine the prices at which | to customers. ABC Co. is entitled !% J n it sells the voucher. Customers PY *ovenue from Contracts with Customers 141 = they purchase the vouchers and payments are non-refundable, Therefore, ABC Co. has no credit risk. ‘ _ ABC Co. also assists the customers in resolving complaints about the.meals and has a buyer satisfaction program. However, the restaurant is responsible for fulfilling obligations associated with the voucher, including remedies to a customer for dissatisfaction with the service. Analysis: ABC Co. is an agent because it does not control the good or service before it is provided to a customer. ABC’s performance obligation is solely to arrange the provision of good or service by the restaurants. These are evidenced by the following: a, ABC Co. is not responsible for providing the meals. These will be provided by the restaurants. b, ‘ABC Co. does not have inventory risk because it does not purchase the vouchers before they are sold to the customers. c. ABC Co. does not have the full discretion in setting the sales prices for the vouchers because the sales prices are jointly determined with the restaurants. d. ABC Co.’s consideration is in the form of a commission. ABC Co. recognizes revenue in the amount of the commission to which it is entitled upon the sale of each voucher. Consignment arrangements Under a consignment arrangement, an entity (called the ‘consignor’) delivers goods to another party (called the ‘consignee’ who undertakes to sell the goods to end customers on behalf of the entity. The entity recognizes revenue only when the consignee sells the consigned goods to end customers because it is only at this point that the control of the asset is transferred to the customer. mSo. 4 Se Te ace ee = i it: Indicators of a consignment arrangemen' 5 controlled by the entity until a SPecifig he sale of the product to a custome dealer or until a specified period expires; b. The entity is able to require the return of the Prod, ‘ ir transfer the product to a third party (such as another dele and ee , The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay? deposit). dey a. The product i eng Of occurs, such as Illustration: Consignment sales ABC Co. produces a wide variety of frozen foods. Due to ity faltering economy, ABC closed its provincial sales outlets. Instead, ABC outsourced various distributors to sell its products. Fag distributor accepting delivery shall pay ABC 10% of the factory selling price of the goods delivered and accepied. However, if the distributor fails to sell all of the goods accepted before their expiration dates, ABC is obligated to repurchase the unsold goods, In June 20x1, ABC delivered goods with total factory selling price of P10,000,000 to its distributors. ABC received 10% of the total factory selling price of the goods delivered. Question: When should ABC recognize revenue from the goods delivered? Answer: When the goods are sold to the ultimate customers. ABC shail not recognize revenue from any unsold goods. email options for additionai goods or services ean options to acquire additional goods or services for or at a discount come in man: i i y forms, including: a._ sales incentives or other discounts on future goods or servi b. contract renewal options : ® customer award credits (or points)ane even from Contracts with Customers Ro A customer option is accounted for as a performance obligation if it provides the customer a material right that the fustomer would not receive without entering into that contract The transaction price allocated to the option is treated as prepayment for future goods or services and recognized as revenue only when the goods or services are transferred or when the option expires, When estimating, the stand-alone selling price of the option for the purpose of allocating the transaction price, the entity shall consider the likelihood that the option will be exercised. A customer option that does not provide the customer with a material right is wot a performance obligation. For example, the price for the additional goods or services reflects their stand- alone selling prices. Illustration 1: Option provides the customer a material right (Based on IFRS 15 Illustrative Examples, [E250 to 1E253) ABC Co. enters into a contract for the sale of Product A for P100. As part of the contract, ABC Co. gives the customer a 40% discount voucher for any future purchases up to P100 in the next 30 days. ABC Co. intends to offer a 10% discount on all sales during the next 30 days as part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% discount voucher. Past experience shows that 80% of customers redeem the voucher " and the average additional purchase is P50. Requirement: Determine the performance obligations and allocate the transaction price to each of those obligations. Solution: Because all customers will receive a 10% discount on purchases during the next 30 days, the only discount that provides the Customer with a material right is the incremental discount of 30% (40% - 10%). ABC Co. allocates the transaction price to the following performance obligations based on their stand-alone selling Prices; ~~Performance __obligati Produc “Stand-alone selling prices” selling prices ! i 100 (100 x 100/112 i loca WY) 12 (10x 12/112) 112 aR Allocation aS Illustration 2: Option does not provide the customer a matey, right : (Based on IFRS 15 Illustrative Examples, [E254 to 1E256) ABC Co., a telecommunications company, enters into a contrac, with a customer to provide a cellphone and network Service fo, 2,499 monthly payments over the next 2 years, Although possession of the cellphone transfers to the customer at contrac inception, ownership transfers only ‘at the end of the 2-year contract. The post-paid plan includes up to 100 call minutes ang 500 text messages each month. Additional calls or text messages will be billed at the regular prices of P8 per call minute and PI per text message. Requirement; Determine the performance obligations. Solution: | * Each of the cellphone and the network service is distint because (a) the customer can benefit from them separately eithet | on their own or together with other resources that are readily available to the customer and (b) each is separately idontifabl from other promises in the contract, Therefore, the cellphor® and the network service are separate performance obligations The option to purchase the additional call minutes and tev does not provide a material right that the customer would" receive without entering into the contract. This is because Prices of the additional call minutes and texts reflect the sa" alone selling prices for those services, Therefore, the opti" purchase additional call a minutes and texts is performance obligation,Hracts with Customers 145 Accordingly, the transaction price shall be allocated only to the cellphone and the network s : Revenue for the additional call minutes or texts will be recognized if and when those services are provided, Illustration 3: Option provides the customer a material right ABC Co. enters into 100 separate contracts with custorners to provide one year of maintenance services for P1,000 per contract. The terms of the contracts specify that at the end of the year, each customer, has the option to renew the maintenance contract for a second year by paying an additional P1,000. Customers who renew for a second year are also granted the option to renew for a third year for P1,000. The entity charges significantly higher prices for maintenance services to customers that do not sign up for the maintenance services initially (i.e, when the products are new). That is, the entity charges P3,000 in Year 2 and P5,000 in Year 3 for annual maintenance services if a customer does not initially purchase the service or allows the service to lapse. The entity expects that 90% of the contracts wil! be renewed at the end of Year 1 and 90% of the contracts renewed at the end of Year 1 will be renewed at the end of Year 2. The entity also determines that recognizing revenue on the basis of costs incurred relative to the total expected cosis depicts the transfer of services to the customer. The estimated costs for a three-year contract are as follows: Year 1 P600, Year 2 ?750, and Year 3 P1,000. Requirement: Compute the expected revenue to be recognized in each of Years 1 to 3 of the contracts. Solution: The total expected considetation is computed as follows:7 0 cu i ted considg {100 x 100% x PL,000) Toe (100x 90% xP 1,000) 90,000 (400 90% x 90% » PL O00) 81,009 i 271,00) ——~ ected consideration for each contract ig as ‘The allocation of the exp yy {for likelihood of contract Allocation of expecteg renewal consideration (750 x 90%) =675 (271K x 675/2,085) = 87,79) 2 3 (1,000 x 90% x 90%) = 810 (271K x 810/2,085) = 105,399 Totals 2,085 271,000 Totals OS Journal entries: For simplicity, assume that revenue and cash collection are recognized on the same date. 201] Cash (100 contracts x P1,000 per contract) 100,000 Revenue 78,00 Contract liability (P100K - P78K) 2,000 202 | Cash (90 contracts x P1,000 per contract) 90,000 Revenue 87,700 Contract liability (P90K - P87,700) 2,300 203 | Cash (81° contracts x P1,000 per contract) 81,000 Contract liability (22,000 + P2,300) 24,300 Revenue 105,300 * (100 contracts x 90% x 90%) = 81 contracts If expectations do not coincide with actual renewals, ABC | Co. shall update the : eo) ; transaction price and the ever accordingly.nue from Contracts with Customers Revel —— customer loyalty programs Often times, entities provide customers with incentives to bur their goods or services through customer loyalty programs. Under guch program, the customer earns award credits (often described as points’) from his purchases. Points can be exchanged for free or discounted goods or services. The entity may operate the customer loyalty program itself or participate in a program operated by a third party. The awards offered may include goods or services supplied by the entity itself and/or rights to claim goods or services from a third party. Illustration: Customer loyalty program ABC Co. has a customer loyalty program that rewards a customer with one loyalty point for every P10 of purchases. Each point is redeemable for a P1 discount on any future purchases of ABC’s products. : During a reporting period, customers purchase products for 100,000 and earn 10,000 points that can be redeemed over the next 3 years. The stand-alone selling price of the purchased products is P100,000.ABC Co. expects 9,500 points to be redeemed. Therefore, the estimated stand-alone selling price per point is of 0.95. Requirement: Provide the journal entry on the date of sale. Solution: The points provide a material right to customers that they would Rot receive without entering into a contract. Therefore, the Promise te provide points to the customer is a performance obligation. The transaction price is allocated as follows:Stand-alone Allocation ~~~ (400,000 x 100/109 (100,000 95/1095 tol 5,675 Totals L00,044¢~ on the date of sale is as follow: ‘The journal entry Date | Cash efsale | Revenue Contract liability * ~ 100,000 Continuation #1: ‘At the end of the first reporting period, 4,500 points have been redeemed and ABC Co. continues to expect 9,500 points to be redeemed in total. Requirement: Provide the journal entry. Solution: Dateof- | Contract liability 4,110 ea Revenue - loyalty points 4,110 (P8,676 x 4,500 points/ 9,500 points) Continuation #2: At the end of the second reporting period, 8,500 points have been redeemed cumulatively. ABC Co. updates its estimate of the points that will be redeemed and now expects that 9,700 poin's will be redeemed. Requirement: Provide the journal entry. Solution: Oi | Contract ability 3,493 ve Revenue ~ loyalty points (P8,676 x 8,500 / 9,700) ~4,110 from 1 yr.yom Contracts with Custom revenues ters i continuation #3: ‘atthe end of the third reporting period, the unredeemed points expire without being redeemed. Requirement: Provide the journal entry. Solution: Dateof | Contract liability | 073 expiration Revenue — loyalty points 1,073 (v.3) (P8,676 - P4,110 - P3,493) , Non-refundable upfront fees In some contracts, an entity charges a customer a non-refundable upfront fee at or near contract inception. Examples include: 1. Joining fees in health club membership contracts 2. Activation fees in telecommunication contracts 3. Setup fees in some services contracts 4, Initial fees in some supply contracts The upfront fee is treated as a performance obligation if it relates to the transfer of distinct goods or services to the customer. The upfront fee is not treated as a performance obligation if it relates to administrative tasks to set up a contract. Set up activities are not performance obligation because they do not result in the transfer of a promised good or service to the customer as the tasks are performed. An entity may charge a non- refundable fee in part as compensation for costs incurred in setting up a contract or other administrative tasks. Illustration 1; Non-refundable upfront fee (Based on IFRS 15 Illustrative Examples, E272 to 1E274) ABC Co, enters into a contract with a-customer for one year of transaction processing. services. ABC Co.’s contracts have standard terms that are the same for all customers. The contract Tequires the customer to pay an upfront fee to set up the customer on the entity's systems and . processes. The fee is a nominal: \ p90 refundable. The customer can rene a and is non- al Ww amount and an additional fee. the contract each year without paying Analysis: The setup customer (i.e, the promised tr are performed). Therefore, performance obligation. Moreover, the renewal option does not provide a Materia] right to the customer that it would not receive without entering into that contract. The upfront fee is, in effect, an advance payment for the future transaction processing services. Consequently, ABC Co, determines. the transaction price, which includes the non. refundable upfront fee, and recognizes revenue for the transaction processing services as those services are provided. transfer a good or service tg ; the setup activities do not result in the transfe, : ansaction processing services as the setup a ctvitg the setup activities do not give Tise to a activities do not Illustration 2: Activation fees ABC Co. is engaged in providing cable TV services. On April |, 20x1, ABC Co. enters into a contract to provide cable TV services to a customer for a monthly fee of P500. The contract is mon cancellable for the first 12 months. If during that period, the customer decides not to pursue the contract, the customer shall pay’ the monthly fees for the remaining contractual period, including disconnection fees. The contract is subject to installation. ABC Co. does not regularly provide installation services separately from cable TV services. The installation is completed 0" May. 16, 20x1 and the customer starts to receive the cable TY service on that date. Case 1: ABC Co. : 0. does not charge a separate fee for the installation se"!Revenue from Contracts with Customers 151 Recall the following concepts from Step 2 Identify the performance obligations in the contract: Each promise in a contract to transfer a distinct good or service is a performance obligation to be accounted for separately. ‘A good or service is distinct if (a) the customer can benefit from the ood or service either on its own or together with other resources that are readily available to. the customer; and (b) the good or service is separately identifiable from other promises in the contract. A promised good ot 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, This may result to treating all the promised goods or services in a contract as a single performance obligation. Performance obligations include only activities that involve the transfer of a good or service to a customer. Performance obligations do not include administrative tasks to set up a contract. Analysis: The installation service is not distinct because of the following reasons: a. the customer cannot benefit from it either on its own or with other resources that are readily available to the customer (this is evidenced by the fact that ABC Co. does not regularly sell the installation services separately); and b. . the installation service is not separately identifiable from the promise to provide monthly cable TV service (ie, the installation service is an input to the combined output of providing the cable TV service.and is highly interrelated with the cable TV service). Accordingly, the transaction price shall be allocated only to the cable TV services. The performance obligation is satisfied over time because the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs.’ Therefore, revenue will be recognized over time as the cable TV services are provided. As a practical expedient, Tevenue is recognized as the customer is billed for the monthly: Services provided.Case 2: At contract inception, ‘ " representing a non-refundable installatio! ABC Co. charges the custome; n fee. Paty Analysis: 7 The installation service is ot distinct (see reasons above), In effect, the non-refundable fee is a prepayment for the’, TV services. Accordingly, the fee will be recognized as reven, the cable TV services are provided (PFRS 15.IE274). However, ABC Co. is not precluded from charging the non-refundable fee as compensation for the installation costs (PFRS 15.B51 and .25). ‘able Ue ag Illustration 3: Joining fees ABC Gym charges its members a P1,000 non-refundable membership fee and ?1,200 monthly fees to cover the members use of the gym’s facilities. During the year, ABC collected P 120,000 membership fees, excluding monthly fees. Case 1: The non-refundable membership fee covers a period of 1 year. The fee permits only membership. All other services are paid for separately through the monthly fees. After a year, the member can renew the contract for another year at P1,000. Analysis: The membership fee does not transfer a good or service to the customer. Therefore, it is not a performance obligation. Z Moreover, the renewal option does not provide a material right to the customer that it would not receive without enterins into that contract. The membership fee is, in effect, an advance payment fot ABC’s obligation’ to stand ready to make the gym facil available for the customer's use. Consequently, ABC - determines the transaction Price, which ane. the nov refundable upfront fee, and recognizes revenue over the period}enue fom Contract with Customers 153 hich ABC Co. is obligated to make the gym facilities available Jor the customer, whether the customer uses the facilities or not case 2: : The facts are the same with Case 1. However, the non-refundable membership fee covers a lifetime membership. “Analysis: ‘The analysis is the similar to Case 1. However, ABC Co. is not precluded under PFRS-15 from charging the non-refundable, lifetime, membership fee in part as compensation for costs jncurred in setting up the contract or other administrative tasks. Illustration 4: Joining fees ABC Co. operates various stores nationwide which sell a variety of goods including groceries, electronics, appliances, and school supplies. ABC offers membership for its customers. A membership entitles the member to special discounts not available to non-members and certain preferences like free parking space. During the year, ABC collected total membership fees of 1,000,000. Analysis: The membership entitles the member to a material right (ie., special discounts and preferences) that it would not receive without entering into that contract. Therefore, the membership fee is treated as a performance obligation and recognized as revenue over time on a basis that Teflects the timing, nature and value of the benefits provided. Asa practical expedient: > If ABC cannot determine such basis and the membership has an expiration date, the fee’shall be recognized ratably (e.8., oo a straight line basis) over the period the membership is in effect.