Chapter 12: Revenue

Recognition:
Contracts with Customers- 5 Steps Process and Other Issues
__Book of Antonio Dayag__
Prepared by: Cruxzelle Bajo
BSA 3
 Revenue Recognition

5 –Step Process Other issues

1. Contract with Customers. still IFRS 15

2. Separate performance obligations.
3. Determining the transaction price.
4. Allocating the transaction price.
5. Satisfying performance
obligations.
1. Contract with Customers.

Oral

Writing

Others customary business practices

1. Contract with Customers.

Parties have approved the contract.

Entity’s can identify each parties right regarding the goods or services to be
transferred.

The entity can identify the payment terms for the goods and services to be
transferred.

The contract has commercial substance, and

It is probable that will collect the consideration.

2. Separate performance obligations.

Implicit

Explicit

Possibly
 2. Separate performance obligations.

Distinct/ Separable Performance Non-separable Performance

1. Capable of being distinct.

2. Separately Identifiable.

Recorded separately Combined to single performance

 2. Separate performance obligations.

Distinct/ Separable Performance Non-separable Performance

Example:
Example:
a. Extended Warranties
a. Prepayments
b. Options that provide a material
b. Quality-assurance warranties
right.
c. Right of return
c. Discounts (page 976)

Recorded separately Combined to single performance

 2. Separate performance obligations.

Distinct/ Separable Performance Non-separable Performance

Contract Modifications?

Modification of existing
New Contract
contract

Separate Performance
Prospective Modification
Obligation
-uses blended price.
-uses no blended price.

Recorded separately Combined to single performance

3. Determining the transaction price.

TVM if > 1 year

Non-cash Consideration @ FV

Consideration payable to customer

Estimate of Variable Consideration

3. Determining the transaction price.

TVM if > 1 year

If payment BEFORE delivery

====Interest Expense
Can be:
a. Simple Interest If payment AFTER delivery
b. Compounding Interest ====Interest Revenue
c. Effective Interest Rate
ETC.
If payment BEFORE/AFTER delivery
LESS THAN A YEAR.
====IGNORED

STEP 5: OVER TIME REVENUE RECOGNITION

3. Determining the transaction price.

Non-cash Consideration

Can be:
a. @FV
b. @Stand-alone selling price

STEP 5: OVER TIME REVENUE RECOGNITION or POINT IN TIME

3. Determining the transaction price.

Consideration Payable to the customer/ Payments by the seller to the customer

should be:
1. Deduction to Transaction Price
==viewed as refund (excess payment of customer)
==includes: discounts, volume rebates, coupons, free products, or services.
==reduce REVENUE TO BE RECOGNIZED AND ONSIDERATION RECEIVED.

STEP 5: OVER TIME REVENUE RECOGNITION OR POINT IN TIME

3. Determining the transaction price.

Variable Consideration (TP depends on future events)

EXPECTED VALUE (is probable; uses

probability)

Maybe attributable to: MOST LIKELY AMOUNT (is probable;

a. Entire Contract uses probability)
b. Specific part of the contract

STEP 5: OVER TIME REVENUE RECOGNITION OR POINT IN TIME

3. Determining the transaction price.

Variable Consideration (TP depends on future events)

EXPECTED VALUE (is probable; uses

Examples: probability)
1. Volume discounts
2. Refunds or rebates MOST LIKELY AMOUNT (is probable;
3. Rights of return uses probability)
4. Incentives
5. Etc.

STEP 5: OVER TIME REVENUE RECOGNITION OR POINT IN TIME

4. Allocating the transaction price.

3 ways of transaction price allocation

1. Adjusted Market Assessment Approach

2. Estimated cost plus a margin Approach
3. Residual Approach

STEP 5: OVER TIME REVENUE RECOGNITION OR POINT IN TIME

5. Satisfying performance
obligations.

@Point in Time/ PIT

@Overtime/ OT

STEP 5: OVER TIME REVENUE RECOGNITION OR POINT IN TIME

ADDITIONAL INFORMATION
 Contract Asset Contract Liability

VS
==For conditional obligations.
==referred to as Unearned Sales Revenue and
==co’z conditional can’t recognize A/R in debit.
Unearned Service Revenue
Record: (performance 1st obligation)
Record: (receive of prepayment)
Contract Asset xx –instead of AR
AR xx
Revenue xx
Contract Liability xx
Record: (performance 2nd obligation )
Record: (perform obligation)
AR xx ---finally can use AR
Contract Liability xx
Contract Asset xx
Revenue xx
Revenue xx
 How to recognize income?

Paragraph 74: Revenue definition Paragraph 75: Gains definition

 CONTRACTS

Single Performance Multi-performance Obligation

Identify each performance, if:

Separately
Separately Identifiable Just Combine
Identifiable

Transaction price accounted as: Transaction price accounted as:

TVM if > 1 year TVM if > 1 year OT

OT
Non-cash Consideration
Non-cash Consideration OT/PIT
OT/PIT @ FV
@ FV
Consideration payable to
Consideration payable to OT/PIT
OT/PIT customer
customer
Estimate of Variable
Estimate of Variable OT/PIT
OT/PIT Consideration
Consideration

Modifications Modifications

Entire Contract Specific Entire Contract Specific

Method can be: Method can be:
a. Separate Performance Obligation a. Separate Performance Obligation
b. B. Prospective Modification b. B. Prospective Modification