ACC 311

PFRS 15:
REVENUE FROM
CONTRACTS WITH
CUSTOMERS
 INTRODUCTIO
N

1 Revenue is a top fraud

risk
PFRS 15 (Revenue from Contracts with
2 Customers) supersedes the following
standards
PAS 18 (Revenue
Recognition) CORE
PAS 11 (Construction
Contracts) PRINCIPLE
An entity will
SIC 31 Revenue – Barter transaction
involving Advertising Services
recognize revenue to depict the transfer
of promised goods or services to
PFRIC 13 (Customer Loyal customers
Programs) in an amount that reflects the
PFRIC 15 (Agreementsfor the Constructionof consideration (Payment) to which the
Real Estate) entity expects to be entitled in exchange
PFRIC 18 (Transfer of Assets from for those goods or services.
 OVERVIEW OF PFRS 15

THE FIVE STEP PROCESS

1.Identify the contract with customers.
2. Identify the separate performance obligation of the
contract. 3.Determine the transaction price.
4.Allocate the transaction price to the separate performance
obligations. 5.Recognize revenue when each performance obligation is
 USING THE 5 - STEP
PROCESS
SAMPLE PROBLEM
STEP 1 On March 1, 20x7, Bench Company enters into a
Identifying the Contract with Customers contract to transfer a product to Warmer on July
Contract criteria for revenue guidance to 31, 20x7. The contract is structured such that
Warmer is required to pay the full contract price of
contracts if:
P47,500 on August 31, 20x7. The cost of the
The contract has commercial substance; The
goods transferred is P28,500. Bench delivers the
parties to the contract have approved the product to Warmer on July 31, 20x7.
contract and are committed to perform their
respective obligation
The company can identify each party’s ANSWER
rights regarding the goods and services to be On July 31, 20x7
transferred; Accounts Receivable 47,500
The company can identify the payment Sales 47,500
terms for the goods and services to be
Cost of Sales 28,500
transferred.
Inventory 28,500
It is probable that the company will collect
the consideration to which it will be On August 31, 20x7
entitled. Cash 47,500
Accounts Receivable 47,500
 Account for it as new contract if the following
Companies determine
conditions are met:
Whether a new contract (new Promised goods or services are distinct
performance obligations) results, or The company has the right to receive an amount
Whether is a modification of the of consideration that reflects the standalone
existing contract selling price of the promised goods or services.

SAMPLE PROBLEM ANSWER

San Miguel Beer (SMB) Corp. has a contract to Original Contract
sell 100,000 products to a customer for P90 million (100,000 units- 60,000) x P900 = P36,000,000
(P900 per product) at various points in time
over a six- month period. After 60,000 products New Product (20,000 units x P855)
17,100,000
have been delivered, SMB Corp., modifies the = Total Revenue after modification
contract by promising to deliver 20,000 more P53,100,00
products for an additional P17.1 million pesos, or PROSPECTIVE 0
P855 per product (which is the standalone selling MODIFICATION
price of the products at the time of contract
modification). SMB regularly sells the products
separately.
IMPORTANT NOTE: Whether modification is
treated as a separate performance obligation
or prospectively, the same amount of Revenue per remaining unit (P53,100,000 ÷
60,000)
 STEP
2
IDENTIFYING SEPARATE PERFORMANCE OBLIGATION
Performance obligation – a promise in a contract to provide a product or service to a
customer. This may be, implicit, explicit or possibly based on the usual business practices.
To establish whether a performance obligation exists, the company must provide a distinct
product or service.
REVENUE RECOGNITION SITUATIONS

To determine whether a company has to account for multiple performance obligations, it evaluates
a second condition. Whether the product is distinct within the contract:
If performance obligation is not highly dependent on, or interrelated with, other promises in
the contract, then each performance obligation should be accounted for separately.
If each of these services is interdependentand interrelated,these services are combined
and reported as one performance obligation.
SAMPLE PROBLEM
Anton Computers licenses customer-
relationship software to GMA Company. In
addition to providing the software itself, Anton
Computersconsulting
provide promises toservices by
customizing the software to extensively GMA’s
information
technology environment, for a total consideration
of
P2,880,000. In this case, Anton Computers is The sale of the computer and
providing a significant service by integrating
related assurance warranty
the goods and services (the license and the
are one performance
consulting service) into one combined item for
obligation
which GMA has contracted. In addition, the
software is significantly customized by Anton
as they are interdependent
Computers in accordance with specifications
and interrelated with each
negotiated by GMA. other.
However, the extended
ANSWE warranty is separately sold and
is not interdependent.
R
 STEP 3 - DETERMINING THE TRANSACTION
PRICE
The amount of consideration a company expects to receive from a
customer. Companies must also consider:
Variable Considerations
Time Value of Money
Non-Cash
Considerations
Consideration paid or
payable to customers

VARIABLE CONSIDERATION
1. Price dependent on future events. (e.g. discounts,
rebates, credits, performance bonuses, or royalties)
2. Companies estimate amount of revenue to recognize:
3. Expected value: Probability-weighted amount in range
of possible consideration
4. Most likely amount: Single most likely amount in a
range of possible consideration outcomes
SAMPLE PROBLEM On January 3, Aljon and Associates,
Company an Accounting Services into
#1Builders Construction Company enters into a
DJ contract into perform
enters advisory servicesa regarding financialwith
contract and investment
Gorski in
a customer to build a 50 km road for P100,000,000., with a group of companies concerns for12tomonths. Aljon received
International
a performance bonus of P50M that will be paid based on the a quarterly management fee based on a percentage of
timing of completion. The amount of the performance bonus Gorski’s investment in the group companies at the end of each
decreases by 10% per week for every week beyond the quarter. In addition, Aljon received a performance-based
agreed upon completion date. The contract requirements incentive fee of 20% of the investment’s return in excess of
are similar to contracts that DJ builders has performed the return of an observable value at the end of the year.
previously, and management believes that such experience is Aljon accounts for the contract as a single performance
predictive for this contract. Management estimates that there obligation to perform the services for 12 months because
is a 60% probability that the contract will be completed the services are interdependent and interrelated. To
by the agreed-upon completion date, a 30% probability that recognize revenue for satisfying the performance
it will be completed one week late and only a 10% probability obligation over time, Aljon selects an output method of
that it will be completed two weeks late. measuring progress towards completing the satisfaction of the
of contracts with
performance customersAljon
obligation. in thehas had a numerous of these
types
past.
# 2

ANSWER The following should be taken into consideration:

Recognized the management fee each quarter based
Probability-weighted on the performance of its services during the year.
method Incentive fee should not be recorded until the end of
the
year. Therefore, this fee is constrained (not
recognized) until the incentive is determinable at the
end of the year.
 SAMPLE PROBLEM # 3
On July 1, 20x7, Elerie Company sold goods to Aranas Company for P450,000 in exchange for a 4-
year, zero-interest bearing note with a face amount of P708,081.50. Effective interest is at 12%. The
goods have a cost on Elerie’s books of P295,000. How should the company record the sale?

ANSWER
July 1, 20x7

December 31,
20x7
SAMPLE PROBLEM # 4 Recognition of revenue for the
first three months (March 31,
Nokia Company offers its 20x7)
customers a 3% volume
discount if they purchase at
least 1 million of its products
during the year. On March 31, If threshold is
20x7, Nokia has made sales of met:
P350,000 to Georgie Store. In
the previous two years, Nokia sold
over P1,500,000 to Georgie
in the period April 1 to If threshold is not
December 31. How should the met:
company record the revenue?
 STEP 4 - ALLOCATING THE TRANSACTION PRICE TO SEPARATE
PERFORMANCE OBLIGATION
Allocation should be:
Based on their relative fair values.
Best measure of fair value is what the company could sell the good or service for
on a standalone basis, usually referred to as standalone selling price.
If not available, companies should use their best estimate of what the good or service might
sell for as a standalone unit.

3-WAYS OF TRANSACTION PRICE ALLOCATION

Adjusted market assessment approach – how goods or services will be sold and the price
the customers are willing to pay.
Estimated cost plus a margin approach – cost +
margin Residual Approach
SAMPLE PROBLEM

Asser Maritime Industries, Inc. is a manufacturer of bridge simulator used in the maritime school. The
company’s products range from varies range of machineries and equipment. The selling price of their
units varies depending on the unit involved with a range P5,000,000 to P50,000,000 and are
quoted inclusive of installation and training, if there is a need. The installation does not involve any
modification as to the original specifications. Asser, Inc. has the following arrangement with Tamayo’s
Maritime College:
Tamayo’s purchases bridge simulator from Asser at a price of P33,950,000 and prefer Asser to do
the
installation and Tamayo agreed on such arrangements. The price of the installation service is estimated
to have a fair value of P700,000.
The fair value of the training sessions is estimated at P350,000
Tamayo is obligated to pay Asser, Inc. the P33,950,000 upon the delivery and installation of the
bridge simulator.
Asser delivers the bridge simulator on September 1, 20x7 and completes the installation on
November 1,
20x7. Training related to the bridge simulator starts once the installation is completed and lasts for
4 month. The bridge simulator has a useful life of 15 years.

ANSWER

STEP 5 - RECOGNIZING REVENUE
WHEN (OR AS) EACH
PERFORMANCE OBLIGATION IS
SATISFIED
Company satisfies its performance obligation
when the customer obtains control of the good or
service. Change in Control indicators is as
follows:
Company has a right to payment for asset
Company has transferred legal title to asset
Company has transferred physical possession
of asset.
Customer has significant risks and rewards
of ownership.
Customer has accepted the asset.
TIMING OF REVENUE RECOGNITION
Point in Time or Over a period of time
Over a period of time if one of the following
criteria is met:
The customer controls the asset as it is created
or enhanced.
The company does not have an alternative use
for the asset created or enhanced:
Customer received benefits as the
company performs and therefore the task
would not need to be re-performed, or
Company has a right to payment and this
right is enforceable.
SAMPLE PROBLEM
CPI Outsourcing Company does not create an asset
with an alternative use because it is prohibited
from redirecting the source program to another
customer since it is customer specified product. In
addition, CPI Outsourcing is entitled to payments for
performance to date and expects to complete the
project.
 RIGHT OF
RETURN
Nathan Company sells 200 units for P100 each to Jaja Inc. for cash. Nathan allows Jaja to return any
unused product within 30 days and receive a full refund. The cost of each product is P60. To
determine the transaction price, Nathan decides that the approach that is the most predictive of
the amount of consideration to which it will be entitled is the most likely amount. Using the most
likely amount, Nathan estimates that:
Six products will be returned.
The costs of recovering the products will be immaterial.
The returned products are expected to be resold at a
profit. Assume 4 products were returned.

ANSWER
Record of Assume 4 products was
Sale returned
 REPURCHASE BILL-AND-HOLD
AGREEMENTS
Mylene Inc., an equipment dealer’s, AGREEMENTS
Gianne Company sells P900,000 (cost, P560,000)
sells equipment on January 1, 20x8, to Rhea of products on March 1, 20x7 to a local store,
Company for P200,000. It agrees to Camille, which is planning to expand its locations
repurchase this equipment on December 31, around the city. Under the agreement, Camille asks
20x8, for a price of P242,000. Assuming an Gianne to retain these products in its warehouses
interest rate of 10 percent is imputed until the new store are ready and be operational. Title
from the agreement. The contract is for 2 passes to Camille at the time of agreement is signed.
years.
Gianne determined when it has satisfied its
ANSWER performance obligation to transfer a product by
evaluating when Camille obtains control of that
JANUARY 1, 20X8 product. For Camille to have obtained control of a
product in a bill-and-hold arrangement, all of the
following criteria must be met:
DECEMBER 31, The reason for the bill-and-hold arrangement
20X8 must
be substantive.
The product must be identified
DECEMBER 31, separately as belonging to Camille.
20X9 The product currentlymust be ready for
physical
transfer to Camille.
Gianne cannot have the ability to use the product
or to direct it to another customer.
PRINCIPAL-AGENT WARRANTIES
RELATIONSHIPS
Agent’s performance obligation is to arrange for
Jack Company sold 2,000 units during 20x7 at a total price
principal to provide goods or services to a
of P12,000,000 with a warranty guarantee that the product
customer. Amount collected on behalf of the
was free of any defects. The cost of each unit sold is
principal are not revenue of the agent.
P8,000,000. The term of the assurance warranty is two
Revenue for agent is the amount of commissions
years, with an estimated cost of P60,000. In addition,
received.
Jack sold extended warranties related to 800 units for
three years beyond the two-year period for P24,000.
NON - REFUNDABLE UPFRONT FEES How should the company record this transaction?
Gor Macariola signs a 3-year contract with Fitness The
First Gyms. The terms of the contract are that Gor To record the revenue and liabilities related to the
is required to pay a non-refundable initiation fee
warranties
of P12,000 and an annual membership fee of P1,000
per month. Fitness The First Gym determines
that its customers, an average, renew their annual
membership two times before terminating their
membership. How should the Gym record its revenue
on this transaction?

ANSWER To record inventory and recognize cost of goods

The total revenue would be P48,000 – 12,000 sold.
upfront fees + 1,000 per month x 36 months.
48,000 / 36 months = 1,333.33 revenue should
be reported every month for 3 years.
 CONTRACT
On JanuaryASSET
1, 20x7, Janine Company enters into
a contract to transfer Product X and Product Y
to Darlene Co. for P200,000. The contract specifies
that payment of Product X will not occur until
Product Y is also delivered. In other words, payment
will not occur until both Product X and Y are
transferred to Darlene. Janine determines that
standalone prices are P60,000 for Product X
and P140,000 for Product Y. Janine delivers
Product X to Darlene on February 1, 20x7. On
March 1, 20x7, Janine delivers Product Y to
Darlene. How should Janine record the transaction?
February 1, 20x7
March 1,
20x7
CONTRACT LIABILITIES
On March 1, 20x7, Asser Company enters into a
contract to transfer a product to Conrad, Inc. on July
31, 20x7. It is agreed that Conrad will pay the full
price of P20,000 in advance on April 1, 20x7. The
contract is non-cancelable. Conrad, however, does not
pay until April 15, 20x7 and Asser delivers the product
on July 31, 20x7. The cost of the product is P15,000.
transaction?
How should Asser record the
April 15,
20x7
July 31,
20x7
THANK
YOU!
Any questions?