PFRS 15 - REVENUE FROM CONTRACTS WITH Step 1: Identify the contract with the customer

CUSTOMERS
Contracts
PFRS 15 is a new global framework for revenue
recognition. Agreement between two or more parties that
creates enforceable rights and obligations in a contact
Entities that sell in bundle, multiple deliverables which is under a matter of law.
or major projects could see significant change in timing
of revenue recognition. Contracts should be accounted separately.

Entities affected by new revenue standard includes Contract criteria:

businesses who are engaged in:  Parties have approved the contract in writing,
 Telecom orally or in accordance with customary business
 Software practice.
 Engineering  Rights and obligations can be identified.
 Construction and real estate  Payment terms can be identified.
 Contract has commercial substance.
Revenue  The collection is probable.

Income in ordinary course of business activities Contracts should be combined as one if any of the ff.
is satisfied:
Income
 Contracts are treated as single package.
Increase in economic benefit during accounting  Consideration in one contract depends on goods
period in form of an inflow or enhancement of asset or or services of another contract.
decrease in liability that results in an increase in equity.  Goods and services in contract relate to a single
performance obligation.
PFRS 15 applies to all contracts with customers, except:
Step 2: Identify the performance obligation
 Leases under PFRS 16
 Insurance contracts under PFRS 17 Performance Obligation
 Financial instruments under PFRS 9
A promise to deliver goods or services in a
Core Principle contract with customers. Promise constitute obligation if
it is distinct.
 An entity should recognize revenue in a manner
that depicts the pattern of transfer of good or Promised goods or service is distinct if it meets both
service to a customer. criteria:
 The amount recognized as revenue should
reflect the consideration to which the entity  The customer can benefit from good or service.
expects to be entitled in exchange for good or  Entity's promise to transfer goods or services is
service. separately identifiable from other promises in
Revenue is recognized: contract.
 At a point in time
 Over time

Distinct good or service example:

Five Step Model:  Sale of finished goods produced by

manufacturer
  Sale of merchandise inventory by retailer Transaction price is allocated to each
 Constructing, manufacturing or developing asset performance obligation on the basis of relative stand-
on behalf of customer, as in long term alone selling price.
construction contract
 Granting license or franchise Determining Stand-Alone Selling Price
 Performing a contractually agreed-upon task for Best evidence of stand-alone selling price is
a customer, as in bookkeeping service or payroll when goods or services is sold on stand-alone basis or
processing service. when sold separately.
Step 3: Determine transaction price If stand-alone selling price is not directly
Transaction Price observable, the entity must estimate price using the ff.
methods:
Amount of consideration in a contract to which an
entity expects to be entitled in exchange for transferring  Adjusted market assessment approach - entity
good or service to a customer. may refer to prices from competitors for similar
good or service.
Adjusted for discount, rebate, price concession,  Expected cost plus margin approach - entity
return, performance bonus, penalty and other similar may forecast expected cost to satisfy the
item. performance obligation adjusted for an
appropriate margin or profit.
Factors that affects transaction price:  Residual approach - this may be used only
when either selling price of good or service is
 Variable consideration - included when it is highly variable or uncertain. Under this method,
highly probable that significant reversal of stand-alone price is the difference between total
revenue or decrease in revenue will not occur. transaction prices and total observable stand-
 Time value of money - if the contact has alone selling prices of other goods and services.
significant financing component the
consideration should adjust to time value of Step 5: Recognition of revenue
money. But if the contract is less than one year,
the entity can disregard time value of money. Control of an Asset
Difference between total consideration and cash Ability to direct the use of asset and obtain
selling price is accounted as interest income. substantially all of the benefits from the asset.
 Noncash consideration - measure at FV but if
FV cannot be estimated, stand-alone selling is Entity shall recognize revenue when the entity
used. transfers control of good or service to customer.
 Consideration payable to a customer - entity Revenue can be recognized either at point in time or
needs to determine if consideration payable to over time.
customer may result to reduction of transaction
price.
Example: vouchers, coupons and volume rebate

Revenue recognition at a point of time:

Step 4: Allocation of transaction price
 The entity has the right to receive payment for
Stand-Alone Selling Price the asset and for which the customer is obliged
to pay
The price that an entity would sell a promised  Customer has legal title to the asset
good or service separately to a customer.
  Entity has transferred physical possession of the Consignor shall not recognize revenue upon
asset to the customer delivery of the goods to the consignee until the goods are
 The customer has the significant risks and sold by the consignee.
rewards of ownership of the asset
 The customer has accepted the asset When consigned goods are sold by consignee, a
report to called account of sales is given to the consignor
Revenue recognition over time: together with cash remittance minus commission and
other expenses chargeable against consignor.
 Customer simultaneously receives and consumes
the benefits provided by the entity's performance Bill and Hold Arrangement
as the entity performs
 Entity's performance creates or enhances an Contract under which an entity bills a customer
asset that customer controls as the asset is for a product but the entity retains possession of the
created or enhance. product. Revenue shall be recognized when the customer
 Entity's performance does not create an asset obtains control or takes title of product.
with an alternative use to the entity and the Criteria for the recognition of revenue:
entity has an enforceable right to receive  Customer has requested for arrangement
payment for performance completed to date  Product must be identified separately as
belonging to customer
Sale of Goods  Product must be ready for physical transfer
to the customer anytime
Revenue is recognized at the point of sale  Entity cannot have the ability to use the
because the entity has transferred the significant risk and product or to direct it to another customer
reward ownership to the customer.
Customer Loyalty Program
of sale is usually point of delivery which may
be actual or constructive. Generally designed to reward customers for past
purchases and to provide them incentives to make
Sale with a Right Return further purchases.
An entity shall recognize the ff. with respect to a The entity can redeem "points" by distributing to
sale with a right of return: the customer free or discounted goods or services.
 Revenue equal to the total sale price less the sale Measurement
price of the expected return
 Revenue liability equal to the sale price of  Revenue under time value of money is measure
expected return based on cash selling price.
 Recover asset and corresponding reduction of  Noncash consideration is measure at fair value.
cost of goods sold equal to the cost of the  Award credits shall account as a separately
expected return component of initial sale transaction.
 FC of the consideration received with respect to
initial sale shall be allocated between award
credits and sale based on relative stand-alone
Consignment Arrangement
selling price.
Consignment
Recognition
Method of marketing goods in which the entity
The consideration allocated to award credits is
called the consignor transfer physical possession of
initially recognized as deferred revenue and
certain goods to a dealer or distributor called the
subsequently recognized as revenue when the award
consignee that sells goods on behalf of the consignor.
credits are redeemed.
 The amount of revenue shall be based on
number of award credits that have been redeemed
relative to total number of expected to be redeemed.

Changes in total number expected to be

redeemed do not affect the total consideration for the
award credits but changes shall be reflected in the
amount of revenue recognized in current and future
periods.

Calculation of revenue to be recognized in any

one period is made on "cumulative basis" in order to
reflect changes in estimate.