LONG TERM CONSTRUCTION

CONTRACTS
(PFRS 15)
 INTRODUCTION
An entity applies PRFS 15 (Revenue from Contracts with Customers
to account for REVENUES from CONTRACTS with
CUSTOMERS.

PFRS 15 supersedes PAS 11 Contraction Contracts

REVENUE – Income arising in the course of an

entity’s ordinary activities.

CONTRACT – an agreement between 2 or more

parties that creates enforceable rights and obligations.

CUSTOMER – 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.
CORE PRINCIPLES
UNDER PFRS 15
An entity recognized 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.
 SUMMARY OF THE REVENUE RECOGNITION
PRINCIPLES UNDER PFRS 15

Identify the Recognize

ALLOCATE
Identify the PERFORMA Determine revenue when
the
CONTRAC NCE the (or as) a
transaction
T with the OBLIGATION TRANSACTI performance
customer price to the
S in the ON PRICE. obligation is
performance
contract SATISFIED.
obligations.
 The contracts is with a customer and (among others) the
collectability of the consideration is probable.

Following Criteria should be met:

STEP 1: • The contracting parties approved the contract and are
IDENTIFY committed to perform their respective obligations.

THE • The entity can identify each party’s rights regarding the goods
or services to be transferred.
CONTRACT • The entity can identify the payment terms.
WITH THE • The contract has commercial substance (risk, timing or
CUSTOMER. amount of entity’s future cash flow).

• The consideration in the contract is probable of collection.

NOTE: NO REVENUE IS RECOGNIZED on a contract that

does not meet the criteria. Any consideration received from such
contract is recognized as a LIABILITY and recognized as
REVENUE ONLY WHEN either of the following has occurred:

• The entity has no remaining obligation to transfer goods or

services to the customer and the consideration has been
received and is non-refundable.
 Each promise to deliver a distinct good or
STEP 2: IDENTIFY services in the contract is treated as a separate
performance obligation.
THE
A promised goods or services is distinct if:
PERFORMANCE
OBLIGATIONS IN a. The customer can benefit from good or
services either on its own or together with
THE CONTRACT. other resources that are readily available to
the customers; and

b. The promise to transfer the goods or

services is separately identifiable from
other promises in the contract.
STEP 3:
DETERMINE THEThe Transaction Price is the amount that the
entity expects to be entitled to in exchange
TRANSACTION for satisfying a performance obligation.
PRICE.

The Transaction Price is allocated to the

STEP 4: performance obligations based on the
ALLOCATE THE relative stand-alone prices of the
TRANSACTION distinct goods and services.

PRICE TO THE Note: Stand Alone Selling Price is the

PERFORMANCE price at which a promised good or
services can be sold separately by a
OBLIGATIONS. customer.
 • For a performance obligation
STEP 5: satisfied over time, revenue
recognized as the entity progresses
RECOGNIZE towards the complete satisfaction of
REVENUE WHEN the performance obligation.
(OR AS) A • For a performance obligation
PERFORMANCE satisfied at a point in time, revenue
OBLIGATION IS recognized when the entity
completely satisfies the performance
SATISFIED. obligation.

• Revenue is measured at the amount

of transaction price allocated to the
performance obligation satisfied.
TERMINOLOGIES
CONSTRUCTION CONTRACT – A contract specifically negotiated for the construction of an
asset or a combination of assets that are closely interrelated or interdependent in terms of their
design, technology and function or their ultimate purpose or use.

FIXED PRICE CONTRACT – Contract in which the contractor agrees to a fixed contract
price or fixed rate per unit of output, which in some cases is subject to cost escalation clauses.

COST PLUS CONTRACT – Contract in which the contractor is reimbursed for allowable or
defined cost plus a fee.

CONTRACT LIABILITY – Is “an entity obligation to transfer goods or services to a customer

for which the entity has received considerations from the customer.

NOTE: It is recognized at the earlier of the date:

The entity receives consideration before the good or services is transferred to the customer.

The entity has an unconditional right to the consideration before the goods or services is
transferred to the customer.

CONTRACT ASSET – Is “an entity’s right to consideration in exchange for goods or services
that the entity has transferred to a customer when the right is conditioned on something other
than the passage of time.
 • Cost-to-Cost Method – (Percentage of Completion Method) Refers to the
METHOD FOR estimation of stage of completion by reference to the proportion that contract cost
incurred for work performed to date bear to the estimated total contract cost.
MEASURING
PROGRESS WHAT ARE PART OF CONTRACT COST?
(THE MOST • Incremental Cost of Obtaining the Contract
• Cost to fulfill the contract
COMMON USE)
Total cost incurred to date
• Percentage of Completion Total
= cost incurred to date + estimated cost to complete
(Estimated total contract cost)

• Total Cost Incurred to date – represent the cumulative cost incurred from the
contract inception up to the current reporting date.
• Estimated total contract cost (Estimated total costs at completion) – pertain to the
forecasted total estimated cost of completing the contract. (Total cost incurred to date
+ estimated cost to complete).
• Estimated costs to complete – pertain to the anticipated additional costs to fully
complete the contract.
AQC SOLOM0NIC BUILDERS DEV. CORP
Lecture on the treatment of construction Contracts

Assume that a construction contracted was finalized with the following terms:

Contract Price 50,000,000.00

Estimated Material Cost 20,000,000.00

Estimated Direcr Labor 10,000,000.00
Estimated Overhead Cost 5,000,000.00

Total Estimated Costs 35,000,000.00

Estimated Gross Profit 15,000,000.00

Gross Profit Rate 30%

Esrimated completion date 2 years, semi -annual billing

Contracted September 5, 2023.
Billing: March 30, 2024
September 30, 2024
March 30,2025
September 5, 2025
SCENARIO
 JOURNAL ENTRIES
September 5, 2023 upon finalization of of contract: MEMO ENTRYONLY
De ce mbe r 31,2023

Cons truction in Proces s 5,500,000.00

Ma teria ls 3,000,000.00
Direct La bor 1,500,000.00
Applied Fa ctory Overha ed 1,000,000.00

To be s hown a s cons truction-in-Proces s (yea r end) No revenue from

cons truction ta ken up beca us e there is no billing yet. But the
cos ts incurred in cons truction were a lrea dy ca pita lized in
the Cons truction in Proces s a ccount

March 30, 2024

Cons ruction in Proces s 3,250,000.00
Ma teria ls 1,500,000.00
Direct La bor 1,000,000.00
Applied Fa ctory Overea d 750,000.00

To record a dditiona l cos t before 1s t billing

 JOURNAL ENTRIES
March 30, 2024 1s t bill1ng

1 Contra ct Receiva ble 12,500,000.00

Contra cted Lia bility 12,500,000.00
To reord 1s t billing

2 Cos t of Sa les 8,750,000.00

Cons truction in Proces s 8,500,000.00
To clos e the Cons truction Contra ct Account

3 Ca s h 11,625,000.00
Credita ble Withholding Ta x 250,000.00
Credita bleWihholding VAT 625,000.00
Cotra ct Receiva ble 12,500,000.00
To record collection

4 Contra cted Lia bility 12,500,000.00

Output Ta x 875,000.00
Revenue 11,625,000.00
 JOURNAL ENTRIES
Se pt 30,2024
Journa l entries a pplica tion of cos ts from April 1 to September 30:

5 Cons truction in Proces s 6,900,000.00

Ma teria ls 4,000,000.00
Direct La bor 2,000,000.00
Fa ctory Overhea d 900,000.00
To record a pplica tion of cos ts

6 Contra ct Receiva ble 12,500,000.00

Contra cted Libiltity 12,500,000.00
To ta ke up 2nd billng

7 Ca s h 11,625,000.00
Witholding Ta x 250,000.00
Withholding VAT 625,000.00
Contra ct Receiva ble 12,500,000.00
Collection

8 Contra cted Lia bility 12,500,000.00

Va t Output 1,500,000.00
Revenue 11,000,000.00
To record revenue from cons truction a nd to clos e contra cted lia bility

9 Cos t of Sa les 6,900,000.00

Cons tuction in Proces s 6,900,000.00
 Journal Entrie s from Octobe r 1 to De ce mbe r 3, 2024

Cons truction in Proces s 4,000,000.00

Ma teria ls 2,500,000.00
Direct La bor 1,000,000.00
Applied Overhea d 500,000.00
To be s hown in the Ba la nce Sheet a s Cont In Proces s

10 Cons triction in Proces s 10,500,000.00

Ma teria ls 8,000,000.00
Direct La bor 2,000,000.00
Fa ctory Overhea d 500,000.00
10,500,000.00
Additiona l cos t before Ma rch 30 billing
JOURNAL ENTRIES
 JOURNAL ENTRIES
4th billing: Se pte mbe r 5, 2025

Contra ct Receiva ble 12,500,000.00

Contra ct Lia bility 12,500,000.00

Cost of Sa les 7,000,000.00

Construction in Process 7,000,000.00

Ca sh 11,625,000.00
Credita ble Withholding TAX 250,000.00
Credita ble Withholding VAT 625,000.00
Contra ct Receiva ble 12,500,000.00

Contra cted Lia bility 12,500,000.00

VAT Pa ya ble 1,500,000.00
Revenue 11,000,000.00
 NOTES TO REMEMBER:

•PFRS 15 does not prohibit the use of alternative terms

for “contract asset” and “contract liability” so as long as
sufficient information is provided to enable users of the
financial statements to distinguish between “receivables”
and “contract asset”. (ex., “advances from customers”
may be used in lieu of contract liability when the
consideration is received in advanced.
UNDER PFRS 15
• CONTRACT ASSET is recognized when the entity
performs but its right to consideration is still
conditional. Once the entity’s right to consideration
becomes unconditional, the contract asset is
reclassified as receivable.
• CONTRACT LIABILITY is recognized if the
consideration is received or becomes due before the
entity performs.
THANK YOU