FINANCIAL ACCOUNTING 1

CASH AND CASH EQUIVALENTS

THEORIES

1. As contemplated in accounting, cash includes

a. Money only
b. Money and any negotiable instrument
c. Any negotiable instrument
d. Money and any negotiable instrument that is payable in money and acceptable by the bank for deposit
and immediate credit
2. To be reported as “cash and cash equivalent”, the cash and cash equivalent must be
a. Unrestricted in use for current operations
b. Available for the purchase of property, plant and equipment
c. Set aside for the liquidation of long-term debt
d. Deposited in the bank
3. Cash equivalents are
a. Short-term and highly liquid investments that are readily convertible into cash
b. Short-term and highly liquid investments that are readily convertible into cash with remaining maturity
of three months or more
c. Short-term and highly liquid investments that are readily convertible into cash with remaining maturity
of three months or less
d. Short-term and highly liquid marketable equity securities
4. Which is false concerning measurement of cash and cash equivalents?
a. Cash is measured at face value
b. Cash in foreign currency is measured at the current exchange rate
c. If a bank or financial institution holding the funds of the company is in bankruptcy or financial difficulty,
cash should be written down to estimated realizable value
d. Cash equivalents should be measured at maturity value, meaning face value plus interest
5. If material, deposits in foreign bank which are subject to foreign exchange restriction should be classified
a. Separately as current asset, with appropriate disclosure
b. Separately as a non-current asset with appropriate disclosure
c. Be written off as an extraordinary loss
d. As part of cash and cash equivalents
6. Bank overdraft
a. Is a debit balance in a cash in bank account
b. Is offset against demand deposit account in another bank
c. Which cannot be offset is classified as a current liability
d. Which cannot be offset is classified as non-current liability
7. A compensating balance
a. Must be included in cash and cash equivalent
b. Which is legally restricted and related to a long-term loan is classified as a current asset
c. Which is legally restricted and related to a short-term loan is classified separately as a current asset
d. Which is not legally restricted as to withdrawal is classified separately as current asset
8. Unreleased checks
a. Should be treated as outstanding checks
b. Should be restored to the cash balance
c. Should be treated as outstanding checks if the date is shortly after the balance sheet
d. Should be treated as outstanding checks if they are ultimately encashed
9. Which of the following should not be considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks and personal checks
c. Coin, currency and available funds
d. Post-dated checks and IOUs
FINANCIAL ACCOUNTING 1

10. Which of the following is usually considered cash?

a. Certificates of deposit
b. Checking accounts
c. Money market savings certificates
d. Post-dated checks
11. Petty cash fund is
a. Separately classified as current asset
b. Money kept on hand for making minor disbursements of coin and currency rather than by writing
checks
c. Set aside for the payment of payroll
d. Restricted cash
12. The petty cash account under the imprest fund system is debited
a. Only when the fund is created
b. When the fund is created and every time it is replenished
c. When the fund is created and when the size of the funds is increased
d. When the fund is created and when the size of the funds is decreased
13. The internal control feature that is specific to petty cash is
a. Separation of duties
b. Assignment of responsibility
c. Proper authorization
d. Imprest system
14. In reimbursing the petty cash fund, which of the following is true?
a. Cash is debited
b. Petty cash is debited
c. Petty cash is credited
d. Expense accounts are debited
15. A cash over and short account
a. In not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash
16. The following statements pertain to accounting for petty cash fund. Which statement is false?
a. Each disbursement from petty cash should be supported by a petty cash voucher
b. The creation of a petty cash fund requires a journal entry to reflect the transfer of fund out of the
general cash account
c. At any time, the sum of cash in the petty cash fund and the total of petty cash vouchers should equal
the amount for which the imprest petty cash fund was established
d. With the establishment of an imprest petty cash fund, one person is given the authority and
responsibility for issuing checks to cover minor disbursements
17. The following statements pertain to the cash short or over account. Which statement is true?
a. It would be impossible to have cash shortage or overage if employees were paid in cash rather than by
check
b. The entry to account for daily cash sales for which a small amount of cash shortage existed would
include a debit to cash short or over account
c. If the cash short or over account has a debit balance at the end of the period it must be debited to an
expense account
d. A credit balance in a cash short or over account should be considered a liability because the short
changed customer will demand return of this amount
18. A bank reconciliation is
a. A formal financial statement that lists all of the bank account balances of an enterprise
b. A merger of two banks that previously where competitors
c. A statement send by the bank to depositor on a monthly basis
FINANCIAL ACCOUNTING 1

d. A schedule that accounts for the differences between an enterprise’s cash balance as shown on its
bank statement and the cash balance shown in its general ledger
19. Which of the following items must be added to the cash balance per ledger in preparing a bank
reconciliation which ends with the adjusted cash balance?
a. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor
b. NSF customer check
c. Service charge
d. Erroneous bank debit
20. Which of the following must be deducted from the bank statement balance in preparing a bank
reconciliation which ends with adjusted cash balance?
a. Deposit in transit
b. Outstanding check
c. Reduction of loan charged to the account of the depositor
d. Certified check
21. If the balance shown on a company’s bank statement is less than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the company
22. If the cash balance shown on a company’s accounting records is less than the correct cash balance and
neither the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the company
23. Which will not require an adjusting entry on the depositor’s books?
a. NSF check from customer
b. Check in payment of account payable amounting to P50,000 is recorded by the depositor as P5,000
c. Deposit of another entity credited to the account of the depositor
d. Bank service charge
24. Which statement is true?
a. Bank service charge will cause the cash balance per ledger to be higher than that reported by the
bank, all other things being equal
b. Outstanding checks will cause the cash balance per ledger to be greater than the balance reported by
the bank, all other things being equal
c. An error made by the bank by charging an amount to the depositor’s account requires a correcting
entry in the depositor’s own records
d. The cash amount shown in the balance sheet must be the balance reported in the bank statement
25. A proof of cash
a. Is a physical count of currencies on hand on balance sheet date
b. Is a formal statement showing that total cash receipts during the year
c. Is a four-column bank reconciliation showing reconciliation of cash balances per book and per bank at
the beginning and end of the current month and reconciliation of cash receipts and cash disbursements
of the bank and the depositor during the current month
d. Is a summary of cash receipts and cash payments
26. The following statements relate to cash. Which statement is true?
a. The term cash equivalent refers to demand credit instruments such as money order and bank drafts
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time
c. Classification of a restricted cash balance as current or noncurrent should parallel the classification of
the related obligation for which cash was restricted
FINANCIAL ACCOUNTING 1

d. Compensating balance required by a bank should always be excluded from cash and cash equivalents
27. Which is not considered as a cash equivalent?
a. A three-year treasury note maturing on May 30 of the current year purchased by the entity on April 15
of the current year
b. A three-year treasury note maturing on May 30 of the current year purchased by the entity on January
15 of the current year
c. A 90-day T-bill
d. A 6-day money market placement
28. As of December 31 of the current year, an entity had various checks and papers in its safe. Which item
should not be in its cash account in the current year-end balance sheet?
a. US$ 20,000 cash
b. Past due promissory note issued in favor of the entity by its President
c. Another entity’s P150,000 check payable to the entity dated December 15 of the current year
d. The entity’s undelivered check payable to a supplier dated December 31 of the current year
29. Which item should be excluded from cash and cash equivalent on the current year-end balance sheet of an
entity?
a. The minimum cash balance in the entity’s current account which is maintained to avoid service charges
b. A check issued by the entity on December 27 of the current year but dated January 15 of next year
c. Time deposit which matures in one year
d. A customer’s check denominated in a foreign currency
30. At December 31 of the current year, an entity had cash accounts at three different banks. One account
balance is segregated solely for payment into a bond sinking fund. A second account, used for branch
operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in the December 31 classified balance sheet?
a. The segregated account should be reported as a non-current asset, the regular account should be
reported as a current asset, and the overdraft should be reported as a current liability
b. The segregated and regular accounts should be reported as current assets, and the overdraft should
be reported as a current liability
c. The segregated account should be reported as a non-current asset and the regular account should be
reported as a current asset net of the overdraft
d. The segregated and regular accounts should be reported as current assets net of the overdraft

PROBLEMS

1. San Miguel Corporation provided the following data on December 31, 2014:
Checkbook balance……………………………………………………………… P 4,000,000
Bank statement balance………………………………………………………… 5,000,000
Check drawn on San Miguel’s account, payable to supplier, dated
and recorded on December 31, 2015 but not mailed until
until January 2016……………………………………………………… 500,000
Cash in sinking fund…………………………………………………………….. 2,000,000
On December 31, 2015, what amount of cash should be reported as cash under current assets?
a. P 4,500,000
b. P 5,500,000
c. P 3,500,000
d. P 6,500,000
2. On December 31, 2015, DALTA Inc. reported cash accounts with the following details:
Undeposited collections………………………………….............................. P 60,000
Cash in bank – PCIB checking account………………….………………….. 500,000
Cash in bank – PNB (overdraft)…………………………….………………… (50,000)
Undeposited NSF check received from customer dated 12/01/14……….. 15,000
Undeposited customer check, dated 01/15/25……………………………… 25,000
FINANCIAL ACCOUNTING 1

Cash in bank – PCIB (fund for payroll)………………………………………. 150,000

Cash in bank – PCIB (savings deposit)……………………………………… 100,000
Cash in bank – PCIB (90-day money market instrument)…………………. 2,000,000
Cash in foreign bank – restricted……………………………………………… 100,000
IOUs from officers………………………………………………………………. 30,000
Sinking fund cash………………………………………………………………. 450,000
Financial asset held for trading……………………………………………….. 120,000
On December 31, 2014, what total amount should be reported as cash and cash equivalents?
a. P 2,660,000 c. P 2,770,000
b. P 2,810,000 d. P 810,000
3. SMART Telecoms had the following balances on December 31, 2014:
Cash in bank…………………………………………………………………….. P 2,250,000
Cash on hand……………………………………………………………………. 125,000
Cash restricted for plant addition……………………………………………… 1,600,000
Cash in bank included P600,000 of compensating balances against short-term borrowing agreement. The
compensating balance is not legally restricted as to withdrawal. On December 31, 2015, what total cash
should be reported under current assets?
a. P 1,775,000 c. P 2,375,000
b. P 2,250,000 d. P 3,975,000
4. Petron Tri-Activ had the following account balances on December 31, 2015:
Cash in bank…………………………………………………………………….. P 2,250,000
Cash on hand……………………………………………………………………. 125,000
Cash restricted for plant acquisition
(to be disbursed in 2016)….………………………………………….. 1,600,000
Cash in bank included P600,000 of compensating balance against long-term borrowing. The compensating
balance is not legally restricted as to withdrawal. On December 31, 2015, what is the total cash to be
reported under current assets?
a. P 1,775,000
b. P 2,250,000
c. P 2,375,000
d. P 3,950,000
5. F2 Logistic Cargo reported that the cash had a balance on December 31, 2015 of P 4,415,000 which
consisted of the following:
Petty cash fund…………………………………………………………………. P 24,000
Undeposited receipts including PDC for P70,000………………………….. 1,220,000
Cash in PNB, per bank statement, with P40,000 outstanding checks…... 2,245,000
Bonds in sinking fund………………………………………………………….. 850,000
Vouchers paid out of collection, not yet recorded………………………….. 43,000
IOUs signed by employees…………………………………………………… 33,000
What amount of cash should be reported as cash on December 31, 2015?
a. P 3,379,000
b. P 3,419,000
c. P 3,489,000
d. P 3,449,000
6. Apple Co. provided the following information with respect to the cash and cash equivalents on December
31, 2015:
Checking account at first bank…………………………………………………. P (200,000)
Checking account at second bank…………………………………………….. 3,500,000
Treasury bonds…………………………………………………………………... 1,000,000
Payroll account…………………………………………………………………… 500,000
VAT account……………………………………………………………………… 400,000
Foreign bank account – in peso (unrestricted)……………………………….. 2,000,000
FINANCIAL ACCOUNTING 1

Postage stamps………………………………………………………………….. 50,000

Employee’s postdated check…………………………………………………… 300,000
IOU from president………………………………………………………………. 750,000
Credit memo from a vendor for purchase returns……………………………. 80,000
Travelers check………………………………………………………………….. 300,000
NSF check……………………………………………………………………….. 150,000
Petty cash fund (P20,000 cash & P30,000 vouchers)………………………. 50,000
Money order…………………………………………………………………….... 180,000
What amount should be reported as unrestricted cash on December 31, 2015?
a. P5,900,000
b. P4,600,000
c. P4,900,000
d. P6,900,000
7. Nike reported petty cash fund with the following details:
Currencies……………………………………………………………………….. P 20,000
Coins……………………………………………………………………………… 2,000
Petty cash vouchers
Gasoline payment for delivery of equipment………………………. 3,000
Medical supplies for employees…………………………………….. 1,000
Repairs of office equipment…………………………………………. 1,500
Loans to employees………………………………………………….. 3,500
Check drawn by the entity payable to the order of Grace de la Cruz,
the petty cash custodian, representing her salary………………… 15,000
NSF employee check…………………………………………………………… 3,000
A sheet of paper with names of several employees together
With contribution for a birthday gift of a co-employee…………….. 5,000
The petty cash general ledger account has an imprest balance of P50,000. What is the amount of petty
cash fund that should be reported in the Statement of Financial Position?
a. P 27,000
b. P 37,000
c. P 22,000
d. P 42,000
8. On December 31, 2015, Cignal HD had the following cash balances:
Cash in bank……………………………………………………………………. P 1,800,000
Petty cash fund (all funds were reimbursed on 12/31/15)…………………. 50,000
Time deposit (due February 1, 2016)………………………………………… 250,000
Cash in bank included P600,000 of compensating balance against short-term borrowing arrangement on
12/31/15. The compensating balance is legally restricted as to withdrawal. On December 31, 2015, what is
the amount that is to be reported as cash and cash equivalents?
a. P 2,100,000
b. P 1,950,000
c. P 1,500,000
d. P 1,250,000
9. New San Jose Builders Inc. reported petty cash fund which comprised the following:
Coins and currencies…………………………………………………….......... P
3,300
Paid vouchers
Transportation…………………………………………………………. 600
Gasoline……………………………………………………………….. 400
Office supplies………………………………………………………… 500
Postage stamps………………………………………………………. 300
FINANCIAL ACCOUNTING 1

Due from employees…………………………………………………. 1,200

3,000
NSF managers check…………………………………………………………..
1,000
Checks drawn by the order of the custodian…………………………………
2,700
What is the correct amount of petty cash fund for financial statement presentation purposes?
a. P 10,000
b. P 7,000
c. P 6,000
d. P 9,000
10. Megaworld Co. established a P3000 petty cash fund. You found the following items in the fund:
Cash & Currency………………………………………………………………….P 1683.80
Expense Vouchers………………………………………………………..……… 829.80
Advances to employees……………………………………….…………………. 200.00
IOU from employees……………………………………………………………… 300.00
In the entry to replenish the fund, what amount should be debited to the cash short or over account?
a. P 13.60
b. P 300.00
c. P 500.00
d. P 0
11. Stark Industry’s accountant is preparing its October bank reconciliation and has collected the following
data:
Per Books Per
Bank
Oct. 1 balance…………………………………………………. P11600
P10,000
Oct. deposits…………………………………………………… 24,600 21,200
Oct. checks……………………………………………………. 27,800 29,000
Note Collected (plus 10% interest)…………………………. 0 4,400
Oct. service charge…………………………………………… 0 20
Oct. 31 balance……………………………….………………. 8,400 6,580
Additionally, deposits in transit and outstanding checks from September reconciliation were P4,400 and
P2,800, respectively.
The correct cash balance at October 31 should be:
a. P10,960
b. P12,780
c. P11,180
d. P 3,980
12. Fédération Internationale de Volleyball provided the following information in preparing the August 31, 2015
bank reconciliation:
Balance per bank statement…………………………………………………... P 1,805,000
Deposit in transit………………………………………………………………… 325,000
NSF customer check…………………………………………………………… 60,000
Outstanding checks…………………………………………………………….. 275,000
Bank service charge for August………………………………………………. 10,000
On August 31, 2015, how much is the adjusted cash balance?
a. P 1,855,000
b. P 1,795,000
c. P 1,785,000
d. P 1,755,000
13. FIBA prepared the following bank reconciliation on December 31, 2015:
Balance per bank statement…………………………………………………… P 2,800,000
Add: Deposit in transit………………………………………………………. 195,000
FINANCIAL ACCOUNTING 1

Checkbook printing charge…………………………………………… 5,000

Error made in recording check no. 45 last December…………….. 35,000
NSF check……………………………………………………………… 110,000
Less: Outstanding checks…………………………………………………… 100,000
Note collected by bank……………………………………………….. 215,000

Balance per book……………………………………………………………….. P 2,830,000

The entity had P200,000 cash on hand on 12/31/15. How much should be reported as cash in the
statement of financial position?
a. P 2,930,000
b. P 3,095,000
c. P 2,895,000
d. P 3,130,000

14. When a company’s bookkeeper started to prepare the monthly bank reconciliation, the cash account
showed a balance of P528,600. At the end of the month, the following information was available from the
company records and the monthly bank statement:
Customers NSF check listed in the bank statement………………………………… P 40,800
Bank service charge…………………………………………………………………….. 2,400
Outstanding check………………………………………………………………………. 178,000
Deposit of 45,000 was erroneously credited in the bank statement as................. 54,000
Company wrote 1,700 but recorded it as…………………………………………….. 7,100
Customer default on account………………………………………………………….. 12,600
The correct cash balance should be:
a. P 572,400
b. P 490,800
c. P 581,400
d. P 561,600
15. Samsung Inc. uses four-column bank reconciliation. The bank reconciliation for March shows outstanding
checks for P300. During April, the company wrote check totaling P23,600. The bank statement for April
shows P23,010 of checks clearing the company’s account. The amount of outstanding checks on April
bank reconciliation must be:
a. P 890
b. P 600
c. P 300
d. P 1,200
16. Nitendo Co. reported a balance of P14,300 in its cash account at the end of the month. There were
P12,000 deposits in transit and P11,500 of checks outstanding. The bank statement showed a balance of
P15,000. Service charge of P600, and the collection of a note plus interest. The note had a face value of
P1500. How much interest did the company collect?
a. P 1,800
b. P 300
c. P 2,400
d. P 1,200
17. Sony uses four-column bank reconciliation. The bank statement for May shows payments of P13,150,
including service charge of P200. At the beginning of May, there were P900 of checks outstanding. At the
end of May, there were P1,200 of checks outstanding. Before recording the bank service charge, Sony
must have recorded May payments of:
a. P13,250
b. P12,650
c. P13,050
d. P13,650
18. A company received its monthly bank statement, which showed an ending balance of P150,000.
Adjustment on the bank reconciliation included a deposit in transit of P20,000; outstanding checks of
P30,000; NSF check of P5,000; bank service charge of P300; proceeds of a note collected by the bank of
P40,000. What was the correct cash balance to be shown in the statement of financial position?
a. P134,700
b. P105,300
c. P140,000
FINANCIAL ACCOUNTING 1

d. P174,700
19. Using the same information in no. 18, how much is the unadjusted cash balance per books?
a. P134,700
b. P105,300
c. P140,000
d. P174,700
20. GIC Enterprise’s cash account had a balance of P96,200 on August 31. This included a bank deposit of
P8,700 that was in transit on the 31st. The August 31 bank statement contained the following information:
Bank statement balance……….. P 108,900 NSF check……………………… P
1,600
Bank service charge……………. 1,700 Collection of note……………….
8,600
GIC also had an outstanding check of P16,100. What is GIC’s reconciled balance?
a. P92,900
b. P96,200
c. P104,700
d. P101,500

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 FINANCIAL ACCOUNTING 1

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IASB publishes revised Conceptual Framework
o Error! Filename not specified.
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29 Mar 2018
The International Accounting Standards Board (IASB) has published its
revised 'Conceptual Framework for Financial Reporting'. Included are
revised definitions of an asset and a liability as well as new guidance on
measurement and derecognition, presentation and disclosure. The new
Conceptual Framework does not constitute a substantial revision of the
document as was originally intended when the project was first taken up
in 2004. Instead the IASB focused on topics that were not yet covered or
that showed obvious shortcomings that needed to be dealt with.
 
Background
The Conceptual Framework had been left largely unchanged since its
inception in 1989. In 2004, the IASB and the FASB decided to review and
revise the conceptual framework, however, changed priorities and the slow
progress in the project led to the project being abandoned in 2010 after only
Phase A of the original joint project had been finalised and introduced into the
existing framework as Chapters 1 and 3 in September 2010. Phase D saw the
publication of a discussion paper and an exposure draft but was never
finalised. The Boards discussed Phases B and C quite extensively without any
consultation document ever being issued, and Phases E to H largely remained
untouched.
During the 2011 agenda consultation many participants called for the IASB to
reactivate and finalise the conceptual framework project given the multitude of
open conceptual issues it is facing in many of its current projects. As a result,
the IASB officially added the project to its agenda again in September 2012,
this time as an IASB-only project and no longer aimed at a substantial revision
of the framework but focused on those topics that are not yet covered (e.g.
presentation and disclosure) or that show obvious shortcomings that need to
be dealt with. As a first step, a Discussion Paper covering all aspects of the
framework project was published in July 2013, followed by a comprehensive
Exposure Draft in May 2015.
 
Summary of main aspects of the Conceptual Framework
The 2018 Conceptual Framework is structured into an introductory explanation
on the status and purpose of the Conceptual Framework, eight chapters, and
a glossary:
FINANCIAL ACCOUNTING 1

Chapter Topic

Status and purpose of the Conceptual Framework

1 The objective of general purpose financial reporting

2 Qualitative characteristics of useful financial information

3 Financial statements and the reporting entity

4 The elements of financial statements

5 Recognition and derecognition

6 Measurement

7 Presentation and disclosure

8 Concepts of capital and capital maintenance

Appendix A Glossary

The key content of each chapter is summarised below:

Status and purpose of the Conceptual Framework. The first section notes that
the Conceptual Framework's purpose is to assist the IASB in developing and revising
IFRSs that are based on consistent concepts, to help preparers to develop consistent
accounting policies for areas that are not covered by a standard or where there is
choice of accounting policy, and to assist all parties to understand and interpret IFRS.
It maintains that the framework does not override any specific IFRS. Should the IASB
decide to issue a new or revised pronouncement that is in conflict with the framework,
the IASB will highlight the fact and explain the reasons for the departure  in the basis
for conclusions.
Chapter 1 - The objective of general purpose financial reporting. This is the first
of the two chapters that were finalised as part of the joint project with the FASB in
2010, so there are only limited changes. The chapter notes that objective of general
purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in
making decisions relating to providing resources to the entity. This is identified as
information about the entity’s economic resources and the claims against the reporting
entity as well as information about the effects of transactions and other events that
change a reporting entity’s economic resources and claims. The chapter newly stresses
that information can also help users to assess management’s stewardship of the
FINANCIAL ACCOUNTING 1

entity’s economic resources.

Chapter 2 - Qualitative characteristics of useful financial information. This is the
second of the two chapters that were finalised as part of the joint project with the
FASB in 2010 (published as Chapter 3 in the 2010 Conceptual Framework). Again,
changes are limited. The chapter explains the fundamental qualitative characteristics
(relevance and faithful representation) and the enhancing qualitative characteristics
(comparability, verifiability, timeliness, and understandability) of useful financial
information and notes the cost constraint. Materiality is noted as an entity-specific
aspect of relevance. The chapter reintroduces an explicit reference to the notion of
prudence and states that the exercise of prudence supports neutrality. Prudence is
defined as the exercise of caution when making judgements under conditions of
uncertainty. New is also a clarification that faithful representation means
representation of the substance of an economic phenomenon instead of representation
of its legal form only.
Chapter 3 - Financial Statements and the reporting entity. The chapter states the
objective of financial statements (to provide information about an entity's assets,
liabilities, equity, income and expenses that is useful to financial statements users in
assessing the prospects for future net cash inflows to the entity and in assessing
management's stewardship of the entity's resources) and sets out the going concern
assumption. It only mentions two statements explicitly: the statement of financial
position and the statement(s) of financial performance (the latter being the former
statement of comprehensive income); the rest are "other statements and notes". The
chapter notes that financial statements are prepared for a specified period of time
and provide comparative information and under certain circumstances forward-
looking information. New to the framework is the definition of a reporting entity and
the boundary of a it. The chapter also states the IASB's conviction that, generally,
consolidated financial statements are more likely to provide useful information to
users of financial statements than unconsolidated financial statements.
Chapter 4 - The elements of financial statements. The main focus of this chapter is
on the definitions of assets, liabilities, and equity as well as income and expenses. The
definitions are quoted below:
Asset. A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
Liability. A present obligation of the entity to transfer an economic resource as a
result of past events.
Equity. The residual interest in the assets of the entity after deducting all its
liabilities.
Income. Increases in assets or decreases in liabilities that result in increases in
equity, other than those relating to contributions from holders of equity claims.
Expenses. Decreases in assets or increases in liabilities that result in decreases in
equity, other than those relating to distributions to holders of equity claims.
New is the introduction of a separate definition of an economic resource to move the
references to future flows of economic benefits out of the definitions of an asset and a
liability. The expression "economic resource" instead of simply "resource" stresses
that the IASB no longer thinks of assets as physical objects but as sets of rights. The
definitions of asets and liabilities also no longer refer to "expected" inflows or
outflows. Instead, the definition of an economic resource refers to the potential of an
asset/liability to produce/to require a transfer of economic benefits. Distinguishing
FINANCIAL ACCOUNTING 1

between liabilities and equity is not part of the new framework but has been
transferred to the IASB's research project on financial instruments with the
characteristics of equity.
Chapter 5 - Recognition and derecognition. The Conceptual Framework states that
only items that meet the definition of an asset, a liability or equity are recognised in
the statement of financial position and only items that meet the definition of income or
expenses are to be recognised in the statement(s) of financial performance. However,
their recognition depends on two criteria: their recognition provides users of financial
statements with (1) relevant information about the asset or the liability and about any
income, expenses or changes in equity and (2) a faithful representation of the asset or
the liability and of any income, expenses or changes in equity. The framework also
notes a cost constraint. New to the framework is the discussion of derecognition. The
requirements as presented in the framework are driven by two aims: the assets and
liabilities retained after the transaction or other event that led to derecognition must be
presented faithfully and the change in the entity's assets and liabilities as a result of
that transaction or other event must also be presented faithfully. The framework also
describes alternatives when it is not possible to achieve both aims.
Chapter 6 - Measurement. This chapter is dedicated to the description of different
measurement bases (historical cost and current value (fair value, value in
use/fulfilment value, and current cost)), the information that they provide and their
advantages and disadvantages. Current cost is newly introduced into the Conceptual
Framework as it is widely advocated in academic literature. A table offers an
overview of the information provided by various measurement bases. The framework
also sets out factors to consider when selecting a measurement basis (relevance,
faithful representation, enhancing qualitative characteristics and the cost constraint,
factors specific to initial measurement, as well as more than one measurement basis)
and points out that consideration of the objective of financial reporting, the qualitative
characteristics of useful financial information and the cost constraint are likely to
result in the selection of different measurement bases for different assets, liabilities
and items of income and expense. The framework does not provide detailed guidance
on when a particular measurement basis would be suitable because the suitability of
particular measurement bases will vary depending on facts and circumstances. On
equity, the framework offers some limited discussion, although total equity is not
measured directly. Still, the framework maintains, it may be appropriate to measure
directly individual classes of equity or components of equity to provide useful
information.
Chapter 7 - Presentation and disclosure. In this chapter, the framework discusses
concepts that determine what information is included in the financial statements and
how that information should be presented and disclosed. The statement of statement of
comprehensive income is newly described as "statement of financial performance",
however, the framework does not specify whether this statement should consist of a
single statement or two statements, it only requires that a total or subtotal for profit or
loss must be provided. It also notes that the statement of profit or loss is the primary
source of information about an entity’s financial performance for the reporting period
and that only in "exceptional circumstances" the Board may decide that income or
expenses are to be included in other comprehensive income. Notably, the framework
does not define profit or loss, thus the question of what goes into profit or loss or into
other comprehensive income is still unanswered.
 FINANCIAL ACCOUNTING 1

Chapter 8 - Concepts of capital and capital maintenance. The content in this

chapter was taken over from the existing Conceptual Frameworkand and discusses
concepts of capital (financial and physical), concepts of capital maintenance (again
financial and physical) and the determination of profit as well as capital maintenance
adjustments. The IASB decided that updating the discussion of capital and capital
maintenance could have delayed the completion of the framework significantly. The
Board might consider revising the description and discussion of capital maintenance in
the future if it considers such a revision necessary.

The Conceptual Framework does not have a stated effective date and the

Board will start using it immediately.
 
References to the Conceptual Framework
Together with the revised Conceptual Framework, the IASB has also
issued  Amendments to References to the Conceptual Framework in IFRS
Standards. The document contains amendments to IFRS 2, IFRS 3, IFRS 6,
IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20,
IFRIC 22, and SIC-32. Not all amendments, however update those
pronouncements with regard to references to and quotes from the framework
so that they refer to the revised Conceptual Framework. Some
pronouncements are only updated to indicate which version of the framework
they are referencing to (the IASC framework adopted by the IASB in 2001, the
IASB framework of 2010, or the new revised framework of 2018) or to indicate
that definitions in the standard have not been updated with the new definitions
developed in the revised Conceptual Framework.
The amendments, where they actually are updates, are effective for annual
periods beginning on or after 1 January 2020.
 
Additional information
o Press release on the IASB's website (inclues a three minute introductory
video)
o Feedback statement (link to IASB website)
o One page factsheet on the new framework (link to IASB website)
o IFRS in Focus newsletter explaining the changes
o IAS Plus project page on the IASB’s conceptual framework project
o Updated EFRAG status report
The IASB also announces that on 18 April 2018, there will be two live web
presentations to introduce the revised Conceptual Framework. Please click
for more information and registration on the IASB website.
 
Related Topics

Resources

 International Accounting Standards Board (IASB)

 FINANCIAL ACCOUNTING 1

 IASB finalised pronouncements

Projects

 Conceptual Framework — Comprehensive IASB project

Standards

 Conceptual Framework for Financial Reporting 2018

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 SPECIAL PURPOSE FINANCIAL STATEMENTS

 STEP FIVE – RECOGNISING REVENUE UNDER IFRS 15

 FEES CHARGED TO CUSTOMERS BY LENDERS

 VIDEO SERIES
 NFPS – REFUND OBLIGATIONS

Step Five – Recognising revenue under IFRS 15 –

Simultaneous use and consumption can be complex
In the April 2018 edition of Accounting News, we discussed the five-step model for revenue recognition
introduced by IFRS 15 Revenue from Contracts with Customers:

Step 1 Identify the contract(s) 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

Step 5 Recognise revenue when a performance obligation is satisfied

Since then we have included a number of articles on IFRS 15 in Accounting News that cover various issues
from the five-step process in greater depth:

Ste Accounting News edition…

 
p

Identify May and June 2018
the
Ste
contract(s
p1
) with the
customer

Identify July and September 2018
the
performa
Ste
nce
p2
obligation
s in the
contract
FINANCIAL ACCOUNTING 1

Determin November 2018, February 2019, Ma
Ste e the rch 2019 and May 2019
p 3 transactio
n price

Allocate June and July 2019
the
transactio
n price to
Ste
the
p4
performa
nce
obligation
s

Recognise August 2019
revenue
when a
Ste performa
p 5 nce
obligation
is
satisfied

In this edition we continue our examination of the final step in the five step process – recognising revenue
when a performance obligation is satisfied.

Recognising revenue
In the August 2019 edition of Accounting News we outlined how, under IFRS 15, revenue is recognised
when (or as) a performance obligation is satisfied by transferring a promised good or service (i.e. an asset)
to a customer (with transfer occurring when, or as, the customer obtains control of the good or service).  A
performance obligation may be satisfied:

 At a point in time, or
 Over time.

We also noted that an entity transfers control of a good or service over time and, therefore, satisfies a
performance obligation and recognises revenue over time, provided that at least one of the following
criteria is met:

1. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs (this would occur, for example, in relation to the provision of
nightly office cleaning services)
2. The entity’s performance creates or enhances an asset (for example, work in progress) that the
customer controls as the asset is created or enhanced, or
3. The entity’s performance does not create an asset with an alternative use to the entity (due to a
contractual restriction, or practical limitation, on directing the asset to another use) and the entity has
an enforceable right to payment for performance completed to date.

The requirements for the recognition of revenue are illustrated in the decision tree below:
FINANCIAL ACCOUNTING 1

In the August 2019 edition of Accounting News, we examined the third of the three criteria for recognition of
revenue over time (i.e. 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).  In this edition we
examine the first instance where revenue is recognised over time, i.e. where the customer simultaneously
receives and consumes the benefits provided by the entity’s performance as the entity performs (IFRS 15,
paragraph 35(a)).

The customer simultaneously receives and consumes the

benefits provided by the entity’s performance as the entity
performs (IFRS 15, paragraph 35(a))
This criterion applies to certain contracts for services.  The concept of control of an asset applies, because
services are viewed as being an asset (if only momentarily) when they are received and used.
In some cases, it will be straightforward to identify whether a customer simultaneously receives and
consumes the benefits provided by the entity’s performance, but in other circumstances it will be more
FINANCIAL ACCOUNTING 1

complex.  In these cases, a key test is whether, in order to complete the remaining performance obligations,
another vendor would need to substantially re-perform the work the vendor has completed to date.
If another vendor would not need to substantially re-perform the work, then the customer is simultaneously
receiving and consuming the economic benefits arising from the vendor’s performance.

In determining whether another entity would need to substantially re-perform the work completed to date, the
vendor is required to:

 Disregard any contractual or practical barriers to the transfer of the remaining performance
obligations to another entity, and
 Presume that any replacement vendor would not have the benefit of any asset that the entity
currently controls, and would continue to control (such as a partially completed service or item of
property, plant and equipment), were the remainder of the contract to be fulfilled by the entity.

Example 1
Payroll Co enters into a contract to provide monthly payroll processing services to a customer for one year.
Most of the payroll processing work is conducted on the 14th day of each month as staff are paid on the
15th day of each month.
If the entity ceased providing services to the customer, another entity would not need to re-perform the
payroll processing services performed prior to the date that Payroll Co ceases its service provision. 
In this case it is clear that the customer simultaneously receives and consumes the benefits of Payroll Co’s
performance in processing each payroll transaction as and when each transaction is processed.
Note that, in determining whether a customer simultaneously receives and consumes the benefits of the
entity’s performance as the entity performs, the entity must disregard any practical limitations on
transferring the remaining performance obligation, including setup activities that would need to be
undertaken by another entity.
Payroll Co therefore concludes that revenue from providing the payroll services meet the criteria in
paragraph 35(a) for recognising revenue ‘over time’.
In addition, Payroll Co is essentially providing a series of distinct services (i.e. 12 monthly payroll services)
that are substantially the same, and that have the same pattern of transfer to the customer (i.e. all 12
services are performed on the 14th day of each month). IFRS 15 treats such a series of distinct services
as one performance obligation. Revenue is recognised over time for this one performance obligation using
a method that measures Payroll Co’s progress towards complete satisfaction of this performance obligation
to transfer each of the 12 month’s payroll services to the customer. Because the payroll services are
processed on the 14th day of each month, strictly speaking, using a straight-line method to recognise
revenue over time would not be appropriate. Revenue should instead be recognised as and when each
payroll process is complete, i.e. on 14th of each month. However, in practice, because revenue is
recognised every month, using a straight-line basis would achieve a similar outcome.

Example 2
Shipping Co enters into a contract to transport a customer’s goods from Sydney to Los Angeles. When
Shipping Co enters into the contract, the ship to be used to transport the customer’s goods is docked in
Hobart. On Shipping Co’s reporting date (30 June 2019), the goods had been collected from Sydney and the
ship is half way across the Pacific Ocean. 
In this scenario, we can conclude that another shipping company would not need to substantially re-
perform the work completed to date by Shipping Co (being the transport of goods from Sydney to a point
half way across the Pacific Ocean).
Shipping Co can therefore recognise revenue over time to reflect its partial performance at the reporting
date, 30 June 2019.  Note that, in determining how to recognise revenue, the shipping company disregards
the practical limitations associated with a hypothetical transfer of the goods from its ship to another shipping
company’s ship in the middle of the Pacific Ocean.
Note: The ’series’ provisions noted in Example 1 above do not apply in this case because the shipping
services do not comprise a series of distinct and repetitive services. Revenue is merely recognised over time
using a method that depicts Shipping Co’s performance in transferring control of the shipping services to the
customer (e.g. kilometres shipped).

More complex examples – timing of revenue recognition

However, things are not always as straightforward as in the payroll processing contract (Example 1) and
shipping contract (Example 2) examined above.  For example, consider the following two cleaning contracts,
each running for one year, commencing 1 April 2019, with a 30 June year-end and half-yearly reporting
obligations:

  Details of services Revenue

FINANCIAL ACCOUNTING 1

provided recognised…
Contrac Provision of after- The customer
t one hours office simultaneously
cleaning services receives and
five evenings a consumes the
week, with each benefits of the
clean to include the cleaning
same services services
(emptying of bins, provided ‘over
cleaning of kitchens time’ (IFRS 15,
and bathrooms, paragraph
dusting and 35(a)).
vacuuming) Cleaning
services are
routine and
recurring. Each
cleaning service
forms part of a
‘series’ of
distinct services
that are
substantially the
same and have
the same pattern
of transfer.
Cleaning
contract is
treated as one
performance
obligation
recognised over
time using a
straight-line
method to
measure the
entity’s progress
towards
satisfying the
whole
performance
obligation.
Note: Straight-
line method is
appropriate
because
cleaning
services are
provided each
day of the
working week.
Contrac 1. Provision of Performance
t two after-hours obligations #1
office As for Contract
cleaning one above.
services five
evenings a
week, with
each clean to
FINANCIAL ACCOUNTING 1

include the
same services
(emptying of
bins, cleaning
of kitchens
and
bathrooms,
dusting and
vacuuming)

2. Deep clean of Performance

carpets every obligations #2
six months The customer
(i.e. 30 simultaneously
September receives and
2019 and 31 consumes the
March 2020) benefits of the
- takes one carpet cleaning
weekend to services
complete provided ‘over
time’ (IFRS 15,
paragraph
35(a)).
Carpet cleaning
services are
recurring. Each
carpet cleaning
service forms
part of a ‘series’
of distinct
services that are
substantially the
same and have
the same pattern
of transfer.
Carpet cleaning
contract is
treated as one
performance
obligation
recognised over
time using a
method to
measure the
entity’s progress
towards
satisfying the
whole
performance
obligation.
Note: At 30
June 2019 year-
end, no carpet
clean service
had been
provided to the
customer.
Therefore it
would not be
FINANCIAL ACCOUNTING 1

appropriate to
recognise
revenue over
time using a
straight-line
basis as no
carpet cleaning
service had
been provided
to customer at
30 June 2019.
Instead, an
output method
for recognising
revenue over
time may be
appropriate.
3. Window Performance
clean every obligations #3
twelve The customer
months (i.e. simultaneously
commence 27 receives and
March 2020) consumes the
- takes five benefits of the
days to window
complete cleaning
services
provided ‘over
time’ (IFRS 15,
paragraph
35(a)).
Window
cleaning
services do not
meet the ‘series’
requirement as
there is only one
window
cleaning service
provided in the
contract (i.e.
there is no
repetitive
service).
There is simply
one performance
obligation to be
recognised over
time using a
method to
measure the
entity’s progress
towards
satisfying the
whole
performance
obligation (e.g.
as each day
FINANCIAL ACCOUNTING 1

completed).
Note: At 30
June 2019 year-
end and 31
December 2019
half-year end,
no window
cleaning service
had been
provided to the
customer.
Therefore it
would not be
appropriate to
recognise
revenue over
time using a
straight-line
basis as no
window
cleaning service
had been
provided to
customer at 30
June 2019 or 31
December 2019.
Instead, an
output method
for recognising
revenue over
time for the five-
day cleaning
period may be
appropriate.

Concluding thoughts
Under IAS 18 Revenue, revenue recognition was comparatively straightforward – when services were being
sold, revenue was recognised on a percentage of completion basis.
Under IFRS 15, revenue can only be recognised over time if strict criteria are met.  A determination of
whether those criteria have been met will often involve an in-depth examination of the terms of contracts that
have been entered into with customers.  As we have seen with all of the five steps in the IFRS 15 revenue
recognition model, this will require finance teams to work with sales (and in some instances legal) teams to
ensure that they have a sufficiently in-depth understanding of contractual terms to correctly identify when
revenue should be recognised. 
This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial
advice and should not be relied upon as such. The information in this publication is subject to change at any time and
therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied
upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained
therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss
these matters in the context of your particular circumstances.

BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do
not give any warranty as to the accuracy, reliability or completeness of information contained in this article nor do they
accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in
reliance on the information in this publication or for any decision based on it, except in so far as any liability under
statute cannot be excluded. Read full Disclaimer.

 
 FINANCIAL ACCOUNTING 1

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Performance Obligations and Timing of Revenue Recognition (IFRS

15)
Last updated: 5 November 2020
FINANCIAL ACCOUNTING 1

When to recognise revenue

Revenue is recognised when/as performance obligations are satisfied in the amount

of transaction price allocated to satisfied performance obligations (IFRS 15.46). A performance
obligation is satisfied by transferring a promised good or service to a customer (IFRS 15.31). A
good or service is transferred to a customer when they obtain control of that asset.
A performance obligation can be satisfied (and revenue recognised) at a point in time or over
time. If a performance obligation is not satisfied over time, it must be treated as satisfied at a
point in time (IFRS 15.32).

Performance obligation

A performance obligation is a promise to transfer to the customer a good or service (or a

bundle of goods or services) that is distinct (IFRS 15.22). At a contract inception, entities need
to identify the goods or services promised in that contract. This is a starting point in identifying
performance obligations. In addition to the goods or services explicitly stated in the contract,
all implied promises (e.g. by past business practices or published policies) that create a valid
expectation of the customer that the entity will transfer a distinct good or service are also
treated as separate performance obligations, even though they may not be enforceable by law
(IFRS 15.24, BC87).
Activities that do not transfer a good or service to a customer are not a performance obligation
even though they may be necessary to fulfil a contract (IFRS 15.25). Examples of such activities
are setup of a manufacturing process or connecting a customer to a telecommunications
network.
FINANCIAL ACCOUNTING 1

Distinct goods or services

Definition of distinct goods or services

A good or service is distinct if both of the following criteria are met (IFRS 15.27):

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 (in other words: the good or service is capable of
being distinct); and
b. the entity’s promise to transfer the good or service to the customer is separately identifiable
from other promises in the contract (in other words: the promise to transfer the good or
service is distinct within the context of the contract).

A 2-step approach seems to work best. At first, entities look at point a. and assess
whether the good or service is capable of being distinct (more discussion on this point
below). If the answer is no, the good/service is not distinct. If the answer is yes, entities
move on to point b. and assess whether this good/service is distinct within the context
of the contract (again, more discussion on this point below). If the answer is yes, the
good/service is distinct. If no, the good/service is not distinct. Examples of distinct
goods or services are given in IFRS 15.26.
If a promised good or service is not distinct, it should be combined with other promised
goods or services until they become distinct together (‘a bundle’). Such a bundle is then
treated as a single performance obligation (IFRS 15.30).
A good or service should be treated as a separate performance obligation irrespective of
the business model adopted by an entity. For example, a telecommunications company
may want to consider a ‘free’ mobile phone provided to a customer as a marketing
expense as its business model is to provide telecommunications services, not to sell
phones. Such an approach is not allowed under IFRS 15 (IFRS 15.BC88-BC90).

The good or service is capable of being distinct

For some goods or services, such as a piece of furniture, it is obvious that a customer
will benefit from them on their own. Sometimes a customer can benefit from the good
or service only by using them with other readily available resources (e.g. a mobile
phone that needs a provider of telecommunications services). A readily available
resource is defined in IFRS 15.28 as a good or service that is sold separately (by the
reporting entity or third party) or a resource that the customer has already obtained
from the entity (including goods or services that the entity will transfer to the customer
under the contract before the good or service in question is transferred) or from other
transactions or events. See Example 11 Cases A/E, Example 12 and Example 56 Case A
accompanying IFRS 15.
Paragraph IFRS 15.BC100 notes that the assessment of whether the customer can
benefit from the goods or services on its own should be based on the characteristics of
the goods or services themselves instead of the way in which the customer may use the
goods or services. Consequently, an entity would disregard any contractual limitations
that might preclude the customer from obtaining readily available resources from a
source other than the entity. See Example 11 Case D accompanying IFRS 15.

The good or service is distinct within the context of the contract

A good or service promised to the customer is not separately identifiable from other
promises in the contract when, in substance, the customer contracted for a combined
good or service. In such cases, goods or services that seem to be distinct are in fact only
inputs to the combined item. For example, when a customer places an order to print
FINANCIAL ACCOUNTING 1

10,000 copies of a book, the paper used for printing that book is not a distinct good,
although the customer would be able to take that paper with him and print the book in
a different place. Similarly, construction companies do not recognise revenue when
they deliver building materials to the construction site if the customer contracted them
to construct a building. See Example 10 Case A, Example 11 Cases B/E and Example 55
and Example 56 Case B accompanying IFRS 15.
Paragraph IFRS 15.29 lists three most common circumstances in which two or more
promises to transfer goods or services to a customer are not separately identifiable (a
non-exhaustive list):

a. The entity provides a significant service of integrating the goods or services with other
goods or services promised in the contract into a bundle of goods or services that represent
the combined output or outputs for which the customer has contracted. In other words, the
entity is using the goods or services as inputs to produce or deliver the combined output or
outputs specified by the customer. A combined output or outputs might include more than
one phase, element or unit (e.g. construction contracts).
b. One or more of the goods or services significantly modifies or customises, or are
significantly modified or customised by, one or more of the other goods or services
promised in the contract (e.g. sale of software with significant customisation).
c. Each of the goods or services is significantly affected by one or more of the other goods or
services in the contract (they are highly interdependent or highly interrelated).

Non-refundable upfront fees

Non-refundable upfront fees should be assessed against the criteria for identifying a
performance obligation which will determine their accounting treatment. Usually, the
upfront fee does not result in the transfer of a distinct good or service to the customer
and therefore it is not treated as a separate performance obligation. Instead, it is
allocated to other performance obligations identified in the contract (IFRS 15.B48-
B50).
When the up-front fees are deemed to be a compensation for set-up costs incurred by
the entity, those costs can be recognised as costs to fulfil a contract (assets) (IFRS
15.B51).
See Example 53 accompanying IFRS 15.

Examples of distinct goods or services

 A car manufacturer sells its cars to a dealer and promises in the contract to provide a free
maintenance to a final customer (i.e. to a customer of a dealer) for 3 years after the
purchase. Such a promise of free maintenance is a distinct service and constitutes a separate
performance obligation for a car manufacturer.
 A telecommunications company promises a free smartphone to each customer who
subscribes for a premium telecommunications service. Additionally, it charges a one-off
connection fee. Free smartphone is a distinct good and constitutes a separate performance
obligation for the telecommunications company. Connection fee is not a distinct service and
does not constitute a separate performance obligation as it does not result in a transfer of
goods or services to the customer.
 A manufacturer contracts with its customer for a production of 100,000 pieces of sporting
equipment. The manufacturer charges $0.5 million of up-front setup costs and $100 for
each manufactured piece. The setup of manufacturing line is not a distinct service and does
not constitute a separate performance obligation as it does not result in a transfer of goods
or services to the customer.
 Entity X produces a specialised equipment which is installed at customer’s premises. Only
Entity X is able to install the equipment. Entity X charges $5 million for the equipment and
$0.5 million for the installation. The equipment and its installation as treated as a single
performance obligation as the customer would not be able to benefit from the equipment or
installation service on its own.
FINANCIAL ACCOUNTING 1

A series of distinct goods or services that are substantially the same

Another important type of a performance obligation is a series of distinct goods or

services that are substantially the same and that have the same pattern of transfer to
the customer (IFRS 15.22(b)). In practice, this most often applies to repetitive services,
such as cleaning services or transaction processing (IFRS 15.BC114).
A series of distinct goods or services is treated as one performance obligation when
both of the following criteria are met (IFRS 15.23):

a. each distinct good or service in the series would meet the criteria to be a performance
obligation satisfied over time; and
b. when measuring progress towards complete satisfaction of a performance obligation, the
same method would be used to measure the entity’s progress towards complete satisfaction
for each distinct good or service in the series.

See Examples 7, 13, 25 accompanying IFRS 15 and the examples below.

Example: A series of distinct goods or services that are substantially the same
Entity A is a company manufacturing car parts. It contracts with a car producer to
manufacture 1 million car seats over the next three years. Each car seat is a distinct
good, but Entity A treats the whole contract as one performance obligation under
paragraph IFRS 15.22(b). It does so, because in concludes that conditions in paragraph
IFRS 15.35(c) are met (more on performance obligations satisfied over time below). It
does not matter whether the production will be spread evenly over time or not.

Performance obligations satisfied over time

Criteria for performance obligations to be satisfied over time

Performance obligation is satisfied over time if one of the criteria given in IFRS 15.35
is met:

a. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
b. The entity’s performance creates or enhances an asset 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.

Customer simultaneously receives and consumes benefits

This criterion is met in routine or recurring services, such as access to the Internet
charged on a flat fee basis or cleaning services, but can also apply in more complex
contracts. When the application of this criterion is not straightforward, it is crucial to
focus on assessing whether another entity would need to substantially re-perform the
work that the entity has completed to date if that other entity were to fulfil the
remaining performance obligation. In making this assessment an entity should (IFRS
15.B4):

 disregard potential contractual restrictions or practical limitations that otherwise would

prevent the entity from transferring the remaining performance obligation to another
entity; and
FINANCIAL ACCOUNTING 1

 presume that another entity fulfilling the remainder of the performance obligation would
not have the benefit of any asset that is presently controlled by the entity and that would
remain controlled by the entity if the performance obligation were to transfer to another
entity.

IASB stated that this criterion for performance obligation satisfied over time is not
intended to be applied when an asset (e.g. work-in-progress) is created that is not
consumed immediately by the customer (IFRS 15.BC128).
See Examples 13,18 and 25 accompanying IFRS 15 and the example below.
Example: Satisfaction of performance obligation in a transportation service
Entity A contracts to transport a package from Madrid to Moscow. At the reporting
period, the package has already been transported to Berlin. Entity A should recognise
revenue for the transportation completed to date (i.e. from Madrid to Berlin) as
another entity would not need to substantially re-perform the work that Entity A has
completed to date if that other entity were to fulfil the remaining performance
obligation to the customer and transport the package from Berlin to Moscow (IFRS
15.B4).

Entity’s performance creates or enhances an asset that the

customer controls

This is another criterion that, if met, makes a performance obligation satisfied over
time. The most typical application of this criterion is in construction industry, when an
asset is created or enhanced on the customer’s land.
See more discussion on the control of an asset by a customer.

Asset without an alternative use to the entity and enforceable right

to payment

OVERVIEW OF THE CONDITIONS TO BE MET

A performance obligation is treated as satisfied over time under this criterion when
both of the following criteria are met:

1. the entity’s performance does not create an asset with an alternative use to the entity due to
legal and/or practical restrictions and
2. the entity has a contractual or legally enforceable right to receive reasonable compensation
for performance completed to date if the contract were to be terminated before completion
for reasons other than the entity’s failure to perform as promised.

NO ALTERNATIVE USE

An asset created by an entity’s performance does not have an alternative use to an

entity if the entity is either:

 restricted contractually from readily directing the asset for another use during the creation
or enhancement of that asset or
FINANCIAL ACCOUNTING 1

 limited practically from readily directing the asset in its completed state for another use (as
is the case when assets are significantly customised for the customer).

The assessment of whether an asset has an alternative use to the entity is made at
contract inception (IFRS 15.36). See paragraphs IFRS 15.B6-B8 and BC134-BC141 for
more discussion.

ENFORCEABLE RIGHT TO PAYMENT

The fact that the customer is obliged to pay for the work performed to date is a crucial
indicator that the customer controls the asset and performance obligation is satisfied
over time. This does not mean that an entity must have an unconditional right to
payment at the reporting date but, instead, it must have an enforceable right to
demand payment for performance completed to date if the customer were to terminate
the contract before completion. It is also important that the right to payment is legally
enforceable. See IFRS 15.37;B9-B13;BC142-BC147 for more discussion on this
criterion. See also Examples 14, 15, 16 and 17 accompanying IFRS 15.

Stand-ready obligation

The substance of some performance obligations is to stand-ready to serve the customer

and not to deliver the underlying goods/services. Such performance obligations are
usually treated as satisfied over time with straight-line revenue recognition. For
example, a gym membership is an obligation to stand-ready to provide the customer
with access to the gym and its equipment. It would not provide meaningful results if
the gym tried to assess the number of hours that the customer will use throughout the
contract and recognise revenue based on actual/total ratio. Instead, revenue is
recognised proportionately to time lapsed.

Measuring progress towards complete satisfaction of a performance obligation

over time

Methods for measuring progress

If a performance obligation is satisfied over time, revenue is recognised based on the

progress towards complete satisfaction of performance obligation. Measurement of
progress can be based on the output or the input. Only one method should be used for
measuring progress for a particular performance obligation and also for performance
obligations with similar characteristics (IFRS 15.BC161). This can be especially
challenging for performance obligations consisting of several non-
distinct goods/services.

Output methods

Output methods are covered in IFRS 15.B15-B17. Output methods are based on direct
measurement of the value to the customer of the goods or services transferred to date
relative to the remaining goods or services promised under the contract. Measurement
methods include surveys, milestones reached, time elapsed or units delivered.
Measurement method should take into account all goods and services promised in the
FINANCIAL ACCOUNTING 1

contract. The advantage of output methods is that they directly measure the value of
the goods or services transferred to the customer.

Right-to-invoice practical expedient

Paragraph IFRS 15.B16 (see also BC167) offers a practical expedient and allows to
recognise revenue at the amount of consideration to which an entity has a right to
invoice, provided that this corresponds directly with the value to the customer of the
entity’s performance completed to date. This may be a very useful practical expedient
as it effectively allows entities to bypass the requirements for determining
the transaction price and allocating it to performance obligations.

Input methods

Input methods are covered in IFRS 15.B18-B19. Measuring progress using an input
method may be based on e.g. direct labour hours, time elapsed or resources consumed.
IFRS 15 states also that it is possible to recognise revenue on a straight-line basis if the
entity’s efforts or inputs are spread evenly throughout the performance period.
See Example 8 accompanying IFRS 15.
Basis for Conclusions to IFRS 15 and Example 19 include specific discussion on
uninstalled materials (IFRS 15.BC170-BC175) and inefficiencies and wasted materials
(IFRS 15.BC176-BC178).

Inability to measure the progress reliably

When the entity is unable to measure the progress reliably, revenue is recognised only
to the extent of the costs incurred, provided that the entity expects to recover them.
Such costs cannot be deferred and recognised as assets unless they meet the criteria of
recognising costs to fulfil a contract. Once the reliable measurement of progress
becomes possible, the entity applies output or input methods as described above (IFRS
15.44-45).

Performance obligations satisfied at a point in time

Performance obligations satisfied at a point in time as the default

option

Performance obligation satisfied at a point in time is the default option, i.e. if a

performance obligation does not meet the criteria of being satisfied over time, it is
assumed to be satisfied at a point in time. It is then a matter of deciding when exactly a
performance obligation is satisfied, which is the date when a customer
obtains control of a promised good or service (‘an asset’) (IFRS 15.38).

Control of an asset

Control is the ability to direct the use of, and obtain substantially all of the remaining
benefits from, the asset, or to restrict the access of other entities to those benefits (IFRS
FINANCIAL ACCOUNTING 1

15.31-34). The definition of control can be split into the following parts as set out in
IFRS 15.33 and discussed further by the IASB in IFRS 15.BC120:

a. ability – the present right to:

b. direct the use of and asset (which includes restricting another entity from using an asset),
and
c. obtain substantially all of the remaining benefits from an asset.

The assessment of when control has been transferred to a customer should be made
from his perspective (IFRS 15.BC121). Paragraph IFRS 15.38 provides additional
indicators of the transfer of control which are discussed below.

Present right to payment for the asset

When a contract execution comes to a point when the entity has the right to a payment,
it is an indicator that the control of the asset has been passed to a customer.

Transfer of legal title to a customer

When the entity has transferred a legal title to a customer under a contract, it is an
indicator that the control of the asset has been passed to a customer. However, the
control may have been passed to a customer even without the transfer of legal title, e.g.
when the entity keeps the legal title until all receivables are paid by a customer.

Transfer of physical possession

Transfer of physical possession is another indication of transfer of control, but there

are notable exceptions:

 repurchase agreements (including call and put options) covered in IFRS 15.B64-B76 and in
Example 62 accompanying IFRS 15
 consignment arrangements (e.g. with a dealer or distributor) covered in IFRS 15.B77-B78
 bill-and-hold arrangements covered in IFRS 15.B79-B82 and in Example 63 accompanying
IFRS 15

Requirements relating to repurchase agreements can be summarised as follows:

FINANCIAL ACCOUNTING 1

Put options

under IFRS 15
Call options under IFRS 15

Transfer of significant risks and rewards of ownership of the asset

Transfer of significant risks and rewards of ownership of the asset is an indication of

transfer of control.

Acceptance of the asset by a customer

For contracts that require an acceptance by a customer of the good or service in

question, the entity does not consider a performance obligation to be satisfied until
FINANCIAL ACCOUNTING 1

such acceptance is obtained. An exception to this rule applies when the entity can
objectively determine that the agreed specifications are met, such as weight or size
(IFRS 15.B83-B85).
For arrangements with trial/evaluation periods, revenue is not recognised until the
customer accepts the asset or trial period ends and customer becomes committed to
pay consideration for the asset (IFRS 15.B86).

Onerous (loss-making) contracts

IFRS 15 does not have any specific provisions on onerous (loss-making) contracts,
therefore these IAS 37 requirements apply. When there are several performance
obligations in a contract, a provision is recognised only when the contract as a whole is
onerous.
IAS 37 is silent on the treatment of variable consideration, which can make a difference
in assessing whether a contract is onerous or not. IFRS 15 is prudent when it comes to
recognition of variable consideration, but we don’t have to follow the same approach in
assessing whether a contract is onerous. Variable consideration can be included in
projected cash inflow based on e.g. the expected value.

More about IFRS 15

See other pages relating to IFRS 15:

Scope of IFRS 15
Identify a Contract
Performance Obligations and Timing of Revenue Recognition
Contract Modifications
Transaction Price
Principal vs Agent, or Reporting Revenue Gross vs Net
Revenue from Licensing of Intellectual Property
Revenue from Customers’ Unexercised Rights (Breakage)
Customer Loyalty Programmes and Other Options for Additional Goods or Services
Warranties
Contract Assets and Contract Liabilities
Contract Costs
Disclosure

© 2018-2021 Marek Muc

Excerpts from IFRS Standards come from the Official Journal of the European Union (© European
Union, https://eur-lex.europa.eu). The information provided on this website is for general information
and educational purposes only and should not be used as a substitute for professional advice. Use at
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