REVENUE FROM CONTRACTS WITH

CUSTOMERS
7. Explain the core principle.
An entity recognizes revenue to depict the
1. What is income? transfer of promised goods or services to
customers in an amount that reflects the
Increases in economic benefits during the
consideration to which the entity expects to be
accounting period in the form of inflows or
entitled in exchange for those goods or services.
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those 8. What are the steps in revenue
relating to contributions from equity participants. recognition?
Income encompasses both revenue and gains.
PFRS 15 requires the following steps in
2. What is revenue? recognizing revenue: (CPTAR)
Income arising in the course of an entity’s a) Step 1: Identify the contract with the
ordinary activities. customer
b) Step 2: Identify the performance
3. What is contract?
obligations in the contract
An agreement between two or more parties c) Step 3: Determine the transaction price
that creates enforceable rights and obligations. A d) Step 4: Allocate the transaction price to
contract can be written, oral, or implied by an the performance obligations in the contract
entity’s customary business practice. e) Step 5: Recognize revenue when (or as)
the entity satisfies a performance obligation
4. What is customer?
A party that has contracted with an entity to 9. Explain identify the contract with the
obtain goods or services that are an output of the customer
entity’s ordinary activities in exchange for Requirements before a contract with a customer
consideration. is accounted for under PFRS 15:
5. Explain counterparty. a. The contract must be approved and the
contracting parties are committed to it;
A counterparty to a contract is not a customer
if he agrees to participate in the entity’s activities b. rights and payment terms are identifiable;
wherein, he shares the related risk & benefits rather
c. The contract has commercial substance;
than to obtain the output of the entity’s ordinary and
activities.
d. The consideration is probable of
6. PFRS 15 does NOT apply to the collection.
following\
a) Lease contracts (PAS 17 Leases); NOTE:
b) Insurance contracts (PFRS 4 Insurance No revenue is recognized if the contract does
Contracts); not meet the criteria above. Any consideration
c) Financial instruments; and received is recognized as liability and recognized
d) Non-monetary exchanges between entities as revenue only when either of the following has
in the same line of business to facilitate occurred:
sales to customers. For example, PFRS 15
 The entity has no remaining obligation to
is not applicable to a contract between two
transfer goods or services to the customer
oil companies that agree to exchange oil to and all, or substantially all, of the
fulfil customer demands in different consideration has been received and is non
locations on a timely basis. refundable
 The contract has been terminated and the
consideration received is non-refundable
 entitled in exchange for transferring promised
goods or services to a customer, excluding
10. Explain combination of contracts.
amounts collected on behalf of third parties (e.g.,
Two or more contracts entered into at or near some sales taxes).” The consideration may include
the same time with the same customer are fixed amounts, variable amounts, or both.
combined & accounted for as a single contract if:
13. Explain Allocate the transaction price to
a. The contracts are negotiated as a packaged the performance obligations in the contract
with a single commercial substance
The transaction price shall be allocated to each
b. The amount of consideration to be paid in
performance obligation identified in a contract
one contract depends on the price or
based on the relative stand-alone prices of the
performance of the other contract
distinct goods or services promised to be
c. Some or all of the goods or services
transferred.
promised in the contracts are single
performance obligation.   The stand-alone selling price is the price
at which a promised good or service can be sold
11. Explain identify the performance separately to a customer.
obligations in the contract
14. What are the methods may be used to
A contract includes promises to transfer goods estimate the stand-alone selling price?
& services to the customer. a. Adjusted market assessment
approach
a. Distinct good or service
b. Expected cost plus a margin
b. Series of distinct goods or services
approach
that are substantially the same &
c. Residual approach
have the same pattern of transfer to
the customer. If the stand-alone selling price is not directly
observable, the entity shall estimate it using one or
A good or service is distinct if:
a combination of the following methods:
(a) the customer can benefit from it, either on
• Adjusted market assessment approach –
its own or together with other resources that
the entity evaluates the market in which it
are readily available to the customer (e.g.,
sells goods or services and estimates the
the good or service is regularly sold
price that a customer in that market would
separately); and
be willing to pay for those goods or
(b) the good or service is separately services.
identifiable (i.e., not an input to a combined
• Expected cost plus a margin approach –
output, does not significantly modify the
the entity forecasts its expected costs of
other promises, or not highly interrelated
satisfying a performance obligation and then
with the other promises).
add an appropriate margin for that good or
NOTE: service.

A good or service that is not distinct shall be • Residual approach – the entity estimates
combined with the other promises in the contract. the stand-alone selling price as the total
Combined promises are treated as a single transaction price less the sum of the
performance obligation. observable stand-alone selling prices of
other goods or services promised in the
12. Explain transaction price contract.
The entity shall determine the transaction price
because this is the amount at which revenue will be
measured.
Transaction price is “the amount of
consideration to which an entity expects to be
 and the entity has an enforceable right to
payment for performance completed to
date.
15. Explain Recognize revenue when (or as)
the entity satisfies a performance obligation.
18. Explain measuring progress towards
RECOGNITION complete satisfaction of a performance
obligation
A performance obligation is satisfied when the
control over a promised good or service is For each performance obligation satisfied
transferred to the customer. over time, an entity shall recognize revenue over
time by measuring the progress towards
Recognized when the entity satisfies a complete satisfaction of that performance
performance obligation. obligation.
MEASUREMENT Examples of acceptable measurement methods:
Revenue is measured at the amount of the 1. Output methods (e.g., surveys of work
transaction price allocated to the satisfied performed)
performance obligation. 2. Input methods (e.g., relationship between
Performance obligations are classified into the costs incurred to date and total expected
following: costs)

a. Performance obligation that is If efforts or inputs are expended evenly

satisfied over time throughout the performance period, revenue may
be recognized on a straight-line basis.
b. Performance obligation that is
satisfied at a point in time 19. Explain output method

16. Explain satisfaction of performance Output method progress is measured

obligation based on direct measurement of the value of goods
or services transferred to date relative to the
A performance obligation is satisfied when the remaining goods or services promised under
control over a promised goods or services is contract.
transferred to the customer.
20. Explain input method
17. Explain Performance obligations satisfied
over time. Input method progress is measured based
on efforts or inputs expended relative to the total
For a performance obligation that is expected inputs needed to fully satisfy a
satisfied over time, revenue is recognized over time performance obligation.
AS the entity progresses towards the complete
satisfaction of the obligation. 21. What is Cost-recovery Approach?

A performance obligation is satisfied over If the outcome of a performance obligation

time if one of the following criteria is met: cannot be reasonably measured, revenue shall be
recognized only to the extent of costs incurred
a. The customer simultaneously receives and that are expected to be recovered.
consumes the benefits provided by the
entity’s performance as the entity performs. 22. Explain changes in the measure of
progress
b. The entity’s performance creates or
enhances an asset that the customer The measure of progress is updated as
controls as the asset is created or circumstances change over time to reflect any
enhanced. changes in the outcome of the performance
obligation. Such changes are accounted for as a
c. The entity’s performance does not create change in accounting estimate in accordance with
an asset with an alternative use to the entity PAS 8
 23. Explain reasonable measure of progress A subsequent reversal of impairment is
recognized in profit or loss. However, the reversal
Revenue for a performance obligation
should not result to an increase in the asset’s CA in
satisfied over time is recognized only if the
excess of the amount.
progress towards the complete satisfaction of the
performance obligation can reasonably measured. 27. PRESENTATION
24. Explain Performance obligations satisfied A contract where either party has performed
at a point in time is presented in the statement of financial position
as a contract liability, contract asset or receivable.
A performance obligation that is not
satisfied over time is presumed to be satisfied at a • Contract liability – is an entity’s obligation
point in time. to transfer goods or services to a customer
For a performance obligation that is for which the entity has received
satisfied at a point in time, revenue is recognized consideration (or the amount is due) from
WHEN the performance obligation is satisfied. the customer.

 The entity has present the right to payment A contract liability is recognized at
for the asset the earlier of the date:
 The customer has legal title to the asset
 The entity receives consideration
 The entity has transferred physical
before the goods or service is
possession of the asset
transferred to the customer
 The customer has the significant risks &
rewards of ownership of the asset (advance payment)
 The customer has accepted the asset  The entity has an unconditional right
to the consideration before the good
25. What is contract cost? or service is transferred to the
customer (non-cancellable contracts
Contract costs include the following: requires payment in advance)
(a) Incremental costs of obtaining a contract • Contract asset – is an entity’s right to
– recognized as asset if they are consideration in exchange for goods or
recoverable and avoidable. As a practical services that the entity has transferred to a
expedient, the costs are recognized as customer when that right is conditioned on
expense if their expected amortization something other than the passage of time.
period is 1 year or less.
A contract asset is recognized
(b) Costs to fulfill a contract –if within the when the goods or service is transferred to
scope of PFRS 15, they are recognized as the customer before the consideration is
asset if they are: (a) directly related to a received or becomes due; it measured,
contract, (b) generate or enhance assessed for impairment presented &
resources, and (c) recoverable. disclose in accordance with PFRS 9
26. Explain amortization and impairment • Receivable – is an entity’s right to
Contract cost that are recognized as asset consideration that is unconditional.
are amortized on systematic basis that is
consistent with the transfer of the related goods
or services to the customer. 28. DISCLOSURE

The amortization is updated for any

significant change in the expected timing of transfer
of the related goods or services to the customer.
Such a change is accounted for as a change in
accounting estimate in accordance with PAS 8.