No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

ACCOUNTING FOR CONSTRUCTION CONTRACTS

PFRS 15 – Revenue from Contracts with Customers

• Core principle: revenue is recognized upon transfer of control to customer in an amount
that reflects consideration to which an entity expects to be entitled
• 5-step model
1. Identify the contract(s) with customers
2. Identify the performance obligation(s) in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligation(s) in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation

1. Which of the following is not a criterion of a contract under PFRS 15?

A. It is virtually certain that the entity will collect the consideration
B. The contract has commercial substance.
C. The parties to the contract have approved the contract
D. The entity can identify each party’s rights regarding the goods or services to be
transferred
E. The entity can identify the payment terms for the goods or services to be transferred

2. Which of the following must be met in order for a promised good or service to be
considered as a distinct performance obligation?
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
B. The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract
C. The promised good or service is separately stated in the contract.
D. Both A and B must be met.

3. Which of the following is not a factor that indicate that two or more performance
obligations are not separately identifiable?
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
B. one or more of the goods or services significantly modifies or customizes, or are
significantly modified or customized by, one or more of the other goods or services
promised in the contract.
C. the goods or services are highly interdependent or highly interrelated.
D. All of the following are factors to be considered

4. How will performance bonuses, incentives and penalties be accounted for under PFRS 15?
A. Such items will be included in the transaction price once the requirements are met or
underlying conditions have occurred
B. Such items will be included in the transaction price only to the extent that it is highly
probable that a significant reversal in the amount of cumulative revenue recognized will
not occur
C. Such items will be included in the transaction price only to the extent that it is likely that
a significant reversal in the amount of cumulative revenue recognized will not occur
D. Such items are not included in the scope of PFRS 15

1|P a g e RFERRER/RLACO/ATANG/PDEJESUS
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

5. If the contract includes a significant financing component, which of the following statements
are true?
A. The entity shall always adjust the promised consideration for the effects of the time value
of money, regardless of the payment term
B. The entity shall not recognize the financing component and disregard the effects of the
time value of money, regardless of the payment term
C. The entity need not adjust the promised amount for the effects of the time value of
money if it is expected at date of transfer, at date of satisfaction of performance
obligation, the customer will pay for the consideration within one year
D. None of the above

6. How are non-cash considerations measured under PFRS 15?

A. at agreed value
B. at net realizable value
C. at fair value
D. at trade-in value

7. Which is not an acceptable method for allocating transaction prices to performance

obligations in case the stand-alone price is not directly observable?
A. Adjusted market assessment method
B. Expected cost plus a margin approach
C. Residual approach
D. Constant gross margin approach

8. Which is not a scenario wherein revenue is recognized over time?

A. The customer simultaneously receives and consumes the benefits by the entity’s
performance
B. The entity’s performance creates or enhances an asset that will be transferred to the
customer at a future date
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
D. All of the above are scenarios wherein revenue is recognized over time

9. Which of the following is not an indicator of the transfer of control to the customer?
A. The customer has legal title to the asset
B. The entity has transferred physical possession of the asset to the customer
C. The entity retains significant risks and rewards of ownership of the asset
D. The customer has accepted the asset

10. Which of the following costs are generally expensed as incurred?

A. Costs for which an entity cannot distinguish whether the costs relate to unsatisfied
performance obligations or to satisfied performance obligations
B. Costs of wasted materials, labor or other resources to fulfill the contract that were clearly
reflected in the price of the contract
C. General and administrative costs that are explicitly chargeable to the customer under the
contract
D. All of the above are generally expensed as incurred

2|P a g e RFERRER/RLACO/ATANG/PDEJESUS
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Problem 1:
ABC Company enters into a construction contract to build a building on the customer’s land for a
total contract price of P60,000,000. Included in the contract are the following additional items that
may affect the contract price:
• Bonus of P500,000 if the building is completed on or before September 8, 2023
• Penalty of P20,000 per week if the building is not complete by September 17, 2023

ABC Company determines the following possible scenarios using reasonable and supportable
information available as of contract inception:
Scenario Details Probability
#1 ABC Company finishes the project on or before September 8, 2023 40%
#2 ABC Company finishes the project after September 8, 2023 but before 20%
September 18, 2023
#3 ABC Company finishes the project 1 week after September 17, 2023 25%
#4 ABC Company finishes the project 2 weeks after September 17, 2023 10%
#5 ABC Company finishes the project 3 weeks after September 17, 2023 5%

As of December 31, 2022, due to changes in circumstances, ABC Company updated the scenario
analysis as follows:
Scenario Details Probability
#1 ABC Company finishes the project on or before September 8, 2023 30%
#2 ABC Company finishes the project after September 8, 2023 but before 20%
September 18, 2023
#3 ABC Company finishes the project 1 week after September 17, 2023 40%
#4 ABC Company finishes the project 2 weeks after September 17, 2023 10%

Required: Determine the transaction price of the contract under PFRS 15 as of contract inception and
as of December 31, 2022.

Problem 2:
ABC Company agreed to build an office building for a contract price of P100,000,000 on January 1,
2021. Expected costs to complete the contract amounted to P80,000,000. Both parties have agreed
that the customer will make annual payments to ABC, provided that it will not exceed the costs
incurred by ABC during the year. Pertinent information regarding the project is as follows:
2021 2022 2023
Cost incurred during the year P35,000,000 P20,000,000 P30,000,000
Estimated costs to complete 45,000,000 25,000,000 -
Progress billings during the year 16,000,000 28,000,000 56,000,000
Payments received during the year 14,000,000 25,000,000 61,000,000

ABC Company determines that the performance obligation is satisfied over time and elected to use
the input method in measuring progress.

Required:
1. How much is the realized gross profit for 2021?
2. How much is the receivable balance as of December 31, 2021 applying View 1 of PIC Q&A
2020-03?
3. How much is the contract asset (liability) balance as of December 31, 2021 applying View 1
of PIC Q&A 2020-03?
4. How much is the realized gross profit for 2022?
5. How much is the realized gross profit for 2023?

3|P a g e RFERRER/RLACO/ATANG/PDEJESUS
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

Problem 3:
During the first year of one of the entity’s construction projects, the entity incurred the following
costs:
Site labor costs P9,500,000
Cost of materials used in construction 8,000,000
Cost of materials not yet used in construction 1,000,000
Depreciation of equipment directly used in the construction 500,000
Depreciation of idle equipment not used in any projects 50,000
Cost of design and technical assistance directly related to the project 300,000
Insurance costs (65% related to other projects; 35% related to this project) 400,000
Research and development costs for which reimbursement is not specified in the 60,000
contract
General and administrative costs for which reimbursement is specified in the contract
90,000
Advance payments to subcontractors (work not yet started) 1,500,000
Selling costs 80,000

Required:
1. How much is the contract costs incurred during the year assuming the cost-to-cost method
is used?
2. How much is the contract costs incurred during the year assuming the cost-to-cost method
is used and the materials not yet used in construction is customized or specific to the design,
measurements and structure of the projects?

Problem 4:
On January 1, 2022, ABC Company entered into a construction contract with a customer which has
the following provisions:
• Contract price: P60,000,000
• Mobilization fee of 5% is to be paid upfront and to be charged against the final billing
• Progress billings are to be paid within 2 weeks upon acceptance
• Payments of progress billings are subject to 10% retention to be reverted to ABC upon
completion and final acceptance of the project by the customer

Cost data related to the project are as follows:

2022 2023
Costs incurred to date P16,000,000 P38,250,000
Estimated costs to complete the project 34,000,000 12,750,000

Progress billings made during the two-year period are as follows:

• 20% on June 6, 2021. The billing was accepted by the customer on June 10, 2022.
• 10% on October 12, 2021. The billing was accepted by the customer on October 15, 2022.
• 7% on December 26, 2021 and accepted by the customer on December 30, 2022.
• 30% on July 12, 2022 and accepted by the customer on July 19, 2023.
• 18% on December 23, 2022 and accepted by the customer on December 29, 2023.

The customer always pays on the last day of the 2nd week after acceptance of the progress billing.

Required:
1. How much is the total collections for 2022?
2. How much is the realized gross profit for 2022?
3. How much is the realized gross profit for 2023?

4|P a g e RFERRER/RLACO/ATANG/PDEJESUS
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

4. How much is the excess of construction in progress over progress billings as of December
31, 2023?

Problem 5:
ABC Company has entered into a fixed price construction contract for P150 million to construct an
innovative building with a design that has never been constructed before, using materials that have
never been used in the construction of a building. As such, ABC has difficulty in estimating the
outcome of the contract with sufficient reliability.

ABC Company began construction of the building in 2022 and expects that the construction will take
at least five years. In 2022, ABC incurred contract costs of P10 million on the project.

Required:
1. How much is the revenue from the construction contract to be recognized in 2022?

Problem 6:
ABC Company accepted a long-term construction project on January 1, 2021 to build a building at a
fixed contract price of P100,000,000. The outcome of the project can be estimated reliably. Because
of supply chain problems brought about by the pandemic, the estimated costs of construction
significantly increased. The following data are provided:
12/31/2021 12/31/2022 12/31/2023
Cumulative costs incurred as of the end of the year P 40,000,000 P 50,000,000 P70,000,000
Estimated total costs at completion 130,000,000 110,000,000 90,000,000

Required:
1. How much is the realized gross profit (loss) for the year ended December 31, 2023?

Problem 7:
On January 1, 2022, ABC Company accepted a long-term construction contract to construct a building
with an initial contract price of P100,000,000. The outcome of the construction project can be
estimated reliably. During 2024, an increase in the contract price due to change in project design was
agreed upon. Cost data are provided below:
12/31/2022 12/31/2023 12/31/2024
Cumulative costs incurred as of the end of the year P10,000,000 ? P108,000,000
Realized gross profit (loss) for the year ? P350,000 (P1,600,000)
Percentage completion as of the end of the year 12.5% 60% 100%

Required:
1. How much is the revised contract price as a result of the change in project design?
2. How much is the contract costs charged to profit or loss in 2024?

“There are no secrets to success. It is the result of preparation, hard work, and learning from failure.”
Colin Powell

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