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Revenue Recognition

The document outlines the principles of revenue recognition under PFRS 15, which became effective on January 1, 2018, and supersedes several previous standards. It details the requirements for recognizing revenue from contracts with customers, including a five-step model framework and considerations for variable and non-cash considerations. Additionally, it emphasizes the importance of understanding the nature of income, distinguishing between revenue and gains, and the implications of contracts that may involve multiple performance obligations.
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0% found this document useful (0 votes)
20 views23 pages

Revenue Recognition

The document outlines the principles of revenue recognition under PFRS 15, which became effective on January 1, 2018, and supersedes several previous standards. It details the requirements for recognizing revenue from contracts with customers, including a five-step model framework and considerations for variable and non-cash considerations. Additionally, it emphasizes the importance of understanding the nature of income, distinguishing between revenue and gains, and the implications of contracts that may involve multiple performance obligations.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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REVENUE RECOGNITION (PFRS 15) At a minimum, you need the following in

answering problems related to partnership


Introduction operations:
1. Rules set ut by PFRS 15
If a company is allowed to recognize 2. English comprehension
revenue, the following entries are made: 3. Basic accounting (e.g., journal entries
adjusting vs, closing, types of accounts,
basic accounting equation)
4. Mathematics
a) Basic operation including PMDAS
rule.
b) Mathematics of investment (e.g.,
interest computation (Prt), present
value computation)
5. Concepts of income (revenue and gains)
discussed in FAR in the topic Conceptual
Framework
6. Related concepts from PFRS 16 and
PFRS 9.
As can be seen in the entries above, aside 7. Diligence, patience, eagerness, and
from the amount of revenue, it can also right mental attitude in learning.
affect cash, receivable, inventories contract
asset, purchases, cost of goods sold and PFRS 15
accounts payable. Hence, some of the  Effective on or after January 1, 2018
concepts in revenue recognition is also used  It supersedes:
in your FAR or AP for the mentioned o PAS 11 Construction contracts:
accounts. o PAS 18 Revenue;
o IFRIC 13 Customer Loyalty
According to PSA 240, there is a Programs,
presumption that there are risks of fraud in o IFRIC 15 Agreements for the
revenue recognition. One reason is Construction of Real Estate,
companies generally wants to report a high o IFRIC 18 Transfers of Assets from
amount of revenue. Hence, some of the Customers; and
sub-topics of revenue recognition is related o SIC 31 Revenue - Barter
to strategies of the companies to increase Transactions Involving Advertising
revenue. Examples include, loyalty Services.
programs, discounts, gift certificates/card, Objective
warranty and many others.  To establish the principles that an entity
shall apply to report useful information
to users of financial statements about
the nature, amount, timing, and
uncertainty of revenue and cash flows
arising from a contract with a customer.
Scope
PFRS 15 Revenue from Contracts with
Customers applies to all contracts with INCOME
customers except for:  increases in economic benefits during
the accounting period in the form of
a. Leases within the scope of PFRS 16 inflows or enhancements of assets or
Leases decreases of liabilities that result in an
b. Financial instruments and other increase in equity, other than those
contractual rights or obligations within relating to contributions from equity
the scope of PFRS Financial Instruments, participants. Income encompasses both
PFRS 10 Consolidated Financial revenue and gains.
Statements, PFRS 11 Joint
Arrangements, PAS 27 Separate 1. Revenue - income arising in the course of
Financial Statements and PAS 28 an entity's ordinary activities
Investments in Associates and Joint
Ventures, Insurance contracts within the 2. Gains - represent other items that meet
scope of PFRS 4/17 the definition of income and may, or may
c. Insurance Contracts not, arise in the course of the ordinary
d. Non-monetary exchanges between activities of an entity. Gains represent
entities in the same line of business to increases in economic benefits and as such
facilitate sales to customers or potential are no different in nature from revenue.
customers.
Core Principle
A contract with a customer may be partially An entity shall recognize revenue to depict
within the scope of PFRS 15 and partially the transfer of promised goods or services
within the scope of another standard. In to customers in an amount that reflects the
that scenario: consideration to which the entity expects to
be entitled in exchange for those goods or
 if other standards specify how to services.
separate and/or initially measure one
or more parts of the contract, then Five-Step Model Framework
those separation and measurement 1. Identify the contract(s) with a customer
requirements are applied first. The 2. Identify the performance obligations in
transaction price is then reduced by the contract
the amounts that are initially 3. Determine the transaction price
measured under other standards; 4. Allocate the transaction price to the
 if no other standard provides performance obligations in the contract
guidance on how to separate and/or 5. Recognize revenue when (or as) the
initially measure one or more parts of entity satisfies a performance
the contract, then PFRS 15 will be obligation
applied.
STEP 2: Identify the performance
STEP 1: Identify the contract(s) with a obligations in the contract
customer
 A contract is an agreement between  A performance obligation is a promise
two or more parties that creates in a contract with a customer to
enforceable rights and obligations. transfer to the customer either
 It may be written, oral or implied by o a good or service (or a bundle of
customary business practice. goods or services) that is distinct; or
 The contract should be in between the
entity and a customer a party that has o a series of distinct goods or services
contracted with an entity to obtain that are substantially the same and
goods or services that are an output of that have the same pattern of
the entity's ordinary activities in transfer to the customer.
exchange for consideration.
If those goods or services are:
PFRS 15 is applied to contracts that have
the following 5 attributes: 1. Distinct -the promises are performance
1. Parties to the contract has approved it obligations and are accounted for
and are committed to perform: separately
2. Each party's rights to the
goods/services transferred are 2. Not distinct - an entity shall combine that
identified; good or service with other promised goods
3. The payment terms are identified; or services until it identifies a bundle of
4. The contract has a commercial goods or services that is distinct. In some
substance cases, that would result in the entity
5. It is probable that an entity will collect accounting for all the goods or services
the consideration (here, you need to promised in a contract as a single
evaluate the customer's ability and performance obligation.
intention to pay)
Distinct
The requirements of PFRS 15 apply to each  A good or service is distinct if:
contract that has been agreed upon with a
customer and meets specified criteria. In 1. The customer can benefit from the good
some cases, PFRS 15 requires an entity to or service on its own or together with
combine contracts and account for them as other resources that are readily available
one contract. PFRS 15 also provides to the customer (ie. the good or service is
requirements for the accounting for capable of being distinct); and
contract modifications. 2. The entity's promise to transfer the good
or service to the customer is separately
identifiable from other promises in the
contract (i.e, the promise to transfer the
good or service is distinct within the context
of the contract).

Not Separately Identifiable


Example of distinct goods or services: 1. The entity provides a significant service of
integrating the goods or services with other
1. Sale of goods produced by an entity (for goods or services promised in the contract
example, inventory of a manufacturer); into a bundle of goods or services that
2. Resale of goods purchased by an entity represent the combined output or outputs
(for example, merchandise of a retailer); for which the customer has contracted. In
3. Resale of rights to goods or services other words, the entity is using the goods
purchased by an entity (for example, a ticket or services as inputs to produce or deliver
resold by an entity acting as a principal); the combined output or outputs specified
4. Performing a contractually agreed-upon by the customer. A combined output or
task (or tasks) for a customer, outputs might include more than one
5. Providing a service of standing ready to phase, element or unit.
provide goods or services (for example, 2 One or more of the goods or services
unspecified updates to software that are significantly modifies or customizes, or are
provided on a when and-if-available basis) significantly modified or customized by, one
or of making goods or services available for or more of the other goods or services
a customer to use as and when the promised in the contract.
customer decides, 3 The goods or services are highly
6. Providing a service of arranging for interdependent or highly interrelated. In
another party to transfer goods or services other words, each of the goods or services
to a customer (for example, acting as an is significantly affected by one or more of
agent of another party), the other goods or services in the contract.
7. Granting rights to goods or services to be For example, in some cases, two or more
provided in the future that a customer can goods or services are significantly affected
resell or provide to its customer (for by each other because the entity would not
example, an entity selling a product to a be able to fulfil its promise by transferring
retailer promises to transfer an additional each of the goods or services
good or service to an individual who independently.
purchases the product from the retailer),
8. Constructing, manufacturing or STEP 3: Determine the transaction price
developing an asset on behalf of a  The transaction price is the amount of
customer; consideration in a contract to which an
9. Granting licenses; and entity expects to be entitled in exchange
10. Granting options to purchase additional for transferring promised goods or
goods or services (when those options services to a customer, excluding
provide a customer with a material right) amounts collected on behalf of third
parties (for example, some sales taxes).
 The consideration promised in a
contract with a customer may include 2. The most likely amount
fixed amounts, variable amounts, or o the single most likely amount in a
both. range of possible consideration
amounts (i.e. the single most likely
outcome of the contract).
When determining the transaction price, an o The most likely amount may be an
entity shall consider the effects of all of the appropriate estimate of the amount
following: of variable consideration if the
1. Variable consideration; contract has only two possible
2.Constraining estimates of variable outcomes (for example, an entity
consideration, either achieves a performance
3. The existence of a significant financing bonus or does not).
component in the contract, o The estimated amount of variable
4. Non-cash consideration; and consideration will be included in the
5. Consideration payable to a customer. transaction price only to the extent
that it is highly probable that a
significant reversal in the amount of
Variable consideration cumulative revenue recognized will
An amount of consideration can vary not occur when the uncertainty
because of. associated with the variable
1. Discounts, rebates, refunds, credits, price consideration is subsequently
concessions, incentives, performance resolved.
bonuses, penalties or other similar items.
2. Entity's entitlement to the consideration Factors that could increase the likelihood
is contingent on the occurrence or or the magnitude of a revenue reversal
nonoccurrence of a future event. include, but are not limited to, any of the
following:
Estimating Variable Consideration a) The amount of consideration is highly
susceptible to factors outside the
Methods (choose depending on which entity's influence. Those factors may
method the entity expects to better predict include volatility in a market, the
the amount of consideration to which it will judgement or actions of third parties,
be entitled) weather conditions and a high risk of
obsolescence of the promised good or
1. The expected value service.
o the sum of probability-weighted b) The uncertainty about the amount of
amounts in a range of possible consideration is not expected to be
consideration amounts. resolved for a long period of time
o An expected value may be an c) The entity's experience (or other
appropriate estimate of the amount of evidence) with similar types of
variable consideration if an entity has a contracts is limited, or that experience
large number of contracts with similar (or other evidence) has limited
characteristics. predictive value.
d) The entity has a practice of either When adjusting the promised amount of
offering a broad range of price consideration for a significant financing
concessions or changing the payment component, an entity shall use the discount
terms and conditions of similar rate that would be reflected in a separate
contracts in similar circumstances financing
e) The contract has a large number and
broad range of possible consideration transaction between the entity and its
amounts. customer at contract inception. That rate
would reflect the credit characteristics of
Financing Component the party receiving financing in the contract,
as well as any collateral or security provided
1. Significant financing component – by the customer or the entity, including
o an entity shall adjust the promised assets transferred in the contract
amount of consideration for the effects
of the time value of money. 2. No significant financing component
o The contract is said to have significant o no adjustment to the transaction price.
financing component if the timing of
payments agreed to by the parties to A contract with a customer would not have
the contract (either explicitly or a significant financing component if any of
implicitly) provides the customer or the the following factors exist.
entity with a significant benefit of a) the customer paid for the goods or
financing the transfer of goods or services in advance and the timing of
services to the customer. the transfer of those goods or services
is at the discretion of the customer.
Considerations in determining whether a b) a substantial amount of the
contract contains a financing component consideration promised by the
and whether that financing component is customer is variable and the amount
significant to the contract, including both of or timing of that consideration varies
the following: on the basis of the occurrence or non-
1. the difference, if any, between the occurrence of a future event that is not
amount of promised consideration and substantially within the control of the
the cash selling price of the promised customer or the entity (for example, if
goods or services, and the consideration is a sales-based
2. the combined effect of both of the royalty).
following: c) the difference between the promised
a) the expected length of time between consideration and the cash selling
when the entity transfers the price of the good or service arises for
promised goods or services to the reasons other than the provision of
customer and when the customer pays finance to either the customer or the
for those goods or services, entity, and the difference between
b) the prevailing interest rates in the those amounts is proportional to the
relevant market. reason for the difference. For example,
the payment terms might provide the
entity or the customer with protection
from the other party failing to transaction price and, therefore, of
adequately complete some or all of its revenue unless the payment to the
obligations under the contract customer is in exchange for a distinct good
or service that the customer transfers to the
entity.
An entity shall recognize the reduction of
3. Practical expedient revenue when (or as) the later of either of
o an entity need not adjust the promised the following events occurs.
amount of consideration for the effects of 1. the entity recognizes revenue for the
a significant financing component if the transfer of the related goods or services to
entity expects, at contract inception, that the customer, and
the period between when the entity 2 the entity pays or promises to pay the
transfers a promised good or service to a consideration (even if the payment is
customer and when the customer pays for conditional on a future event). That promise
that good or service will be one year or might be implied by the entity's customary
less. business practices.

Non-cash consideration STEP 4: Allocate the transaction price to


o An entity shall measure the non-cash the performance obligations in the
consideration (or promise of non-cash contract
consideration) at fair value.  An entity typically allocates the
o If an entity cannot reasonably estimate the transaction price to each performance
fair value of the non-cash consideration, obligation on the basis of the relative
the entity shall measure the consideration stand-alone selling prices (SSP) of each
indirectly by reference to the stand-alone distinct good or service promised in the
selling price of the goods or services contract, except for allocating discounts
promised to the customer (or class of and consideration that includes variable
customer) in exchange for the amounts.
consideration.
Stand-alone selling price
Consideration payable to a customer - price at which an entity would sell a
includes: promised good or service separately to
a. cash amounts that an entity pays, or a customer
expects to pay, to the customer (or to other - If it is not directly observable,
parties that purchase the entity's goods or estimate it by considering all
services from the customer) information that is reasonably
b. credit or other items (for example, a available, such as market conditions,
coupon or voucher) that can be applied entity-specific factors and information
against amounts owed to the entity (or to about the customer or class of
other parties that purchase the entity's customer.
goods or services from the customer).
Suitable methods for estimating the
An entity shall account for consideration stand-alone selling price of a good or
payable to a customer as a reduction of the
service include, but are not limited to, the sold on a stand-alone basis (ie. the
following: selling price is uncertain).
1. Adjusted market assessment approach
an entity could evaluate the market in A combination of methods may need to be
which it sells goods or services and estimate used to, estimate the stand-alone selling
the price that a customer in that market prices of the goods or services promised in
would be the contract if two or more of those goods
or services have highly variable or uncertain
willing to pay for those goods or services. stand-alone selling prices.
That approach might also include referring Allocation of a discount
to prices from the entity's competitors for o A customer receives a discount for
similar goods or services and adjusting purchasing a bundle of goods or
those prices as necessary to reflect the services if the sum of the stand-alone
entity's costs and margins. selling prices of those promised goods
or services in the contract exceeds the
2. Expected cost plus a margin approach promised consideration in a contract.
- an entity could forecast its expected costs Except when an entity has observable
of satisfying a performance obligation and evidence that the entire discount
then add an appropriate margin for that relates to only one or more, but not all,
good or service. performance obligations in a contract,
the entity shall allocate a discount
3. Residual approach - an entity may proportionately to all performance
estimate the stand-alone selling price by obligations in the contract.
reference to the total transaction price less
the sum of the observable stand-alone An entity shall allocate a discount entirely
selling prices of other goods or services to one or more, but not all, performance
promised in the contract. obligations in the contract if all of the
following criteria are met:
However, an entity may use a residual 1. The entity regularly sells each distinct
approach to estimate the standalone selling good or service (or each bundle of distinct
price of a good or service only if one of the goods or services) in the contract on a
following criteria is met: stand-alone basis
a) the entity sells the same good or
service to different customers (at or 2. The entity also regularly sells on a stand-
near the same time) for a broad range of alone basis a bundle (or bundles) of some
amounts (i.e. the selling price is highly of those distinct goods or services at a
variable because a representative discount to the stand-alone selling prices of
standalone selling price is not the goods or services in each bundle; and
discernible from past transactions or
other observable evidence); or 3. The discount attributable to each bundle
b) the entity has not yet established a of goods or services is substantially the
price for that good or service and the same as the discount in the contract and an
good or service has not previously been analysis of the goods or services in each
bundle provides observable evidence of the
performance obligation (or performance 2. Allocating the variable amount of
obligations) to which the entire discount in consideration entirely to the performance
the contract belongs. obligation or the distinct good or service is
consistent with the allocation when
considering all of the performance
obligations and payment terms in the
contract.

Allocation of variable consideration Changes in the transaction price

Variable consideration that is promised in a An entity shall allocate to the performance


contract may be attributable to the entire obligations in the contract any subsequent
contract or to a specific part of the changes in the transaction price on the
contract, such as either of the following: same basis as at contract inception.
1. One or more, but not all, performance Consequently, an entity shall not reallocate
obligations in the contract (for example, a the transaction price to reflect changes in
bonus may be contingent on an entity stand-alone selling prices after contract
transferring promised good or service inception. Amounts allocated to a satisfied
within a specified period of time); or performance obligation shall be recognized
2. One or more, but not all, distinct goods as revenue, or as a reduction of revenue, in
or services promised in a series of distinct the period in which the transaction price
goods or services that forms part of a single changes.
performance obligation (for example, the
consideration promised for the second year STEP 5: Recognize revenue when (or as) the
of a two-year cleaning service contract will entity satisfies a performance obligation
increase on the basis of movements in a  An entity recognizes revenue when (or
specified inflation index). as) it satisfies a performance obligation
by transferring a promised good or
An entity shall allocate a variable amount service to a customer (which is when
(and subsequent changes to that amount) the customer obtains control of that
entirely to a performance obligation or to a good or service).
distinct good or service that forms part of a  The amount of revenue recognized is
single performance obligation if both of the the amount allocated to the satisfied
following criteria are met: performance obligation. A performance
obligation may be satisfied at a point in
1. the terms of a variable payment relate time (typically for promises to transfer
specifically to the entity's efforts to satisfy goods to a customer) or over time
the performance obligation or transfer the (typically for promises to transfer
distinct good or service (or to a specific services to a customer)
outcome from satisfying the performance
obligation or transferring the distinct good Control of an Asset
or service); and  the ability to direct the use of, and
obtain substantially all of the
remaining benefits from, the asset.  To determine the point in time at which
Control includes the ability to prevent a customer obtains control of a
other entities from directing the use of, promised asset and the entity satisfies a
and obtaining the benefits from, an performance obligation, the entity shall
asset. consider the requirements for control.
 The benefits of an asset are the  In addition, an entity shall consider
potential cash flows (inflows or indicators of the transfer of control,
savings in outflows) that can be which include, but are not limited to,
obtained directly or indirectly in many the following:
ways, such as by: 1. The entity has a present right to
1. using the asset to produce goods or payment for the asset
provide services (including public services); - if a customer is presently obliged to pay
2. using the asset to enhance the value of for an asset, then that may indicate that the
other assets; customer has obtained the ability to direct
3. using the asset to settle liabilities or the use of, and obtain substantially all of the
reduce expenses; remaining benefits from, the asset in
4. selling or exchanging the asset; exchange.
5. pledging the asset to secure a loan; and
6. Holding the asset. 2. The customer has legal title to the asset
the transfer of legal title of an asset may
POs satisfied over time [PFRS15:35] indicate that the customer has obtained
 entity transfers control of a good or control of the asset. If an entity retains legal
service over time and, therefore, title solely as protection against the
satisfies a performance obligation and customer's failure to pay, those rights of the
recognizes revenue over time, if one of entity would not preclude the customer
the following criteria is met: from obtaining control of an asset.

1. The customer simultaneously receives 3. The entity has transferred physical


and consumes the benefits provided by the possession of the asset-physical possession
entity's performance as the entity performs; may not coincide with control of an asset.
For example, in some repurchase
2. The entity's performance creates or agreements and in some consignment
enhances an asset (for example, work in arrangements, a customer or consignee may
progress) that the customer controls as the have physical possession of an asset that
asset is created or enhanced; or the entity controls. Conversely, in some bill-
and-hold arrangements, the entity may
3. The entity's performance does not have physical possession of an asset that
create an asset with an alternative use to the customer controls
the entity and the entity has an
enforceable right to payment for 4. The customer has the significant risks
performance completed to date. and rewards of ownership of the asset
- when evaluating the risks and rewards of
POs satisfied at a point in time [PFRS15:38] ownership of a promised asset, an entity
shall exclude any risks that give rise to a
separate performance obligation in addition milestones reached, time elapsed and
to the performance obligation to transfer units produced or units delivered.
the asset. For example, an entity may have
transferred control of an asset to a 2. Input methods
customer but not yet satisfied an additional  recognize revenue on the basis of the
performance obligation to provide entity's efforts or inputs to the
maintenance services related to the satisfaction of a performance obligation
transferred asset. (for example, resources consumed,
labor hours expended, costs incurred,
5. The customer has accepted the asset the time elapsed or machine hours used)
customer's acceptance of an asset may relative to the total expected inputs to
indicate that it has obtained the ability to the satisfaction of that performance
direct the use of, and obtain substantially all obligation If the entity's efforts or inputs
of the remaining benefits from, the asset. are expended evenly throughout the
performance period, it may be
Measuring progress towards complete appropriate for the entity to recognize
satisfaction of a PO revenue on a straight-line basis.

For each performance obligation satisfied In determining the appropriate method for
over time, an entity shall recognize revenue measuring progress, an entity shall consider
over time by measuring the progress the nature of the good or service that the
towards complete satisfaction of that entity promised to transfer to the customer.
performance obligation. An entity shall
apply a single method of measuring As circumstances change over time, an
progress for each performance obligation entity shall update its measure of progress
satisfied over time and the entity shall to reflect any changes in the outcome of the
apply that method consistently to similar performance obligation. Such changes to an
performance obligations and in similar entity's measure of progress shall be
circumstances. At the end of each reporting accounted for as a change in accounting
period, an entity shall remeasure its estimate in accordance with PAS 8
progress towards complete satisfaction of a Accounting Policies, Changes in Accounting
performance obligation satisfied over time. Estimates and Errors.

Methods for measuring progress Methods


1. Output methods a) Percentage of completion
 recognize revenue on the basis of direct - entity can reasonably measure its
measurements of the value to the progress towards complete satisfaction
customer of the goods or services of the performance obligation.
transferred to date relative to the
remaining goods or services promised b) Cost recovery method/zero-profit
under the contract. - an entity may not be able to
 include methods such as surveys of reasonably measure the outcome of a
performance completed to date, performance obligation, but the entity
appraisals of results achieved, expects to recover the costs incurred in
satisfying the performance obligation. b) the price of the contract increases by
The entity shall recognize revenue only an amount of consideration that
to the extent of the costs incurred. reflects the entity's stand-alone selling
prices of the additional promised
goods or services and any appropriate
adjustments to that price to reflect the
circumstances of the particular
contract.
Combination of contracts For example, an entity may adjust the
An entity shall combine two or more stand-alone selling price of an
contracts entered into at or near the same additional good or service for a
time with the same customer (or related discount that the customer receives,
parties of the customer) and account for because it is not necessary for the
the contracts as a single contract if one or entity to incur the selling-related costs
more of the following criteria are met: that it would incur when selling a
a. The contracts are negotiated as a similar good or service to a new
package with a single commercial objective, customer.
o The amount of consideration to be paid
in one contract depends on the price or 2. An entity shall account for the contract
performance of the other contract; or modification as if it were a termination of
the existing contract and the creation of a
o The goods or services promised in the new contract, if the remaining goods or
contracts (or some goods or services services are distinct from the goods or
promised in each of the contracts) are a services transferred on or before the date of
single performance obligation. the contract modification 3 An entity shall
account for the contract modification as if it
Contract modifications were a part of the existing contract if the
 a change in the scope or price (or both) remaining goods or services are not distinct
of a contract that is approved by the and, therefore, form part of a single
parties to the contract. In some
industnes and jurisdictions, a contract
modification may be described as a Contract costs
change order, a variation or an 1. Cost to obtain a contract
amendment.  The incremental costs of obtaining a
contract must be recognized as an asset
Contract modifications is accounted as if the entity expects to recover those
follows: costs. However, those incremental costs
1. An entity shall account for a contract are limited to the costs that the entity
modification as a separate contract if both would not have incurred if the contract
of the following conditions are present: had not been successfully obtained (e.g.
a) the scope of the contract increases 'success fees' paid to agents). A practical
because of the addition of promised expedient is available, allowing the
goods or services that are distinct, and incremental costs of obtaining a
contract to be expensed if the
associated amortization period would be supervision, insurance and depreciation of
12 months or less. [PFRS 15:91-94] tools,

2. Cost to fulfill a contract d. equipment and right-of-use assets used in


fulfilling the contract); a costs that are
If the costs incurred in fulfilling a contract explicitly chargeable to the customer under
with a customer are not within the scope of the contract, and other costs that are
another Standard (for example, PAS 2 inoured poly bosauce
Inventories, PAS 16 Property, Plant and
Equipment or d. costs that are explicitly chargeable to the
customer under the contract, and
PAS 38 Intangible Assets), an entity shall
recognize an asset from the costs incurred e. other costs that are incurred only
to fulfil a contract only if those costs meet because an entity entered into the contract
all of the following criteria: a the costs (for example, payments to subcontractors)
relate directly to a contract or to an
anticipated contract that the entity can An entity shall recognize the following
specifically identify (for example, costs costs as expenses when incurred:
relating to services to be provided under
renewal of an existing contract or costs of  a general and administrative costs
designing an asset to be transferred under a (unless those costs are explicitly
specific contract that has not yet been chargeable to the customer under the
approved); b the costs generate or enhance contract);
resources of the entity that will be used in  costs of wasted materials, labor or
satisfying (or in continuing to satisfy) other resources to fulfil the contract
performance obligations in the future, and that were not reflected in the price of
the costs are expected to be recovered. the contract;
 costs that relate to satisfied
Costs that relate directly to a contract (or a performance obligations (or partially
specific anticipated contract) include any of satisfied performance obligations) in the
the following: contract (i.e. costs that relate to past
performance); and
a. direct labor (for example, salaries and  costs for which an entity cannot
wages of employees who provide the distinguish whether the costs relate to
promised services directly to the customer); unsatisfied performance obligations or
to satisfied performance obligations (or
b. direct materials (for example, supplies partially satisfied performance
used in providing the promised services to a obligations).
customer);
Amortization and impairment
c. allocations of costs that relate directly to The asset recognized in respect of the costs
the contract or to contract activities (for to obtain or fulfil a contract is amortized on
example, costs of contract management and a systematic basis that is consistent with the
pattern of transfer of the goods or services
to which the asset relates. An entity shall which the entity has received consideration
recognize an impairment loss in profit or (or an amount of consideration is due) from
loss to the extent that the carrying amount the customer.
of an asset recognized exceeds:
2. Contract asset is an entity's right to
a the remaining amount of consideration consideration in exchange for goods or
that the entity expects to receive in services that the entity has transferred to a
exchange for the goods or services to which customer when that right is conditioned on
the asset relates, less b. the costs that relate something
directly to providing those goods or services
other than the passage of time (for
An entity shall recognize in profit or loss a example, the entity's future performance). 3
reversal of some or all of an impairment loss Receivable - a receivable is an entity's right
previously recognized when the impairment to consideration that is unconditional A
conditions no longer exist or have improved. right to consideration is unconditional if
The increased carrying amount of the asset only the passage of time is required before
shall not exceed the amount that would payment of that consideration is due.
have been determined (net of amortization)
if no impairment loss had been recognized Contract assets and receivables shall be
previously. accounted for in accordance with PFRS 9.
Gwezza Any impairment relating to contracts with
Gwezza Lou customers should be measured, presented
CPA and disclosed in accordance with PFRS 9.
Any difference between the initial
CPA Reviewer recognition of a receivable and the
corresponding amount of revenue
Revenue Recognition (PFRS 15) recognized should also be presented as an
expense. for example, an impairment loss.
Advanced... Auditing P... Auditing T...
Financial PFRS 15 Disclosure

FAR and AP Othem The objective of the disclosure


requirements is for an entity to disclose
9 sufficient information to enable users of
financial statements to understand the
Home / Advanced Financial Accounting and nature, amount, timing and uncertainty of
Reporting / AFAR Pre-recorded Content revenue and cash flows arising from
Concepts Summaries/ Revenue Recognition contracts with customers. To achieve that
(PFRS 15) objective, an entity shall disclose qualitative
and quantitative information about all of
Financial Statement Presentation the following:

1 Contract liability an entity's obligation to a its contracts with customers;


transfer goods or services to a customer for
b the significant judgements, and changes in 1. Customer has the option to purchase a
the judgements, made in applying this warranty separately (for example, because
Standard to those contracts; and the warranty is priced or negotiated
separately) - allocate a portion of the
cany assets recognized from the costs to transaction price to that performance
obtain or fulfil a contract with a customer. obligation

OTHER REVENUE RECOGNITION ISSUES 2 Customer does not have the option to
purchase a warranty separately
SALE WITH A RIGHT OF RETURN
Gwezza a Assurance-type warranty - an entity shall
Gwezza Lou account for the warranty in accordance with
Revenue Recognition (PFRS 15) PAS 37 Provisions, Contingent Liabilities and
Contingent Assets
Auditing P... Auditing T. Financial FAR and AF
Others bService-type warranty - the promised
service is a performance obligation and an
Home Advanced Financial Accounting and entity shall allocate the transaction price to
Reporting/AFAR Pre-recorded the product and the service
Content/Concepts Summaries/Revenue
Recognition (PFRS 15) An entity shall also consider the following:

OTHER REVENUE RECOGNITION ISSUES a Warranty is required by law - the


promised warranty is not a performance
SALE WITH A RIGHT OF RETURN obligation because such requirements
typically exist to protect customers from the
An entity shall recognize all of the following: risk of

1 Revenue for the transferred products in purchasing defective products. Length of th


the amount of consideration to which the of the warranty coverage period - the longer
entity expects to be entitled (therefore, the coverage period, the more likely it is
revenue would not be recognized for the that the promised warranty to provide a
products expected to be returned); service in addition to the assurance that the
product complies with agreed-upon
A refund liability; and specifications. is a performance obligation
because it is more likely Nature of the tasks
that the entity promises to perform - if it is
3. An asset (and corresponding adjustment necessary for an entity to perform specified
to cost of sales) for its right to recover tasks to provide the assurance that a
products from customers on settling the product complies with agreed
refund liability.
Q
WARRANTIES
ING US
Nature of the tasks that the entity promises
40 to perform if it is necessary for an entity to
perform specified tasks to provide the
Search assurance that a product complies with
Gwezza agreed
Gwezza Lou
CPA CPA Reviewer upon specifications (for example, a return
shipping service for a defective product),
Advanced then those tasks likely do not give rise to a
performance obligation
Financial
PRINCIPAL VERSUS AGENT
FAR and AP Others CONSIDERATIONS

9 1. Principal

Revenue Recognition (PFRS 15) An entity is a principal if it controls the


specified good or service before that good
Home or service is transferred to a customer. •

/ Advanced Financial Accounting and When (or as) an entity that is a principal
Reporting / AFAR Pre-recorded satisfies a performance obligation, the
Content/Concepts Summaries / Revenue entity recognizes revenue in the gross
Recognition (PFRS 15) amount of consideration to which it expects
to be entitled in
a Warranty is required by law - the
promised warranty is not a performance exchange for the specified good or service
obligation because such requirements transferred. Indicators that an entity
typically exist to protect customers from the controls the specified good or service
risk of before it is transferred to the customer

Auditing P... 1 the entity is primarily responsible for


fulfilling the promise to provide the
Auditing T... specified good or service.

purchasing defective products, Length of 2 the entity has inventory risk before the
the warranty coverage period - the longer specified good or service has been
the coverage period, the more likely it is transferred to a customer or after transfer
that the promised warranty is a of control to the customer
performance obligation because it is more
likely to provide a service in addition to the 3 the entity has discretion in establishing
assurance that the product complies with the price for the specified good or service.
agreed-upon specifications.
2. Agent
telecommunication contracts, setup fees in
An entity is an agent if the entity's some services contracts and initial fees in
performance obligation is to arrange for the some
provision of the specified good or service by
another party. supply contracts.

When (or as) an entity that is an agent The upfront fee is an advance payment for
satisfies a performance obligation, the future goods or services and, therefore,
entity recognizes revenue in the amount of would be recognized as revenue when those
any fee or commission to which it expects to future goods or services are provided If the
be entitled in exchange for arranging for the non-refundable upfront fee relates to a
specified goods or services to be provided good or service, the entity shall evaluate
by the other party. whether to account for the good or service
as a separate performance obligation
An entity's fee or commission might be the
net amount of consideration that the entity LICENSING
retains after paying the other party the
consideration received in exchange for the A license establishes a customer's rights to
goods or services to be provided by that the intellectual property of an entity.
party. Licenses of intellectual property may
include, but are not limited to, licenses of
NON-REFUNDABLE UPFRONT FEES (AND any of the following:
SOME RELATED COSTS)
Gwezza a software and technology,
Gwezza Lou
A Reviewer bmotion pictures, music and other forms of
media and entertainment;
Advanced... Auditing P... Auditing T...
Financial... FAR and AP Others franchises; and

9 d patents, trademarks and copyrights.

Revenue Recognition (PFRS 15) Promise to Grant a License is Not Distinct

Home Advanced Financial Accounting and If the promise to grant a license is not
Reporting/AFAR Pre-recorded distinct from other promised goods or
Content/Concepts Summaries / Revenue services in the contract, an entity shall
Recognition (PFRS 15) account for the promise to grant a license
and those other promised goods or services
NON-REFUNDABLE UPFRONT FEES (AND together as a single performance obligation.
SOME RELATED COSTS) Examples of licenses that are not distinct
from other goods or services promised in
Examples include joining fees in health club the contract include the following:
membership contracts, activation fees in
a license that forms a component of a in the contract and, therefore, the promise
tangible good and that is integral to the to grant the license is a separate
functionality of the good; and a performance obligation, an entity shall
determine whether the license transfers to
ba license that the customer can benefit a customer either at a point in time or over
from only in conjunction with a related time. In making this determination, an
service (such as an online service provided entity shall consider whether the nature of
by the entity that enables, by granting a the entity's promise in granting the license
license, the customer to access content). to a customer is to provide the customer
with either:
Promise to Grant a License is Distinct
1. Right to Access (RTA)
If the promise to grant the license is distinct
from the other promised goods or services • The nature of an entity's promise in
in the contract and, therefore, the promise granting a license is a promise to provide a
to grant the license is a separate right to access the entity's intellectual
performance property if all of the following criteria are
met a the contract requires, or the
ENG customer reasonably expects, that the
Gwezza entity will undertake activities that
Gwezza Lou significantly affect the intellectual property
Revenue Recognition (PFRS 15) to which the customer has

Advanced rights;

Auditing P... b the rights granted by the license directly


expose the customer to any positive or
Auditing T... negative effects of the entity's activities;
and cthose activities do not result in the
Financial... transfer of a good or a service to the
customer as those activities occur.
FAR and AP
Customer cannot direct the use of, and
Others obtain substantially all of the remaining
benefits from, the license at the point in
Home / Advanced Financial Accounting and time at which the license transfers.
Reporting / AFAR Pre-recorded
Content/Concepts Summaries / Revenue May be evidenced by usage-based royalty
Recognition (PFRS 15) or sales-based royalty. Revenue is
recognized over time as it exists throughout
Promise to Grant a License is Distinct the license period.

If the promise to grant the license is distinct 2. Right to Use (RTU)


from the other promised goods or services
Customer can direct the use of, and obtain
substantially all of the remaining benefits A repurchase agreement is a contract in
from, the license at the point in time at which an entity sells an asset and also
which the license transfers • Revenue is promises or has the option (either in the
recognized at the point in time at which the same contract or in another contract) to
license is granted. repurchase the asset The repurchased asset
may be the asset that was originally sold to
Sales-based or usage-based royalties the customer, an asset that is substantially
the same as that asset, or another asset of
An entity shall recognize revenue for a sales- which the asset that was originally sold is a
based or usage-based royalty promised in component.
exchange for a license of intellectual
property only when (or as) the later of the Forms of repurchase agreements
following events occurs:
1 an entity's obligation to repurchase the
a the subsequent sale or usage occurs; and asset (a forward)

b the performance obligation to which some 2 an entity's right to repurchase the asset (a
or all of the sales-based or usage-based call option), and
royalty has been allocated has been
satisfied (or partially satisfied) 3 an entity's obligation to repurchase the
asset at the customer's request (a put
INO option).

US A forward or a call option


Gwezza
Gwezza Lou a customer does not obtain control of the
CPA CPA Reviewer asset because the customer is limited in its
ability to direct the use of, and obtain
Revenue Recognition (PFRS 15) substantially all of the remaining benefits
from, the asset
Advanced... Auditing P... Auditing T...
Financial even though the customer may have
physical possession of the assel
FAR and AP Others Consequently, the entity shall account for
the contract as either of the following:
9
a a lease in accordance with PFRS 16 Leases
Home / Advanced Financial Accounting and if the entity can or must repurchase the
Reporting/AFAR Pre-recorded asset for an amount that is less than the
Content/Concepts Summaries/Revenue original selling price of the asset, unless the
Recognition (PFRS 15) contract is part of a sale and leaseback
transaction. If the contract is part of a sale
REPURCHASE AGREEMENTS and leaseback transaction, the entity shall
continue to recognize the asset and shall ⚫ repurchase price is expected to
recognize a financial liability for any significantly exceed the market value of the
consideration received from the customer. asset accounted as a lease in accordance
The entity shall account for the financial with PFRS 16, unless the contract is part of a
liability in accordance with PFRS 9, or b a sale and leaseback transaction
financing arrangement if the entity can or
must repurchase the asset for an amount bno significant economic incentive to
that is equal to or more than the original exercise that right
selling price of the asset If the option lapses
unexercised, an entity shall derecognize the account for the agreement as if it were the
liability and recognize revenue. sale of a product with a right of return

A put option 2. repurchase price ≥ original selling price >


expected market value of the asset the
An entity has an obligation to repurchase contract is in effect a financing arrangement
the asset at the customer's request (a put
option) 3. repurchase price ≥ original selling price <
expected market value of the asset the
1. Repurchase prices original selling price, entity shall account for the agreement as if
the entity shall consider at contract it were the sale of a product with a right of
inception whether the customer has return
Gwezza
Gwezza Lou CONSIGNMENT ARRANGEMENTS
CPA CPA Reviewer
A consignment arrangement exists when an
Advanced... Auditing P... Auditing T... entity delivers a product to another party
Financial (such as a dealer or a distributor) for sale to
end customers and that other party has not
FAR and AP Others oblained control of the product.
Accordingly, an entity shall not recognize
Revenue Recognition (PFRS 15) revenue upon delivery of a product to
another party if the delivered product is
Home / Advanced Financial Accounting and held on consignment.
Reporting / AFAR Pre-recorded
Content/Concepts Summaries / Revenue Indicators that an arrangement is a
Recognition (PFRS 15) consignment arrangement include, but are
not limited to, the following:
1. Repurchase price < original selling price -
the entity shall consider at contract a the product is controlled by the entity
inception whether the customer has until a specified event occurs, such as the
sale of the product to a customer of the
a significant economic incentive to exercise dealer or until a specified period expires, b
that right the entity is able to require the return of the
product or transfer the product to a third
party (such as another dealer); and the
dealer does not have an unconditional 3 the product currently must be ready for
obligation to pay for the product (although physical transfer to the customer, and
it might be required to pay a deposit).
Gwezza 4 the entity cannot have the ability to use
Gwezza Lou the product or to direct it to another
CPA CPA Reviewer customer

Revenue Recognition (PFRS 15) If an entity recognizes revenue for the sale
of a product on a bill-and-hold basis, the
Advanced entity shall consider whether it has
remaining performance obligations (for
Auditing P example, for custodial services) to which the
entity shall allocate a portion of the
. Auditing T... Financial transaction price.

FAR and AP Others Construction Contract

9 A construction contract is a contract


specifically negotiated for the construction
Home / Advanced Financial Accounting and of an asset or a group of interrelated assets
Reporting / AFAR Pre-recorded or a combination of assets that are closely
Content/Concepts Summaries/Revenue interrelated or interdependent in terms of
Recognition (PFRS 15) their design, technology or their ultimate
purpose or use. Construction contract
BILL-AND-HOLD ARRANGEMENTS maybe classified into:

A bill-and-hold arrangement is a contract 1 Fixed Price Contract. This is a construction


under which an entity bills a customer for a contract in which the contractor agrees to a
product but the entity retains physical fixed contract price, or a fixed rate per unit
possession of the product until it is of output, which in some cases is subject to
transferred to the customer at a point in
time in the future. cost escalation clauses. 2 Cost Plus Contract.
This is a construction contract in which the
Revenue is recognized when all of the contractor is reimbursed for allowance or
following criteria are met: otherwise defined costs, plus a percentage
of these costs or a lixed fee Construction
1 the reason for the bill-and-hold contracts under PFRS 15 may be accounted
arrangement must be substantive (for as a performance obligation satisfied over
example, the customer has requested the time or at a point in time.
arrangement);
ING
2. the product must be identified separately Gwezza
as belonging to the customer, Gwezza Lou
maps
Supervision of the construction activity,
D which involves obtaining financing,
designing building, and supervising
CPA contractor

CPA Reviewer Assistance in the acquisition of signs,


fixtures, and equipment.
Advanced... Auditing P... Auditing T...
Financial d Provision of bookkeeping and advisory
services. e. Provision of employee and
FAR and AP Others management training.

9 + Provision of quality control.

Revenue Recognition (PFRS 15) Provision of advertising and promotion.

Home / Advanced Financial Accounting and 2 Continuing franchise fee - this represent
Reporting / AFAR Pre-recorded Content / continues payment to the franchisor for
Concepts Summaries/ Revenue Recognition providing specific future services, such as
(PFRS 15) advertising, and for continued use of
intangible rights by the franchisee;
Franchise recognized as revenue when continuing
services are rendered.
Franchise involves the grant from the
business owner (franchisor) to the applicant Franchise Cost
(franchisee), the legal rights to obtain the
trade name, market the service or goods 1 Initial direct cost - necessary cost to
and operate the business with an equivalent transfer the franchise and the know-how
of a one-time fee. Franchise is under license embodied in it. 2 Indirect cost-cost that
agreement under PFRS 15. cannot be traced to a particular franchise
contract; expensed in the period incurred
Franchise Fee Gwezza
Gwezza Lou
1. Initial franchise fee-contractual CPA Reviewer
consideration for the franchise and initial
services to be rendered by the franchisor. Revenue Recognition (PFRS 15)
The initial services rendered by the
franchisor prior to the opening of the Advanced ... Auditing P... Auditing T...
franchisee's operations usually include the Financial
following:
FAR and AP Others
a Assistance in site selection for the
construction of the building. 9
Home / Advanced Financial Accounting and Franchise Cost
Reporting / AFAR Pre-recorded
Content/Concepts Summaries / Revenue 1 Initial direct cost - necessary cost to
Recognition (PFRS 15) transfer the franchise and the know-how
embodied in it.
Franchise Fee
2 Indirect cost-cost that cannot be traced to
1 Initial franchise fee contractual a particular franchise contract; expensed in
consideration for the franchise and initial the period incurred
services to be rendered by the franchisor.
The initial services rendered by the Franchise under PFRS 15 is under Licensing
franchisor prior to the opening of the and accounted depending whether it is
franchisee's operations usually include the classified as right to use or right to access
following:

a Assistance in site selection for the


construction of the building.

Supervision of the construction activity,


which involves obtaining financing,
designing building, and supervising
contractor.

Assistance in the acquisition of signs,


fixtures, and equipment.

d Provision of bookkeeping and advisory


services.

e Provision of employee and management


training

Provision of quality control.

g Provision of advertising and promotion.

2 Continuing franchise fee this represent


continues payment to the franchisor for
providing specific future services, such as
advertising, and for continued use of
intangible rights by the franchisee;
recognized as revenue when continuing
services are rendered.

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