INTEGRATED REVIEW CLASS IN ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Revenue from Contracts with Customers (PFRS 15): General Concepts

CORE PRINCIPLE
The core principle of PFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration or payment to which the entity expects to be
entitled in exchange for those goods or services.

REVENUE RECOGNITION
All revenue recognition starts with a contract between a seller and a customer. The seller recognizes revenue
when it satisfies a performance obligation by transferring the promised good or service. It is considered that a
transfer has occurred when the customer has control over the good or the service.

Revenue Recognition Principle

Ø The revenue recognition principle is to recognize revenue in the accounting period when the performance
obligation is satisfied.

FIVE-STEP PROCESS OF REVENUE RECOGNITION

PFRS 15 requires the application of the 5-step model for revenue recognition:
1. Identify the contract with customer.
• A contract can be agreed in writing, orally, or through other customary business practices. An entity
can only account for revenue if the contract meets all of the following criteria:
ü The parties to the contract have approved the contract and are committed to perform their
respective obligations.
ü The entity can identify each party’s rights regarding the goods or services to be transferred.
ü The entity can identify the payment terms for the goods or services to be transferred.
ü The contract has commercial substance, and
ü It is probable that the entity will collect the consideration to which it will be entitled in exchange
for the goods or services that will be transferred to the customer.
• A contract does not exist if both of the following are true:
F Neither the seller nor the customer has performed any obligations under the contract, and
F Both the seller and the customer can terminate the contract without penalty.

The signing of the contract by the two parties is not recorded until one or both of the parties perform under the
contract. Until performance occurs, no asset nor liability occurs.

2. Identify the separate performance obligations within a contract.

• A performance obligation is a promise to transfer to a customer:
F A good or service (or bundle of goods or services) that is distinct (separable); or
F A series of goods or services that are substantially the same and are transferred in the same way.

The distinct (separable) performance obligations within a contract must be identified.

A good or service is distinct (separable) if both of the following criteria are met:
ü The customer can benefit from the good or service in its own, or when combined with the customer’s
available resources; and
ü The promise to transfer the goods or services is separately identifiable from other goods or services in the
contract.

A transfer of good or service is not separately identifiable if the good or service:

Ø Is not integrated with other goods or services in the contract; or
Ø Does not modify or customize another good or service in the contract; or
Ø Does not depend on or relate to other goods or services promised in the contract.

If a promise to transfer a good or service is not distinct (not separate or inseparable) from other goods or services
in a contract, then the goods or services are combined into a single performance obligation.

Some contracts contain more than one performance obligation. For example:
• An entity may enter into a contract with a customer to sell a car, which includes one-year free service and
maintenance.
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 • A telecommunications company enters into a contract to provide 12-month network service, as well as to
give a free phone on the day the contract is signed.

To determine whether a company must account for multiple performance obligations, it evaluates the second
condition. Whether the product is distinct within the contract, then under the second condition (i.e., separately
identifiable):
ü If performance obligation is not highly dependent on or not interrelated or not connected with other
promises in the contract, then each performance obligation should be accounted for separately.
ü If each of these services is interdependent (mutually dependent) and interrelated (or interconnected),
these services are combined and reported as one performance obligation.

EXAMPLES OF REVENUE RECOGNITION SITUATIONS

Types of transaction Revenue description Timing of revenue recognition
Sale of inventory Sales revenue Date of sale or delivery
Rendering of service Service revenue Date when the service is
performed or billable
Permitting use of an asset Revenue from interest, rents, and As time passes or the asset is used
royalties
Sale of an asset other than Gain or loss on sale Date of sale or trade-in
inventory

3. Determine the transaction price.

Ø The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer.
- It includes:
(1) Fixed and/or variable amounts
- Variable considerations can be estimated by determining either the: (1) probability
weighted expected value, or (2) most likely amount.

(2) Effect of the time value of money if there is financing component in the contract (the time
value of money does not need to be considered if the length of time is less than one year);

(3) Fair value of any noncash consideration.

- The transaction price does not include amounts collected for third parties (i.e., sales taxes or
VAT).
- Any consideration payable to customer is treated as a reduction in the transaction price unless
the payment is entirely unrelated (e.g., for goods or services purchased from the customer).

Time Value of Money

Financing
If there is a significant financing component, then the consideration receivable needs to be discounted to present
value using the rate at which the customer would borrow.

Indications of a Financing Component

The following may indicate the existence of a significant financing component:
• The difference between the amount of promised consideration and the cash selling price of the promised
goods or services.
• The length of time between the transfer of the promised goods or services to the customer and the
payment date.

Non-cash Consideration
If the fair value of non-cash consideration cannot be estimated reliably, then the transaction price is measured
using the stand-alone selling price of the good or service promised to the customer.

Variable Consideration
Refunds/Rebates
If a product is sold with a right to return it, then the consideration is variable. The entity must estimate the variable
consideration and decide whether to include it or not in the transaction price.

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 Consideration Payable to the Customer
If consideration is paid to a customer in exchange for a distinct good or service, then it is essentially a purchase
transaction and should be accounted for in the same way as other purchases from suppliers.

Assuming that the consideration paid to a customer is not in exchange for a distinct good or service, an entity
should account for it as a reduction of the transaction price.

4. Allocate the transaction price to the separate performance obligations

Ø The transaction price should be allocated to each or separate performance obligation in proportion
to stand-alone selling price of the goods or services.
Ø The allocation is made at the beginning of the contract and is not adjusted for subsequent changes
in the stand-alone selling price.

Stand-alone selling price is the price at which an entity would sell a promised good or service separately to a
customer. The best evidence of stand-alone selling price is the observable price of a good or service when it is
sold separately. If the stand-alone selling price is not directly observable, then the entity estimates it. Estimates
of stand-alone selling price can be based on:
(1) Adjusted market assessment;
F Determine how goods or services will be sold and estimate the price those customers are willing to
pay. This may include the price of the competitor’s for similar goods or services with price adjustments
to reflect normal costs and profit.

(2) Expected cost plus margin approach;

F Project the estimated costs of satisfying a performance obligation and add a normal profit.

(3) Residual approach

F The standalone selling price is highly variable or uncertain as to its occurrence, then a company may
estimate the standalone selling price by reference to total transaction price less the sum of the
observable standalone selling prices the goods or services made in the contract.
F This method is allowed only if the stand-alone selling price is highly uncertain, either because:
(a) The seller has not previously sold the good or service and has not yet determined a price for it, or
(b) The seller provides the same good or service to different customers at substantially different
prices.

5. Recognize revenue when (or as) each performance obligation is satisfied

Ø Revenue can be recognized:
1. At a point in time
- Revenue is recognized at a point in time when the customer obtains control of the asset.
Indications of the transfer of control include:
F The customer has the obligation to pay for the asset;
F The customer has legal title to the asset;
F The entity has transferred physical possession of the asset;
F The customer has the significant risks and rewards of ownership;
F The customer has accepted the asset.

2. Over a period of time

- Companies recognize revenue over a period of time if one of the following criteria is met:
(1) The customer receives and consumes the benefits as the seller performs;
(2) The customer controls the asset as it is created; or
(3) The company does not have an alternative use for the asset.

- If none of the foregoing criteria is met, then the revenue is recognized at a point in time.

Contract modifications
► It is the change in the contract’s scope, price or both. In other words, when you add certain goods or
services, or you provide some additional discount, you are effectively dealing with the contract
modification.
► Companies determine:
(a) Whether a new contract (or separate performance obligation) results
- Account for as a new contract if both the following conditions are satisfied:
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 1. The promised goods or services are distinct (i.e., company sells them separately and they are
not interdependent with other goods and services), and
2. The company has the right to receive an amount of consideration that reflects the standalone
selling price of the promised goods or services.
(b) Whether it is a modification of the existing contract.
- Account for as a modification of the existing contract if:
1. The additional goods or services are not distinct, or
2. The consideration for the additional goods or services does not reflect their stand-alone selling
prices.
F Entities should account for effect of changes in the period of change as well as future periods if the change
affects both, but not change previously reported results.

DISCUSSION PROBLEMS
Problem 1:
Triton Company entered into contract with a customer to build a warehouse for P850,000 on March 31, 2025. In
addition, a performance bonus of P50,000 was agreed upon if the building is completed by July 31, 2025. The bonus
is reduced by P10,000 each week of delay beyond July 31, 2025. Triton Company commonly includes performance
bonuses in its contracts and based on prior experience, it estimates the following completion outcomes:

Completed by Probability
July 31, 2025 65%
August 7, 2025 25%
August 14, 2025 5%
August 21, 2025 5%

1. Under PFRS 15, how much is the transaction price for this contract?
A. P850,000
B. P894,000
C. P895,000
D. P900,000

2. Assuming the company has no prior experience on bonus variable considerations but based on its
assessment, it is most likely the entity will achieve a one-time performance bonus of P50,000 for the
completion of the contract by July 31, 2025, how much should be the transaction price for this contract?
A. P850,000
B. P894,000
C. P895,000
D. P900,000

Problem 2:
The XYZ Company is a well-established home appliance dealer. Alongside selling appliances, the company provides
related services, including installation and maintenance for the dishwashers it sells. Notably, XYZ does not ofer
these services to customers who purchase dishwashers from other vendors.

The pricing for dishwashers and related services is as follows:

Dishwasher only P950

Dishwasher with Installation service 1,050
Dishwasher with maintenance services 1,150
Dishwasher with installation and maintenance services 1,200

For arrangements that include maintenance services, the company prices the maintenance service separately at
P200. Additionally, the incremental cost for installation aligns with what independent third parties charge for similar
services.

Assume that a customer purchases a dishwasher with both installation and maintenance services for P1,200. Based
on its experience, the company believes that it is probable that the installation of the equipment will be performed
satisfactorily to the customer. Assume that the maintenance service is priced separately.

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 1. How much is the total transaction price for the contract?
A. P1,200
B. P3,150
C. P1,250
D. P2,450

2. Indicate the portions of the transaction price that should be allocated to the separate performance
obligations.

Dishwasher Installation Maintenance

A. P912 P96 P192
B. P2,394 P252 P504
C. P950 P100 P200
D. P1,862 P196 P392

Problem 3:
Globe Telecom, Inc., a telecommunications operator, entered into a contract with a customer on March 1, 2025. In
line with the contract, the customer subscribes to Globe Telecom’s monthly plan for 24 months and in return the
customer receives an iPhone 16 Pro Max from Globe Telecom. The customer is also entitled to monthly network
services such as 210 GB of data, unlimited all-net text, unlimited calls to Globe/TM, and 210 minutes all-net calls.
The customer will pay a monthly fee of P2,499 and a cash out of P46,800 upon signing the contract. The customer
gets the iPhone 16 Pro Max immediately after contract signing.

Globe Telecoms normally sells monthly plans for P1,482 per month without the iPhone. The market value of the
iPhone 16 Pro Max is P82,990. Compute the revenue for the year 2025.
A. 44,490
B. 88,090
C. 106,776
D. 118,558

THEORIES

1. What is the main objective of IFRS 15?

A. To provide guidance on accounting for leases.
B. To establish principles for recognizing revenue from contracts with customers.
C. To provide guidelines for the treatment of financial instruments.
D. To regulate the reporting of insurance contracts.

2. What is the "core principle" of IFRS 15?

A. Recognizing revenue based on legal agreements only.
B. Matching expenses with revenues.
C. Recognizing revenue to reflect the transfer of goods or services.
D. Reporting revenues on a cash basis.

3. Revenue is recognized when:

A. The performance obligation is satisfied.
B. The contract is signed.
C. The customer shows interest.
D. Payment is received.

4. The second step in the process for revenue recognition is to

A. Identify the contract with customer.
B. Determine the transaction price.
C. Allocate the transaction price to the separate performance obligations.
D. Identify the separate performance obligations in the contract.

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 5. The third step in the process for revenue recognition is to
A. Identify the contract with customer.
B. Determine the transaction price.
C. Allocate the transaction price to the separate performance obligations.
D. Identify the separate performance obligations in the contract.

6. The fourth step in the process for revenue recognition is to

A. Identify the contract with customer.
B. Determine the transaction price.
C. Allocate the transaction price to the separate performance obligations.
D. Identify the separate performance obligations in the contract.

7. What criteria must be met for a contract to be recognized under IFRS 15?
A. Written approval of the contract.
B. The contract must have commercial substance.
C. The contract must only include non-variable consideration.
D. All parties must have a legal representative.

8. What is a performance obligation?

A. A liability recognized upon contract completion.
B. A promise to transfer distinct goods or services.
C. A standalone selling price.
D. A contract's payment term.

9. Under IFRS 15, "transaction price" is:

A. The price stated in the contract.
B. The consideration expected for transferring goods/services.
C. Fixed and non-variable amounts only.
D. Payment received in advance.

10. What is "variable consideration"?

A. The difference between total revenue and total expenses.
B. The portion of consideration dependent on future events.
C. Fixed payment amounts in a contract.
D. Non-cash payments promised by the customer.

11. Which method can be used to estimate variable consideration?

A. Discounted cash flow.
B. Expected value or most likely amount.
C. Straight-line amortization.
D. Incremental cost method.

12. What does IFRS 15 require when allocating the transaction price to performance obligations?
A. Use of the historical cost method.
B. Allocation based on relative stand-alone selling prices.
C. Equal distribution among obligations.
D. Allocation based on the customer’s payment schedule.

13. Which of the following indicates that control of an asset has been transferred to the customer?
A. The customer obtains legal title to the asset.
B. The seller retains the risks and rewards of ownership.
C. The customer has physical possession, but the seller retains legal title.
D. Payment has been received in advance.

14. Under IFRS 15, when is revenue recognized over time?

A. If the entity transfers control of goods or services at a point in time.
B. If the customer simultaneously receives and consumes the benefits.
C. Only after the contract is fully performed.
D. When cash is received in advance.

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 15. How should an entity account for a contract modification that adds distinct goods or services?
A. As a new contract.
B. By adjusting the existing contract's terms.
C. By ignoring the modification.
D. By terminating the current contract.

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CPA Reviewer
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