ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 19
ADVANCED FINANCIAL ACCOUNTING & REPORTING A. Dayag  G. Caiga  M. Ngina

AFAR-04: PFRS 15 – Revenue from

Contracts with Customers & Other Topics
Revenue from Contracts with Customers
Different sectors or industries are affected in many different ways along the 5-step model as introduced
by IFRS (PFRS) 15. There are four (4) important industries that will face probably the biggest challenges:
1. Telecommunications: Identifying individual performance obligations and allocating transaction
price
2. Manufacturers: Contract modifications
3. Software development and technology: Splitting the contract into two (2) separate obligations]
4. Real estate and property development: Revenue over time/at the point of time
IFRS (PFRS) 15 will replace the following standards and interpretations:
 PAS 18 Revenue,
 PAS 11 Construction Contracts
 SIC 31 Revenue – Barter Transaction Involving Advertising Services
 PFRIC 13 Customer Loyalty Programs
 PFRIC 15 Agreements for the Construction of Real Estate and
 PFRIC 18 Transfer of Assets from Customers

The core principle of IFRS (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 (payment) to
which the entity expects to be entitled in exchange for those goods or services.

 PFRS 15 contains guidance for transactions not previously addressed (service revenue, contract
modifications);
 PFRS 15 improves guidance for multiple-element arrangements;
 PFRS 15 requires enhanced disclosures about revenue.

Overview of Revenue Recognition in Relation to PFRS 15

Revenue Recognition

The 5-Step Process (Key: COPAS) Other Revenue Recognition Issues

1. Contract with customers 1. Right of return

2. Bill-and-hold arrangements
2. Separate performance obligations
3. Principal-agent relationships
3. Determining the transaction price 4. Warranties
5. Non-refundable upfront fees
4. Allocating the transaction price
6. Repurchase agreements
5. Satisfying performance obligations 7. Licenses (and Royalties)
(Installment sales, Construction 8. Franchise (AFAR-06)
contracts, and Franchise) 9. Consignments (AFAR-06)

Revenue from Contracts with Customers adopts an asset-liability

7. Non-refundable
approach.
upfront
Companies:
fees
8. Consignments (Chapter 9)
 Account for revenue based on the asset or liability arising from contracts with customers.
 Are required to analyze contracts with customers
 Contracts indicate terms and measurement of consideration.
 Without contracts, companies cannot know whether promises will be met.

However, IFRS (PFRS) 15 requires capitalizing them and recognizing them in profit or loss in line with
revenue recognition.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-04
Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS
A Review: Key Considerations When Applying the Five Steps to Revenue Recognition

A Summary: Fundamental Issues related to Recognizing Revenue.

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Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS

Detailed Analysis and their Respective Examples of Revenue Recognition

The five steps of revenue recognition will now be considered in more detail.
Step 1: Identify the contract
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:
 the parties to the contract have approved the contract and are committed to perform their
respective obligations
 the entity can identify each party’s rights regarding the goods or services to be transferred
 the entity can identify the payment terms for the goods or services to be transferred
 the contract has commercial substance, and
 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
Step 2: Identifying the Separate Performance Obligations within a Contract
Performance obligations – a promise to transfer to a customer:
 a good or service (o bundle of goods or services) that is distinct (separable); or
 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:
1. The customer can benefit from the good or service in its own, or when combined with the
customer’s available resources; and
2. The promise to transfer the goods or service is separately identifiable from other goods or services
in the contract.
A transfer of good or service is not separately identifiable (or unidentifiable) if the good or service:
 is not integrated with other goods or services in the contract; or
 does not modify or customize another good or service in the contract; or
 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 separable 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’s free
servicing and maintenance
 An entity might enter into a contract with a customer to provide five (5) lectures, as well as to
provide a textbook on the first day of the course.
Step 3: Determining the Transaction Price
Amounts collected on behalf of third parties (such as sales tax or VAT) are excluded.
The consideration promised in a contract with a customer may include fixed amounts, variable amounts,
or both.
 The transfer price does not include amounts collected for third parties (i.e. sales taxes or VAT).
 The effects of the following must be considered when determining the transaction price:
 the time value of money (the time value of money does not need to be considered if the
length of the contract is less than one year);
 any non-cash consideration is measured at fair value.
 estimates of variable consideration
 any consideration payable to the 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.

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Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS

Non-cash Consideration.
If the fair value of non-cash consideration cannot be estimated reliably then the transaction is
measured using the stand-alone selling price of the good or services 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 or not to include it is in the transaction
price.

The refund liability should equal the consideration received (or receivable) that the entity does
not expect to be entitled to.
 If the consideration promised in a contract includes a variable amount, the variable
consideration must be estimated
 Price dependent on future events
 Examples of variable consideration:
1. Volume discounts
2. Refunds and rebates (e.g., for late completion)
3. Incentives (e.g. for early completion)
4. Royalties or performance bonuses or customer referral bonuses
5. Price concession and
6. Rights of return
 One of two methods should be used to estimate the amount of variable consideration of
revenue to recognize whichever method gives the best prediction:
1. Expected value
2. Most likely amount
The chosen method should be applied consistently throughout the contract.
 Variable consideration may be attributable to:
1. an entire contract; or
2. a specific part of a contract (e.g., part of the performance obligations or part of
the distinct goods or services promised in a single performance obligation)
Sometimes a transaction price is uncertain because some of the price depends on the
outcome of future events. Contracts that include this variable consideration are
commonplace in many industries, including construction (incentive payments),
entertainment (talent fees) and media (royalties), health care (PhilHealth, Medicard
reimbursements, etc.), manufacturing (volume discounts and product returns), and
telecommunications (rebates).
Estimating Variable Consideration
When an amount to be received depends on some uncertain future event, the seller still
should include the uncertain amount in the transaction price by estimating it.
 Expected Value: the sum of possible amounts or probability-weighted amount in a
range of possible consideration amounts:
1. May be appropriate if a company has a large number of contracts with similar
characteristics.
2. Can be based on a limited number of discrete outcomes and probabilities.
 Most Likely Amount: The single most likely amount in a range of possible
consideration outcomes.
On the other hand, if only two outcomes are possible, the most likely amount might be the
best indication of the amount the seller will likely receive
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.

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Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS

Step 4: Allocate the Transaction Price

Recognition of Revenue - Transaction Price
 Recognize revenue when (or as) a performance obligation is satisfied by transferring a promised
good or service (an asset) to the customer.
 An asset is transferred when (or as) the customer gains control of the asset.
 The entity must determine whether the performance obligation will be satisfied:
1. over time or
2. a point in time.
The total transaction price should be allocated to each or separate performance obligation in proportion
to stand-alone selling price of the goods or services.

Stand-alone selling-price – the price at which 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 a stand-alone selling price is not directly observable, then the entity estimates the stand-alone
selling price.
 The allocation is made at the beginning of the contract and is not adjusted for subsequent
changes in the stand-alone selling price.
Allocate the Total Transaction Price:
 Based on the relative fair values of the Separate Performance Obligations in proportion to the
stand-alone selling prices.
 If not available, companies should use their best estimate of what the good or service might sell
for as a standalone unit.
 If a customer is offered a discount (normal) for purchasing a bundle of goods and services, then
the discount should be allocated across all performance obligations within the contract in
proportion to their stand-alone selling prices (unless observable evidence suggests that this would
be inaccurate.)
There are three ways of transaction price allocation:
1. Adjusted market assessment approach – 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.
The seller considers what it could sell the product or services for in the market in which it normally
conducts business, perhaps referencing prices charged by competitors.
2. Estimated cost plus a margin approach – project the estimated costs of satisfying a performance
obligation and add a normal profit.
The seller estimates its costs of satisfying a performance obligation and then adds an appropriate
profit margin.
3. Residual approach – is the standalone selling price is highly variable or uncertain as to its
occurrence, then a company may estimate the standalone sales price by reference to total
transaction price less the sum of the observable standalone selling prices the goods or services
made in the contract.
The seller estimates an unknown (or highly uncertain) stand-alone selling price by subtracting the
sum of the known or estimated stand-alone selling prices from the total transaction price.
The residual approach is allowed only if the stand-alone selling price is highly uncertain, either
because:
a. the seller hasn’t previously sold the good or service and hasn’t yet determined a price for
it, or
b. the seller provides the same good or service to different customers at substantially
different prices.
Discounts
If a customer is offered a discount for purchasing a bundle of goods and services, then the discount
should be allocated across all performance obligations within the contract in proportion to their stand-
alone selling prices (unless observable evidence suggests that this would be inaccurate.)
A discount should only be allocated to a specific component of the transaction if that component is
regularly sold separately at a discount.

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Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS

Step 5: Recognize Revenue (PT/OT)

 Recognize revenue when (or as) a performance obligation is satisfied by transferring a promised
good or service (an asset) to the customer
 An asset is transferred when (or as) the customer gains control of the asset.
 The performance obligation will be satisfied over time or at a point in time.
For each performance obligation identified, an entity must determine at contract inception whether it
satisfies the performance obligation:
 over time (OT), or
 at a point in time/single point in time (PT)
Satisfied Over Time/OT (Key: CCN)
 A performance obligation is satisfied over time if one of the following criteria is met:
1. The customer simultaneously receives and CONSUMES the benefits of the seller’s work as it is
performed of the goods or services (while the contract is being fulfilled e.g., monthly payroll
processing service; routine or recurring service).
2. The customer controls the asset as it is CREATED or enhanced i.e., when the company’s
performance creates or enhances an asset (e.g., work in process or when a contractor builds
an extension into a customer’s existing school building or simply building an asset on a
customer’s site),
3. The seller is creating an asset that has NO ALTERNATIVE use to the seller, and the seller has the
legal right to receive payment for progress to date, as when a company manufactures
customized product (e.g. construction contract or building an asset that only the customer
can use or building an asset to a customer order).
Another company would not need to substantially re-perform the work the company has
completed to date if that other company were to fulfill the remaining obligation to the
customer.
The company has a right to payment for its performance completed to date, and it expects
to fulfill the contract as promised.
 If revenue is recognized over time, we can measure progress towards complete satisfaction of
the performance obligation by using:
1. Input measures. The most common approach is to use the “cost-to-cost” ratio, which is equal
to cost incurred to date divided by estimated total costs.
2. Output measures. Examples include the passage of time and the amount of finished product
delivered.
 Revenue for a performance obligation satisfied over time can only be recognized if progress can
be reasonably estimated.
 Revenue is recognized to the extent of costs incurred if there is no reasonable estimate of
progress but costs are expected to be recoverable.

Satisfied at a Point in Time/Single Point-in-Time (PT)

 A performance obligation that is not satisfied over time is satisfied at a point-in-time.
 Revenue should be recognized at the point in time when the customer obtains control of the
asset.
 Usually transfer of control is obvious, and coincides with delivery.
 Indicators of the transfer of control include: (Key: PAROL)
 The customer has an obligation to pay for an asset;
 The customer has legal title to the asset;
 The entity has transferred physical possession of the asset;
 The customer has the significant risks and rewards of ownership;
 The customer has accepted the asset.
Statement of Financial Position Presentation:
 A contract asset or contract liability should be presented in the statement of financial position
when either party has performed in a contract.
 Contract asset =Rights received > Performance obligation

Contract liability =Rights received < Performance obligation

PFRS (IFRS) 15 is not prescriptive about the treatment of contract assets/liabilities.

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Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS

I – Single Performance Obligation

Assume Kim’s sells a lady’s hat to Dreicy for P1,000 that Kim’s previously purchased from a wholesaler for
P600. How would Kim’s account for the sale to Dreicy?
Step 1: Identify the contract with a customer.
In this case, the contract may not be written, but it is clear - Kim’s delivers the lady’s hat to Dreicy,
and Dreicy agrees to pay P1,000 to Kim.
Step 2: Identify the separate performance obligations within a contract.
Kim’s has only a single performance obligation - to deliver the lady’s hat.
Step 3: Determine the transaction price.
Kim is entitled to receive P1,000 from Dreicy.
Step 4: Allocate the transaction price to the separate performance obligations.
With only one performance obligation, Kim’s allocates the full transaction price of P1,000 to delivery
of the lady’s hat.
Step 5: Recognize revenue when (or as) each performance obligation is satisfied.
Kim’s satisfies its performance obligation when it delivers the lady’s hat to Dreicy, so Kim’s records
the following journal entries at that time:
Cash. . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Revenues from sales of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
To record revenue from sales of goods.
Cost of sales . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
To record cost of goods sold.
Revenue recognition gets more complicated when a contract contains more than one performance
obligation.
First we consider a simple contract that includes only one performance obligation and is satisfied at a
single point in time when goods or services are transferred to a customer.
The performance obligation is satisfied when control of the goods or services is transferred from the seller
to the customer, and usually it’s obvious that transfer occurs at the time of delivery.
In Kim’s example above, for instance, the performance obligation is satisfied at the time of the sale (point
in time) when the lady hat is transferred to Dreicy.
II - Multiple Performance Obligations
Assume that on December 1, 20x8, Anton receives an order from a customer for a computer as well as
12 months of technical support. Anton delivers the computer (and transfers its legal title) to the customer
on the same day. The customer paid P50,400 upfront. The computer sells for P36,000 and the technical
support sells for P14,400.
Step 1: Identify the contract with a customer.
There is an agreement between Anton and its customer for the provision of goods and services.

Step 2 – Identify the separate performance obligations within a contract

There are two performance obligations (promises) within the contract:
 The supply of a computer
 The supply of technical support

Step 3 – Determine the transaction price

The total transaction price is P50,400.

Step 4 – Allocate the transaction price to the performance obligations in the contract
Based on standalone sales prices, P36,000 should be allocated to the sale of the computer and
P14,400 should be allocated to the technical support.

Step 5 – Recognize revenue when (or as) each performance obligation is satisfied.
Control over the computer has been passed to the customer, so the full revenue of P36,000 should
be recognized on December 1, 20x8 (point in time).

The following journal entry - at a POINT in TIME, December 1, 20x8:

Cash. . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,400
Revenues from sales. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14,400
3
To record revenue from sales of goods.

The technical support is provided over time, so revenue from this should be recognized over time. In
the year ended December 31, 20x8, revenue of P1,200 (1/12 xP14,400) should be recognized from
the provision of technical support.

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In Summary Form:
A. We recognize revenue at a point in time when we don’t qualify for recognizing revenue over
time.
B. The performance obligation is satisfied when control of the goods or services is transferred from
the seller to the customer.
C. Usually transfer of control is obvious, and coincides with delivery.
D. Other indicators of transfer of control: the customer has
1. An obligation to pay the seller.
2. Legal title to the asset.
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership.
5. Accepted the asset.

The indicators as mentioned in letter “D” above indicates that control has been transferred from
the seller to the customer (the customer is more likely to control a good or service if the customer
has those indicators).
Sellers should evaluate these indicators individually and in combination to decide whether control
has been transferred and revenue can be recognized.
The following journal entry - to be provided OVER TIME, December 31, 20x8:
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . .. . . . 1,200
Revenues from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
To record earned revenue.

In Summary Form:
A. Revenue should be recognized over time if goods and services are transferred over time to the
customer.
B. Revenue can be recognized over time if one of the following criteria is met:
1. The customer simultaneously receives and consumes the benefit of the seller’s work as it is
performed, or
2. The customer controls the asset as it is created or enhanced i.e., when the company’s
performance creates or enhances an asset, (e.g., work in process or when a contractor
builds an extension into a customer’s existing school building), or
3. The seller is creating an asset that has no alternative use to the seller, and the seller has the
legal right to receive payment for progress to date, as when a company manufactures
customized product.
Therefore, in the example above, the performance obligations are satisfied:
 At the time of the sale (point in time), i.e.., December 1 amounted to P36,000 and
 Over time on installment basis, i.e., every end of the month starting December 31 amounted to
P1,200 (P14,400/12 months).

III – Existence of a Contract

1. Which of the following is not true about contract assets?
a. Contract assets are recorded when payment depends on something other than the passage
of time.
b. Contract assets are recognized when the seller has a conditional right to receive payment.
c. Contract assets are recognized when the seller has been paid in advance for at least partially
fulfilling its performance obligations.
d. Contract assets are not the same as accounts receivable.
2. Which of the following is not true about contract liabilities?
a. Contract liabilities are only recognized when the seller has a conditional right to receive
payment.
b. Contract liabilities might be called deferred revenue.
c. Contract liabilities are recognized when the seller has been paid in advance of satisfying its
performance obligations.
d. Contract liabilities may be shown on a separate line of the balance sheet.
3. On July 1, 20x5, Ellsbury Inc. entered into a contract to deliver one of its specialty machines to
Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of P2,500 in
advance on July 15, 20x5. Kickapoo pays Ellsbury on July 15, 20x5, and Ellsbury delivers the machine
(with cost of P1,600) on July 31, 20x5. The contract exist on:
a. July 1, 20x5 c. July 31, 20x5
b. July 15, 20x5 d. No contract exist

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4. On March 1, 20x7, Giordano Company enters into a contract to transfer a product to Hotter on July
31, 20x7. The contract is structured such that Warmer is required to pay the full contract price of
P57,000 on August 31, 20x7.The cost of the goods transferred is P34,200. Giordano delivers the
product to Hotter on July 31, 20x7.The contract exist on?
a. March 1, 20x7 c. August 31, 20x7
b. July 31, 20x7 d. None of the above
IV – Timing of Revenue Recognition
Service Company
1. On February 1st, H&B Bank originated a loan for P50,000 at an interest rate of 7.2%. On March 15 th, an
interest payment of P300 was received. Which of the following best describes when interest revenue
should be recognized?
a. At a point in time (February 1st) c. At a point in time (March 31st)
b. At a point in time (March 15th d. Over time
Items 2 to 4 are based on the following information:
Lux Hotels, Inc. has signed a service outsourcing contract with Deluxe Rooms, Inc. for P3 million, which
was received in cash at contract inception. Under the agreement, Deluxe Rooms is obligated to clean
and prepare over 5,000 hotels rooms managed by Lux Hotel on a daily basis from August 1, 20x6 to July
31, 20x7.
2. When should Lux Hotels recognize revenue?
a. No transaction c. Point in Time
b. No revenue d. Over Time
3. The amount of sales revenue on August 1, 20x6?
a. Zero c. P1,500,000
b. P1,250,000 d. P3,000,000
4. The sales revenue on December 31, 20x6 amounted to:
a. Zero c. P1,500,000
b. P1,250,000 d. P3,000,000

Construction - refer to AFAR - 05

Trading/Merchandising
Items 5 and 6 are based on the following information:
Aqua Planet, operates a downhill water slide. An all-day adult lift ticket can be purchased for P850. Adult
customers also can purchase a season pass that entitles the pass holder to downhill water slide any day
during the season, which typically runs from December 1 through April 30. Aqua Planet expects its season
pass holders to use their passes equally throughout the season. The company’s fiscal year ends on
December 31. On November 6, 20x6, KimDrei purchased a season pass for P4,500.

5. When should Aqua Planet recognize revenue from the sale of its season passes?
a. No transaction c. Point in Time
b. No revenue d. Over Time

6. The sales revenue for the year 20x6 amounted to:

a. None c. P4,500
b. P900 d. P5,400

7. On October 1, 20x6, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at P3 per gallon.
Fifty-thousand gallons were delivered on December 15, 20x6, and the remaining 50,000 gallons were
delivered on January 15, 20x7. Payment terms were 50% due on October 1, 20x6, 25% due on first
delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme
recognize from this sale during 20x7?
a. P75,000 c. P225,000
b. P150,000 d. P300,000

Manufacturing
8. Joey& Co. manufactures various types of golf clubs to third party vendors. On April 1, 20x6, Joey
delivers a large quantity of golf clubs to Aparri Country Club. Under the sales agreement, Aparri is
obligated to pay Joey & Co.P200,000 within six months. On May 1, Joey & Co. purchases for cash the
right to advertise its products during Aparri’s annual golf tournament event for P3,000. Aparri normally
charges P2,500 for such services. On August 15, Aparri pays Joey & Co. all amounts owed. The
amount of revenue that Joey & Co. should recognize on its sale of golf clubs to Aparri:
a. Zero c. P200,000
b. P199,500 d. P203,000

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Week No. 19: CONTRACT with CUSTOMERS & OTHER TOPICS

V – Performance Obligation
Items 1 to 3 are based on the following information:
On July 15, 20x6, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing
system for a price of P90,000. The system included finely tuned scales that fit into EverFresh’s automated
assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s
automated system, and a one-year contract to calibrate the equipment and software on an as-needed
basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If
Ortiz was to provide these goods and services separately, it would charge P60,000 for the scales, P10,000
for the software, and P30,000 for the calibration contract. Ortiz delivered and installed the equipment
and software on August 1, 2016, and the calibration service commenced on that date.
1. How many performance obligations exist in this contract?
a. 0 c. 2
b. 1 d. 3
2. Assume that the scales, software and calibration service are all separate performance obligations.
How much revenue will Ortiz recognize in 20x6 for this contract?
a. 0 c. P74,250
b. P63,000 d. P90,000
3. Assume that the scales, software and calibration service are viewed as one performance obligation.
How much revenue will Ortiz recognize in 20x6 for this contract?
a. P0 c. P63,000
b. P37,500 d. P90,000
VI – Variable Consideration
Items 1 to 3 are based on the following information:
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings
initiatives. Thomas’ contract specifies that it will receive a flat fee of P50,000 and an additional P20,000 if
Bran reaches a pre-specified target amount of cost savings. Thomas estimates that there is a 20%
chance that Bran will achieve the cost-savings target.
1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the
transaction price.
a. P20,000 c. P54,000
b. P50,000 d. P70,000
2. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the
transaction price.
a. P20,000 c. P54,000
b. P50,000 d. P70,000
3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very
uncertain of that estimate due to a lack of experience with similar consulting arrangements.
Calculate the transaction price.
a. P20,000 c. P54,000
b. P50,000 d. P70,000
VII - Allocation of Transaction Price
Items 1 to 3 are based on the following information:
Wilson Links Products sells a product that involves two separate performance obligations: the Swing Right golf
club weight and the Swing Coach teaching software. Swing Right has a stand-alone selling price of P150.
Wilson sells both the Swing Right and the Swing Coach as a package deal for P200. The Swing Coach
software is not sold separately. Wilson is aware that other vendors charge P100 for similar software, and
Wilson’s prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs
approximately P65 of cost per copy of the software, and usually charges 50% above cost on similar products.
1. Estimate the stand-alone selling price of the software using the adjusted market assessment
approach.
a. P50.00 c. P90.00
b. P80.00 d. P97.50
2. Estimate the stand-alone selling price of the software using the expected cost plus margin approach.
a. P50.00 c. P90.00
b. P80.00 d. P 97.50
3. Estimate the stand-alone selling price of the software using the residual approach.
a. P50.00 c. P90.00
b. P80.00 d. P97.50

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X - Other Revenue Recognition Issues

Right of Return
 Right of return is granted for product for various reasons (e.g., dissatisfaction with product).
 Retailers usually give customers the right to return merchandise if customers are not satisfied or are
unable to resell it. The right to return merchandise does not create a performance obligation for the
seller. Instead, it represents a potential failure to satisfy the original performance obligation to provide
goods that the customer wants to keep.
Items 1 and 2 are based on the following information:
Taster Choice sell natural supplements to customers with an unconditional right of return if they are not
satisfied. The right of returns extends 60 days. On February 10, 20x4, a customer purchases P3,000 of
products (cost P1,500). Assuming that based on prior experience, estimated returns are 20%.
1. The journal entry to record the sale and cost of goods sold includes a
a. debit to Cash and a credit to Sales Revenue of P3,000.
b. credit to Refund Liability of P600 and a credit to Sales Revenue of P2,400.
c. debt to Cost of Goods Sold and credit to Inventory for P1,500.
d. credit to Estimated Inventory Returns of P300
2. The journal entry to record the return of P200 of merchandise includes a
a. credit to Refund Liability for P200.
b. credit to Returned Inventory for P100.
c. credit to Estimated Inventory Returns for P100.
d. debit to Estimated Inventory Returns for P100.

Bill-and-Hold Sales Arrangements

A bill-and-hold arrangement exists when a customer purchases goods but requests that the seller not
ship the product until a later date. For bill-and-hold arrangements, the key issue is that the customer
doesn’t have physical possession of the asset until the seller has delivered it. Remember, physical
possession is one of the indicators that control may have been transferred.
The physical possession indicator normally overshadows other control indicators in a bill-and-hold
arrangement, so sellers usually conclude that control has not been transferred and revenue should not
be recognized until actual delivery to the customer occurs.
3. On June 1st, Joseph & Company received a P500 deposit for 80 cases of wine. On June 10 th the
customer identified specific vintages that are included in Joseph’s inventory, and asked that Joseph
not ship the wine until June 20 so the customer could ready space to store the wine, so Joseph set
those wines aside for the customer, boxed and ready for shipment to the customer. On June 20 th the
wine was shipped and delivered to the customer. Joseph likely would recognize revenue on:
a. June 20th c. June 1st
b. June 10th d. Upon consumption of the wine by the customer
Principal and Agent Relationship
Agent’s performance obligation is to arrange for principal to provide goods or services to a customer.
IFRS (PFRS) 15 requires an entity to determine whether it is the principal on the transaction or the agent
on the basis of whether it controls the goods or services before they are transferred to the customer.An
entity that is a principal in a contract may satisfy a performance obligation by itself or it may engage
another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its
behalf.
‘

An entity is an agent if the entity's performance obligation is to arrange for the provision of goods or
services by another party.
The distinction between a principal and an agent is important because it affects the amount of revenue
that a company can record. If the company is a principal, it records revenue equal to the total sales
price paid by customers as well as cost of goods sold equal to the cost of the item to the company. On
the other hand, if the company is an agent, it records as revenue only the commission it receives on the
transaction.
When an entity uses another party to provide goods or services to a customer, the entity needs to
determine whether it is acting as a principal or an agent.
Principal The entity controls the good or service Revenue = Gross consideration
before it is transferred to the customer.
Agent The entity arranges for the other party to Revenue = Fee or commission*
provide the good or service.
* the fee or commission may be the net consideration that the entity retains after paying the other party
the consideration received in exchange for the good or service

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4. Exploded.com sells fireworks over the Internet. Customers access Exploded’s website and select
particular products, and Exploded refers the customer order to a fireworks manufacturer who fulfills
the order, ships to the customer, and pays Exploded a 20% commission. Which of the following is true
about Exploded?
a. Exploded is an agent in this transaction.
b. Exploded is primarily responsible for providing the product to the customer.
c. Exploded’s income statement would report gross revenue and cost of sales associated with these
transactions.
d. Exploded warehouses inventory.
5. Jing Statistical Services operates a website that links experienced statisticians with businesses that
need data analyzed. Statisticians post their rates, qualifications, and references on the website, and
Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers.
Sick Med Associates contacts Jing and arranges to pay a consultant P1,500 in exchange for
analyzing some data. Jing’s income statement would include the following with respect to this
transaction:
a. Revenue of P1,500
b. Revenue of P1,500, and cost of services of P1,125
c. Revenue of P375
d. Revenue of P1,875 and cost of services of P1,500

Warranties
 Examples of common parts of contracts that are not performance obligations:
 Prepayments (it’s part of the transaction price).
 Quality-assurance warranties (it is part of the performance obligation to deliver goods and
services that are free of defects).
 Right of return (it’s part of the performance obligation to deliver acceptable goods and services).
 Examples of common parts of contracts that are performance obligations:
 Extended warranties (it’s a separate obligation distinct from delivering acceptable goods and
services). A warranty is an extended warranty if either
 the customer has the option to purchase the warranty separately, or
 The warranty provides a service to the customer beyond quality assurance.
Two types of warranties to customers:
 Product meets agreed-upon specifications in contract at time product is sold.
1. Warranty is included in sales price (quality assurance-type warranty). A quality-assurance
warranty is NOT a performance obligation.
2. Extended warranty/service-type warranty is not included in sales price of product. An
extended warranty is recorded as a separate performance obligation.
 How can you tell if a warranty should be treated as a quality-assurance warranty or an
extended warranty? A warranty should be treated as an extended warranty if either:
 the customer has the option to purchase the warranty separately from the seller or
 the warranty provides a service to the customer beyond only assuring that the seller
delivered a product or service that was free from defects.
Quality Assurance Warranty
6. Vacuums sell the Tornado vacuum cleaner. Each vacuum cleaner has a one-year warranty (quality-
assurance) that covers any product defects. When customers purchase a vacuum cleaner, they also
have the option to purchase an extended three-year warranty that covers any breakage or
maintenance. The extended warranty sells for the same amount regardless of whether it is purchased
at the same time as the vacuum cleaner or at some other time. How many performance
obligations?
a. None c. Two
b. One d. Three
Extended Warranty
7. Which of the following is considered a performance obligation?
a. Up-front registration fees for a gym membership
b. Extended warranties on electronic products
c. Quality-assurance warranties on electronic products
d. A processing fee to obtain a bank loan

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Quality Assurance Warranty and Extended Warranty

8. D and R Computer Inc. manufactures and sells computers that include a warranty to make good on
any defect in its computers for 120 days (often referred to as an assurance warranty). In addition, it
sells separately an extended warranty, which provides protection from defects for three years
beyond the 120 days (often referred to as a service warranty). How many performance obligations
exist in this contract?
a. None c. Two
b. One d. Three
Non-refundable Upfront Fees
 Payments from customers before
 Delivery of product and/or
 Performance of a service
 Related to a good or service
 Generally relate to initiation, activation, or setup of a good or service to be provided or performed in
the future.
 Most cases, upfront payments are nonrefundable.
 Examples include:
• Membership fee in a health club.
• Activation fees for phone, Internet, or cable.
Items 9 and 10 are based on the following information:
Emil Morales signs a 1-year contract with Fitness The First Gym. The terms of the contract are that Emil
Morales is required to pay a non-refundable initiation fee of P12,000 and an annual membership fee of
P1,000 per month. Fitness The First Gym determines that its customers, on average, renew their annual
membership two times before terminating their membership.
9. How many performance obligations?
a. None c. Two
b. One d. Three
10. How much is the annual revenue?
a. P 6,000 c. P16,000
b. P12,000 d. P48,000

Repurchase Agreements
A repurchase agreement is where an entity sells an asset but retains a right to repurchase the asset. This
is often not recognized as a sale, but as a secured loan against the asset. Indications that this should not
be recognized as a sale may include:
1. Sale is below fair value
2. Option to repurchase is below the expected fair value
3. Entity continues to use the asset
4. Entity continues to hold the majority of risks and rewards associated with ownership of the
asset
5. Sale is to a bank or financing company
 Transfer control of (sell) an asset to a customer but have an obligation or right to repurchase.
 If obligation or right to repurchase is for an amount greater than or equal to selling price, then
transaction is a financing transaction.
 There are three forms of repurchase agreements:
1. An entity’s obligation to repurchase the asset (a forward);
2. An entity’s right to repurchase the asset (a call option);
3. An entity’s obligation to repurchase the asset at the customer’s request (a put option)

11. On January 1, Drei enters into a contract with Cerise for the sale of an excavator for P42,000,000. The
contract includes a put option that obliges Drei to repurchase the excavator at Cerise request for
P37,800,000 on or before December 31. The market value is expected to be P33,000,000 on 31
December. Cerise pays Drei P42,000,000 on January 1.The transaction should be accounted as:
a. Sale c. No sale/lease
b. Lease d. Incomplete information

Items 12 to 14 are based on the following information:

Sandra Inc., an equipment dealer, sells equipment on January 1, 20x7, to Santos Company for P200,000.
It agrees to repurchase this equipment on December 31, 20x9, for a price of P242,000.Assuming an
interest rate of 10 percent is imputed from the agreement,
12. How much liability will Sandra have on January 1, 20x7:
a. P100,000 c. P200,000
b. P121,000 d. P242,000

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13. What is the interest expense for the year 20x8?

a. None c. P24,200
b. P20,000 d. P44,200
14. How much would Sandra Inc. records interest and retirement of its liability to Santos Company on
December 31, 20x9?
a. None c. P220,000
b. P22,000 d. P242,000
Licenses
 Right to use: Transfer a right to use the seller’s intellectual property as it exists when the license is
granted. Revenue is recognized at the start of the license period, when the right is transferred
(revenue recognized at the point in time). A license transfers a right to use if the seller’s activities
during the license period are not expected to affect the intellectual property being licensed to the
customer. Example: a music download.
 Right of access: A license provides a right of access to the seller’s intellectual property if the seller’s
ongoing activities affect the benefit the customer receives. Revenue recognized over the period of
time for which access is provided. Example: a PBA (Philippine Basketball Association) trademark
granted to a company over a period of time. In that case revenue is recognized over the period of
time for which access is provided.

15. Tony &Jr. is a CPA firm that provides proprietary software to its clients. One of its software packages
sells for P150 and contains pre-programmed tutorials on basic accounting concepts. Another
product sells for P3,000 and contains Tony &Jr. archive of accounting standards and articles, which
Tony & Jr. updates on a weekly basis and downloads to archive users for the two years following
purchase of the product. If a customer purchases both software packages on June 1, 20x6, how
much revenue should Tony &Jr. recognize for the year 20x6?
a. None c. P 875
b. P 150 d. P1,025

Gift Cards
 Seller records a deferred revenue liability when the card is sold.
 Seller recognizes revenue when the card is used and at the point when it concludes there is only a
“remote likelihood” that customer will use the card.

16. Bull’sEye sells gift cards redeemable for Bull’sEye products either in-store or online. During 20x6,
Bull’sEye sold P2,000,000 of gift cards, and P1,800,000 of the gift cards were redeemed for products.
As of December 31, 20x6, P150,000 of the remaining gift cards had passed the date at which
Bull’sEye concludes that the cards will never be redeemed. How much gift card revenue should
Bull’sEye recognize in 20x6?
a. P2,000,000 c. P1,850,000
b. P1,950,000 d. P1,800,000
Payments by the Seller to the Customer:
 If the seller is purchasing distinct goods or services from the customer at the fair value of those goods
or services, we account for that purchase as a separate transaction.
 If a seller pays more for distinct goods or services purchased from their customer than the fair value of
those goods or services, those excess payments are viewed as a refund. They are subtracted from
the amount the seller is entitled to receive from the customer when calculating the transaction price
of the sale to the customer.

17. Lewis Co. sold merchandise to AdCo for P60,000 and received P60,000 for that sale one month later.
One week prior to receiving payment from AdCo, Lewis made a P10,000 payment to AdCo for
advertising services that have a fair value of P7,500. After accounting for any necessary adjustments,
how much revenue should Lewis Co. record for the merchandise sold to AdCo?
a. P 7,500 c. P57,500
b. P10,000 d. P60,000
-end-

**The most difficult secret of a man to keep is the opinion he has of himself.**
**Nothing great was ever achieved without determination.**
**Don’t be discouraged; everyone who got where he is, started where he was.**
**Impossibilities vanish when man with GOD’S HELP and BLESSINGS confront a mountain**

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