INTERMEDIATE ACCOUNTING 3

BSA31M2
Chapter 3: Revenue from Contracts

IFRS 15 supersedes the following ➢ Enforceability is a matter of

standards: law.
➢ On the legal side, contract
a. IAS 11: Construction
has three requirements to be
Contracts
met:
b. IAS 8: Revenue
a. Consent
c. IFRIC 13: Customer Loyalty
b. Object
Programs
c. Cause
d. IFRIC 15: Agreements for the
Construction of Real Estate Criteria to be met in order for
e. IFRIC 18: Transfer of Assets contract to exist for purposes of
from Customers revenue recognition (accounting
f. SIC 31: Revenue – Barter side):
Transactions involving
1. The contract has commercial
Advertising Services
substance.
Steps on Recognizing Revenue ➢ If the cashflow of an entity
significantly changed after
1. Identify the contract the exchange of an asset,
➢ Revenue cannot be then the transaction has a
recognized without a commercial substance.
contract. 2. The entity can identify the
2. Identify the separate payment terms.
performance obligation ➢ Determine how much will be
3. Determine the transaction price the transaction price and
4. Allocate transaction price to how the price will be
the separate performance received.
obligation ➢ Payment terms, discounts,
5. Recognize revenue when each whether the asset is to be
performance obligation is paid on installment basis,
satisfied. should be included in the
Step 1: Identify the Contract with contract.
the Customer 3. The parties to the contract
have approved the contract.
Contract ➢ The contract should have
each of the party’s consent.
• Is an agreement between two
➢ There is a consent, if there is
or more parties that created
a meeting of the minds.
enforceable rights and
➢ Meeting of the minds
obligations.
happens after the
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negotiation between the excluding any amount
contracting parties. presented as receivable.
4. The entity can identify each 4. Entity may use alternative
party’s rights regarding goods descriptions other than
or services to be rendered. contract asset or liability.
➢ Rights of the seller: To ➢ May use the term accounts
receive the consideration or receivable in lieu of contract
the transaction price. asset.
➢ Rights of the buyer: To ➢ May use the term unearned
receive the goods or to income in lieu of contract
receive the rendering of liability.
services.
Difference between Contract Asset
5. It is probable that the entity will
and Accounts Receivable
collect the consideration to
which it will be entitled. • Accounts receivable’s right to
For the purpose of applying IFRS receive consideration is
15, a contract does not exist if unconditional while contact
both of the following are true: asset is not.

1. Contract is unperformed. Contract Modifications

2. Both seller and the buyer can
• Is a change in the scope or
terminate the contract without
price (or both) of a contract
penalty.
that is approved by the parties
Notes to the contract.

1. Performance of either party will Two Scenarios in Contract

give rise to a contract asset or Modifications
liability.
• It creates a new contract.
2. Contract Liability – If a customer
• It modifies the existing contract.
pays, or an entity has a right to
an amount of consideration Recognition of New Contract
before the entity transfers a
• There will be two contracts –
good or service to the
the original and the new
customer, the entity shall
contract.
recognize contract liability.
3. Contract Asset – If an entity Conditions:
performs before the customer
1. The scope of the contract
pays consideration of before
increases because of the
payment is due, the entity shall
recognize contract asset,
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addition of promised goods or Note: Total revenue between the
services that are distinct. two scenarios will always be the
same.
A good or service that is
promised to customer is distinct • If there is no recognition of a
if both of the following criteria new contract, compute for the
are met: blended price.
a. The customer can benefit Blended Price:
from the good or service.
Blended Price = Revenue to be
b. The entity’s promise to
recognize after modification / total
transfer the good or service
performance obligation.
to the customer is separately
identifiable from the other Step 2: Identify the Performance
promises in the contract. Obligations in the Contract
➢ If a product can be sold
separately, ex. A monitor Performance Obligation
in a computer set, • A promise in a contract to
without selling the other provide a product or service to
parts, then that product a customer.
(monitor) is distinct. 1. Distinct – separate
2. The price of the contract performance obligation.
increases by an amount of 2. Not distinct – combine the
consideration that reflects the performance obligation.
entity’s standalone selling
prices of the additional Step 3: Determine the Transaction
promised goods or services and Price
any appropriate adjustments to
Transaction Price
that price.
• Amount of consideration to
Modifications of the Existing which an entity expects to be
Contract entitled in exchange for
• There will only be one contract. transferring promised goods or
• An entity shall account for the services to a customer.
existing contract modification • Amount at which the revenue
as if it were parts of the will be measured.
existing/original contract if the When determining the transaction
remaining goods or services are price, an entity shall consider the
not distinct. effect of all of the following:
1. Variable considerations.
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2. Existence of significant ➢ Transaction price is equal to
financing component. the possible amount which
3. Noncash consideration. has the highest amount of
4. Consideration payable to a occurrence.
customer.

Variable Considerations
Existence of Significant Financing
• Occurs when part of the Component
contract price depends on the
• The entity should consider the
outcome of a future event.
time value of money.
Example: The amount
• Discounts and present value
contract price of a project
are used only when the
will amount to PHP100,000 if
payment period is more than
the project will be
one year.
completed after two years.
• The entity shall estimate the If payment period is more than
amount of variable one year, the transaction price will
consideration. be equal to the following, in order
➢ It needs to be estimated of priority:
because an entity should
1. Cash price equivalent
not wait for the future
➢ The amount that the buyer
outcome to happen before
was supposed to transfer if
establishing a price. The
he pays through cash.
recognition of a revenue
➢ This is different to the
must be on the present
installment price.
date.
2. Present value of future net cash
Methods of Estimating Variable inflows
Consideration
Noncash Consideration
1. Expected Value Approach –
• Transaction price is equal to the
Appropriate if an entity has a
fair value of the noncash
large number of contracts with
consideration received.
similar characteristics.
➢ Transaction price is equal to Consideration Payable to a
the sum of all the possible Customer
amounts multiplied to their
corresponding probability. • Consideration payable to
2. Most Likely Amount Approach – customers for payment of
Appropriate if the contract has distinct goods or services from
only two possible outcomes. customers shall be accounted
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in the same way that it ➢ Considers the prices of the
accounts for other purchases competitors with few
from supplier. adjustments.
• Unless, consideration payable 2. Expected Cost Plus a Margin
to customer is higher than the Approach
fair value of goods or services, ➢ Adds a certain mark-up to
or the fair value cannot be the costs.
reasonably estimated. 3. Residual Approach
• Consideration paid > Fair value ➢ How much is left.
= difference will be deducted ➢ Can only be used if the
to the transaction price. stand-alone selling price or
• Consideration < Fair value = no the fair value is highly
accounting. uncertain.
• If fair value cannot be
Step 5: Recognize Revenue when
reasonably estimated, assume
(or as) the entity satisfies a
it is 0. The consideration paid
performance obligation
will be deducted to the
transaction price. Ways on satisfying
performance obligation:
Step 4: Allocate the Transaction
Price to the Performance 1. Satisfaction over the period of
Obligation time
➢ If the obligation of the entity
• This step does not apply to
does not end after
contracts with single
delivering of goods or
performance obligation.
rendering of services, the
• Allocation basis – relative fair
satisfaction will be over the
value or standalone selling
period of time.
price of each performance
➢ Revenue will be recognized
obligation.
over a period of time/ all
• If the stand-alone selling price is
through-out the period.
not directly observable, an
2. Satisfaction at a point in time
entity shall estimate the stand-
➢ The performance obligation
alone selling price.
is satisfied at a point in time
Methods of Estimating Stand-Alone if after delivering the goods
Selling Price or rendering of services, the
entity will no longer have
1. Adjusted Market Assessment
any remaining obligation to
Approach
the customer.
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➢ Revenue will be recognized
after the performance of the
obligation.