PFRS 15 : De Jesus

What is PFRS 15 Revenue from Contracts with Customers?

It is the standard used to recognize revenue from contracts with customers.

What standard did PFRS 15 replace?

It replaced PAS 11 Construction Contracts.

What is a construction contract?

It is a contract made specifically to build an asset or related assets that are connected in design, technology, function, or use.

What is the main principle of revenue recognition under PFRS 15?

The entity recognizes revenue by following specific steps for contracts with customers.

What is Step 1 in revenue recognition under PFRS 15?

Identify the contract with the customer.

When is a contract recognized under PFRS 15?

When the contract exists with a customer

AND collection of payment is likely.

When is a contract accounted for under PFRS 15?

Only when all required criteria are met.

What is the first criterion for a valid contract under PFRS 15?

Both parties approved the contract

AND are committed to perform their respective obligations

What is the second criterion for a valid contract under PFRS 15?

The entity can identify each party’s rights over the goods or services.

What is the third criterion for a valid contract under PFRS 15?

The entity can identify the payment terms.

What is the fourth criterion for a valid contract under PFRS 15?

The contract has commercial substance, meaning it affects future cash flows.

What is the fifth criterion for a valid contract under PFRS 15?

The payment is likely to be collected.

What should an entity consider when checking if payment is collectible?

Only the customer’s ability and intention to pay on time.

What happens if a contract does not meet the criteria but payment is received?

The payment is not yet recognized as revenue.

When can payment be recognized as revenue if the contract criteria are not met?

When the entity has no more obligations and payment is non-refundable.

Another case when payment can be recognized as revenue?

When the contract is terminated and the payment is non-refundable.

How is payment treated before those conditions are met?

It is recorded as a liability.

What does the liability represent in such cases?

It represents the obligation to deliver goods/services or refund the payment.

What is combination of contracts?

It is when two or more contracts are treated as one.

When are contracts combined under PFRS 15?

When they are entered at or near the same time with the same customer or related parties.

What is the first condition for combining contracts?

They are negotiated as one package with one business goal.

What is the second condition for combining contracts?

Payment in one contract depends on the other contract.

What is the third condition for combining contracts?

The goods or services are treated as one performance obligation.

What is a contract modification?

It is a change in scope or price of a contract approved by both parties.

What are other terms for contract modification?

Change order, variation, or amendment.

When does a contract modification exist?

When changes create or update enforceable rights and obligations.

When is a contract modification treated as a separate contract?

When two conditions are both met.

What is the first condition for treating a modification as a separate contract?

There are additional distinct goods or services.

What is the second condition for treating a modification as a separate contract?

The price increase reflects the stand-alone selling price of added goods/services.

What happens if a contract modification is not a separate contract?

It is accounted for based on remaining goods or services.

How is modification treated if remaining goods/services are distinct?

As if the old contract ended and a new one was created.

What amount is allocated to remaining obligations in this case?

Unrecognized original price plus price from modification.

How is modification treated if remaining goods/services are not distinct?

As part of the existing contract.

How is modification treated if it involves both distinct and non-distinct goods/services?

Apply a method that matches the goal of the standard.

What is Step 2 in revenue recognition under PFRS 15?

Identify the performance obligations in the contract.

What is a performance obligation?

A promise to transfer goods or services to a customer.

When are promises treated separately?

When the goods or services are distinct.

What must an entity do at the start of a contract?

Identify each promised good or service as a performance obligation.

What counts as a performance obligation?

A distinct good/service or a series of similar goods/services transferred the same way.

When is a good or service considered distinct?

When two conditions are met.

What is the first condition for a good/service to be distinct?

The customer can benefit from it alone or with available resources.

How can a customer benefit from a good/service?

By using, consuming, selling it, or gaining economic benefit.

What is the second condition for a good/service to be distinct?

It is separately identifiable from other promises in the contract.

When is a good/service separately identifiable?

When it meets certain conditions.

First indicator of being separately identifiable?

It is not used to produce a combined output.

Second indicator of being separately identifiable?

It does not significantly modify another promised good/service.

Third indicator of being separately identifiable?

It is not highly dependent or interrelated with other goods/services.

Example of not being highly dependent or interrelated?

Customer can skip it without affecting other goods/services.

What happens if a good or service is not distinct?

It is combined with others until a distinct bundle is formed.

What is the result if goods/services are not distinct?

They are treated as one single performance obligation.

What is the rule for recognizing revenue when satisfying performance obligations?

Revenue is recognized when the company fulfills a promise by giving goods or services to the customer.

When is an asset considered transferred to a customer?

When the customer gets control of the asset.

When should an entity decide if a performance obligation is over time or at a point in time?

At the start of the contract.

When is a performance obligation satisfied OVER TIME?

When at least one required condition is met.

What is the first condition for over time recognition?

The customer receives and uses the benefits at the same time the company performs.

What is the second condition for over time recognition?

The company creates or improves an asset that the customer controls while it is being created.

What is the third condition for over time recognition?

The asset has no alternative use and the company has the right to be paid for work done so far.

What does “no alternative use” mean?

The company cannot easily use or sell the asset to someone else.

When is an asset considered to have no alternative use?

When the contract or situation prevents the company from using it for something else.

When is the assessment of alternative use made?

At the start of the contract.

When is a performance obligation satisfied at a POINT IN TIME?

When it does not meet the conditions for over time recognition.

What is the assumption if over time cannot be proven?

It is recognized at a point in time.

What are indicators that control has transferred to the customer?

Signs that the customer already controls the asset.

What is the first indicator of transfer of control?

The company has the right to be paid.

What is the second indicator of transfer of control?

The customer has legal ownership.

What is the third indicator of transfer of control?

The customer physically has the asset.

What is the fourth indicator of transfer of control?

The customer bears the risks and rewards of ownership.

What is the fifth indicator of transfer of control?

The customer has accepted the asset.

What is the transaction price?

The amount the company expects to receive for giving goods or services, excluding taxes collected for others.

What types of amounts can be included in transaction price?

Fixed, variable, or non-cash amounts.

When is the transaction price adjusted for time value of money?

When the contract has a significant financing component.

How is variable consideration handled?

The company estimates how much it expects to receive.

When is variable consideration included in transaction price?

Only if it is very likely no big revenue reversal will happen later.

What is another definition of transaction price?

The amount expected from the customer for goods or services, excluding third-party amounts.

What are the components of transaction price?

Contract price and expected changes that can be measured reliably.

What must be considered when determining transaction price?

Variable consideration, financing, non-cash consideration, and payments to customers.

What is variable consideration?

Amount that changes due to discounts, refunds, bonuses, penalties, or similar items.

Why can variable consideration change?

Because it depends on future events happening or not happening.

What are the methods to estimate variable consideration?

Expected value and most likely amount.

What is the expected value method?

It adds all possible amounts weighted by their probabilities.

When is expected value method used?

When there are many similar contracts.

What is the most likely amount method?

It chooses the single most likely amount.

When is most likely amount method used?

When there are only two possible outcomes.

What is constraining variable consideration?

Only including amounts that will likely not reverse later.

What is a significant financing component?

When timing of payment gives financing benefit to either party.

What happens if there is a financing component?

The transaction price is adjusted for time value of money.

How is non-cash consideration measured?

At fair value.

What if fair value cannot be estimated?

Use the selling price of the goods or services instead.

What if the customer gives materials or labor?

Treat it as non-cash consideration if the company controls it.

What is consideration payable to a customer?

Money or credits given back to the customer.

How is consideration payable to customer treated?

It reduces revenue unless it is for a separate good or service.

What is a fixed price contract?

A contract with a set price or rate per unit.

What is a cost plus contract?

A contract where costs are reimbursed plus a fee or percentage.

What is the formula for cost plus variable fee contract?

Costs plus (costs × percentage).

What is the formula for cost plus fixed fee contract?

Costs plus fixed fee.

When is a cost plus contract used?

When it is hard to estimate total project cost.

Why is it hard to estimate contract price sometimes?

Scope is unclear or no similar past projects exist.

How is transaction price allocated?

Based on stand-alone selling prices of each obligation.

What is stand-alone selling price?

Price of a good or service if sold separately.

When is allocation simple?

When there is only one performance obligation.