IFRS 15 - Revenue Recognition

1. Identify contracts with customers

2. Identify the performance obligations in the contract

3. Determine the transaction price in the contract

4. Allocate the transaction price to the performance obligations

5. Recognize revenue when the performance obligations are satisfied

Five Step Model

• Rights of each party are identifiable

• Commercial substance is present

• Payment terms are identifiable

• Approved by the parties

• Collection is probable

Contract should possess all of the following:

Performance Obligation

A promise in a contract with a customer to transfer to the customer either:

• A good or service that is distinct

• A series of goods or services that are substantially the same and that have the same pattern of transfer to the customer

Distinct Goods / Services

The customer can benefit from the goods or service either on its own or together with other services that are readily available to the customer; and

The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

• It is integrated with other goods or service in the contract

• It modifies or customizes other goods or service in the contract

• It depends on or relates to other goods or services promised in the contract

Goods / Services are not distinct if…

1. Variable Considerations (Bonus, Incentives, Penalties, Discounts, Refunds, etc.)

• Expected Value Approach - if multiple outcomes

• Most Likely Amount - if there are two outcomes or options

2. Financing Component (Time Value of Money)

3. Non-Cash Considerations (Measured at Fair Value)

4. Payable to Customer = Reduction to the Transaction Price

Factors to consider in determining the Transaction Price

Stand-Alone Selling Prices

The price at which the entity would sell a promised goods or services to a customer

1. Directly observable SASP

2. Adjusted market assessment approach (Benchmarking)

3. Expected cost plus mark-up approach

4. Residual approach (Last Resort)

Methods for Estimating Stand-Alone Selling Price (In Order)

Satisfied Over Time

• Customer simultaneously receives and consumes the benefits as the entity performs

• It creates or enhances an asset that the customer controls as the asset is created or enhanced

• The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforcement right to payment for performance completed to date

Satisfied at a Point in Time

• The customer obtains control over the asset at a single point in time.

PAROL

• Physical possession has been transferred

• Acceptance by the customer

• Risks and rewards have been significantly transferred to the customer

• Obligation to pay the asset is assumed by the customer

• Legal title has been acquired by the customer

Indicators of obligations satisfied at a point in time.

Pro-forma solution for Long Term Construction Contracts

POC = Cost incurred to date / Total Estimated Cost to Complete

• Input Method or Cost-to-Cost Method (use if silent)

• Output Method - use of expert opinion

Percentage of Completion Formula and Methods of Estimation

Zero Profit Method / Cost Recovery Method - Recognition of profit or loss will occur at the last year. Hence, during the term of the contract, revenue equals to cost.

Method to be used if there is an Unreliable Estimate

Contract Asset

• Receivable

(May ginawa, wala pang natatanggap)

Entity’s right to a consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other that passage of time.

Contract Liability

• Deferred Revenue

(Wala pang nagagawa, may natanggap na)

Entity’s obligation to transfer goods or services to a customer to which the entity has received consideration (or the amount is due) from the customer.

CIP = Actual Cost incurred to date + Realized Gross Profit ( - Loss) to date

OR

CIP = Contract Price X POC to date

OR

CIP = Revenue to date

Construction in Progress (CIP) Formula

Construction in Progress

Less: (Progress Billings)

= Contract Asset (Liability)

Contract Asset (Liability) Formula

Onerous Contract

A contract that is expected to result in a loss

= Actual Cost incurred for CY + Realized Gross Profit ( - Loss) for CY

OR

= Contract Price X POC for CY

Revenue for the CY formula

1. Mobilization Fee

• To mobilize or start the project

• To protect the seller

2. Contract Retention

• Customer retains portion of billings / payments

• To protect the customer

Other Provision in the Contract

Original CP

Add: Cost Escalation

Less: Penalty

Add: Reward

New CP

Computation of the new Contract Price

TFR = Initial Franchise Revenue + Continuing Franchise Revenue (Royalty)

Total Franchise Revenue

= Total Franchise Revenue + Other Revenues (ex. Interest Revenue)

Total Revenue (in relation to questions about franchise)

• Rights to Trademark or Tradename

• Set Up / Construction / Interior Design

• Training / Orientation

• Delivery of Merchandise

Example of Initial Franchise Services

Rights to Access

• The contract requires or customer expects the intellectual property will change which the customer has rights.

• Rights granted by the license may have negative or positive effects on the customer.

• The entity’s activities does not result in transfer of goods or services to the customer as those activities occur.

Right to Use

The intellectual property does not change throughout the license period. What was received during the first day will not be updated.

• Purchase price

• Freight-in to Nee

• Cartage cost (Materials handling)

• Insurance Freight to Nee

• Packaging Cost

In consignment, what items are considered as part of inventoriable costs?

• Inventory

• Sales Revenue

• COGS

• Gross Profit

• Commission Expense

Items recognized by the Consignor

• Commission Revenue

• Refundable Expenses

Items recognized by the Consignee

• Delivery and Installation

• Advertising

• Reconditioning on delivered units to customer

• Insurance transit to customer

• Freight from Nee to customer

• Freight from Nee to Nor

Outright Expenses of Consignor

Sales Revenue

Less: COGS

Gross Profit

Less: Expenses

Less: Commission Expense

Net Income

Consignment Net Income Formula

Cash / Net Credit Collections

Less: Commissions

Proceeds, Net of Commissions

Less: Any payments made by Nee in behalf of Nor

Net Remittance

Consignee Net Remittance Formula

Reminders

• LTCC

  • Issue to be solve is the timing. As FS are reported annually but projects takes more than 1 year to conclude.

  • Always be mindful of the given figures and the usage of POC as it may be “to date”

• Franchise

  • If the right given is to access (overtime) be aware of the basis of when does the period will start as it will be the basis of recognition. It’s either be at the Start of the Contract or the Start of Operations.

• Consignment

  • Consider the items that are inventoriable as it will affect the COGS as well as when returns of the merchandise from Nee to Nor.

Overall, master working back of the following items.