PFRS 15 : Millan

What is PFRS 15 and what does it apply to?

It is a standard used to account for revenue from contracts with customers.

What standard does PFRS 15 replace?

It replaces PAS 11 Construction Contracts.

What is revenue under PFRS 15?

It is income earned from the normal business activities of an entity.

What is a contract under PFRS 15?

It is an agreement between two or more parties that creates enforceable rights and obligations.

What is a customer under PFRS 15?

It is a party that gets goods or services from an entity in exchange for payment.

What is the core principle of PFRS 15?

Revenue is recognized when goods or services are transferred to customers in the amount expected to be received.

What is Step 1 in revenue recognition under PFRS 15?

Identify the contract with the customer.

What is Step 2 in revenue recognition under PFRS 15?

Identify the performance obligations in the contract.

What is Step 3 in revenue recognition under PFRS 15?

Determine the transaction price.

What is Step 4 in revenue recognition under PFRS 15?

Allocate the transaction price to performance obligations.

What is Step 5 in revenue recognition under PFRS 15?

Recognize revenue when or as the obligation is satisfied.

What is a performance obligation?

It is a promise to deliver a distinct good or service to a customer.

When is a good or service considered distinct?

When the customer can benefit from it and it is separately identifiable from other promises.

What does “customer can benefit” mean?

The customer can use, sell, or gain value from the good or service.

What does “separately identifiable” mean?

The good or service is independent and not closely linked with other promised items.

What is the transaction price?

It is the amount the entity expects to receive for fulfilling a performance obligation.

How is transaction price allocated?

Based on the stand-alone selling prices of each good or service.

When is revenue recognized over time?

When the obligation is satisfied gradually as work progresses.

When is revenue recognized at a point in time?

When the obligation is fully completed at one moment.

How is revenue measured?

Based on the transaction price allocated to the completed obligation.

What is a construction contract?

A contract for building an asset or related assets that are closely connected.

What services are included in construction contracts?

Services like project management, architecture, demolition, and restoration.

Why are construction contracts usually long-term?

Because start and completion dates happen in different accounting periods.

What is the main issue in construction accounting?

Deciding when to recognize revenue and costs.

What are the criteria for a valid contract under PFRS 15?

Approved contract, clear rights, clear payment terms, commercial substance, and probable collection.

What does commercial substance mean?

The contract changes the entity’s future cash flows.

What happens if a contract does not meet the criteria?

No revenue is recognized; any payment received is recorded as a liability.

When can revenue be recognized from an invalid contract?

When obligations are done and payment is non-refundable or when the contract is terminated.

When are multiple contracts combined?

When they are negotiated together, depend on each other, or involve one performance obligation.

Is negotiating multiple contracts enough to combine them?

No, it is not enough by itself.

What counts as a performance obligation?

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

What is a series of distinct goods or services?

Similar items delivered in the same way over time.

What activities are NOT performance obligations?

Administrative tasks like setting up a contract.

When is a performance obligation satisfied over time?

When benefits are received continuously, asset is controlled by customer, or no alternative use and payment right exists.

What does “no alternative use” mean?

The asset cannot easily be used or sold to another customer.

What is an enforceable right to payment?

The entity can demand payment for work already completed.

When is a performance obligation satisfied at a point in time?

When none of the over-time conditions are met.

What is included in the transaction price for construction contracts?

Contract price plus possible changes if measurable and probable.

What factors can affect transaction price?

Variable amounts, financing, non-cash items, or payments to customers.

What is a fixed price contract?

A contract with a fixed total price or rate per unit.

What is a cost-plus contract?

A contract where costs are reimbursed plus a fee.

What is a cost-plus-variable-fee contract?

Costs plus a percentage fee.

What is a cost-plus-fixed-fee contract?

Costs plus a fixed amount fee.

When is cost-plus pricing used?

When project scope is uncertain or no similar project exists.

What is a disadvantage of cost-plus-variable-fee for contractors?

Profit may be too low if costs fluctuate.

What is a disadvantage for customers in cost-plus contracts?

Contractors may increase costs to earn more profit.

What is a stand-alone selling price?

The price a good or service would sell for separately.

What happens if there is only one performance obligation?

All transaction price is assigned to that one obligation.

How is revenue recognized over time?

Based on progress toward completion.

What are methods to measure progress?

Output methods and input methods.

What are input methods?

Measuring progress based on effort or resources used.

What are examples of inputs?

Costs, labor hours, machine hours, resources, and time.

What is the cost-to-cost method?

Progress is based on costs incurred compared to total expected costs.

What is the formula for percentage of completion (cost-to-cost)?

Total costs incurred to date divided by estimated total contract costs.

What do total costs incurred to date mean?

All costs spent from start until the current date.

What are estimated total contract costs?

Expected total cost to finish the project.

What is estimated cost to complete?

Remaining costs needed to finish the project.

What is the alternative formula for percentage of completion?

Costs incurred divided by costs incurred plus estimated costs to complete.

What is the efforts-expended (labor hours) method?

Progress is based on labor hours used compared to total expected labor hours.

What is the formula for labor-hours percentage of completion?

Total labor hours to date divided by estimated total labor hours.

What are contract costs?

Contract costs are all the costs related to getting and completing a contract.

What are the two types of contract costs?

(1) Costs to get a contract and (2) Costs to fulfill a contract.

What are incremental costs of obtaining a contract?

These are costs you only spend because you got the contract, like sales commission.

When are incremental costs recorded as an asset?

When the company expects to recover or get back those costs.

What happens to costs that would be spent even without getting the contract?

They are recorded as expenses right away, unless charged to the customer anyway.

When can incremental costs be expensed immediately as a shortcut?

When the asset will be used up in 1 year or less.

What are costs to fulfill a contract?

These are costs spent to complete or carry out the contract work.

How are fulfillment costs treated if covered by other standards?

They follow those standards like PAS 2 Inventories, PAS 16 Property, Plant and Equipment, or PAS 38 Intangible Assets.

When are fulfillment costs recorded as an asset?

When all conditions are met: directly related, help future performance, and expected to be recovered.

What does “directly related to a contract” mean?

The cost is clearly connected to a specific contract or expected contract.

What does “generate or enhance resources” mean?

The cost helps create or improve resources used to complete future work.

What does “expected to be recovered” mean?

The company expects to earn back the cost from the contract.

What are examples of directly related contract costs?

Direct materials like construction materials.

What is an example of direct labor cost?

Workers’ wages at the site, including supervisors.

What are other costs incurred only because of the contract?

Payments to subcontractors and moving equipment to and from the site.

What are more examples of contract-only costs?

Equipment rental and design/technical help directly related to the contract.

What are costs chargeable to the customer?

Costs that the contract allows to be billed to the customer, like warranty or repair costs.

What are allocated costs related to a contract?

Shared costs assigned to the contract, like insurance and depreciation.

What are examples of allocated costs?

Insurance and depreciation of equipment used in the contract.

What are more examples of allocated costs?

Design help not tied to one contract, supervision, and management costs.

What are additional allocated costs?

Borrowing costs under PAS 23 Borrowing Costs and other overhead.

What costs are expensed immediately?

General admin costs not reimbursed by the contract.

What is another cost that is expensed immediately?

Wasted materials, labor, or resources not included in contract price.

What selling-related costs are expensed?

All selling costs are expensed right away.

What R&D costs are expensed?

Research and development not reimbursed by the contract.

What happens to depreciation of idle equipment?

It is expensed if the equipment is not used in the contract.

What costs related to past performance are expensed?

Costs for work already done or partly done are expensed.

What happens to unclear costs (past vs future)?

They are expensed if the company cannot tell where they belong.

How is incidental income from construction treated?

It reduces contract costs, like selling scrap materials.

How are contract cost assets amortized?

They are spread out based on how goods/services are delivered to the customer.

When is impairment loss recognized?

When the asset value is higher than expected remaining benefits minus related costs.

What is the formula for percentage of completion?

Percentage of completion
=
Costs incurred to date
Estimated total contract costs
Percentage of completion=
Estimated total contract costs
Costs incurred to date
​

What is the percentage of completion if 4,500,000 is incurred out of 10,000,000?

45%.

What is a weakness of input methods?

Costs used may not match actual transfer of control to the customer.

When are inputs adjusted in measuring progress?

When costs don’t properly reflect actual work progress.

What costs are excluded in cost-to-cost method?

Costs that don’t help progress, like wasted materials and inefficiencies.