Reviewer PFRS 15 Revenue from Contracts with Customers PDF

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PFRS 15 Revenue from Contracts with CustomersIncome vs. Revenue The Conceptual Framework provides the following definitions:Income – increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in eq...

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PFRS 15 Revenue from Contracts with Customers Income vs. Revenue The Conceptual Framework provides the following definitions: Income – increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income encompasses both revenue and gains. Revenue – income arising in the course of an entity’s ordinary activities. Applicability of PFRS 15 PFRS 15 shall be applied to contracts wherein the counterparty is a customer. • Contract – An agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied by an entity’s customary business practice. • Customer – A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. PFRS 15 shall not be applied to the following: • Lease contracts (PAS 17 Leases); • Insurance contracts (PFRS 4 Insurance Contracts); • Financial instruments; and • Non-monetary exchanges between entities in the same line of business to facilitate sales to customers. For example, PFRS 15 is not applicable to a contract between two oil companies that agree to exchange oil to fulfil customer demands in different locations on a timely basis. Core principle An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Steps in the recognition of revenue PFRS 15 requires the following steps in recognizing revenue: • Step 1: Identify the contract with the customer • Step 2: Identify the performance obligations in the contract • Step 3: Determine the transaction price • Step 4: Allocate the transaction price to the performance obligations in the contract • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Step 1: Identify the contract with the customer REQUIREMENTS BEFORE A CONTRACT WITH A CUSTOMER IS ACCOUNTED FOR UNDER PFRS 15: • THE CONTRACT MUST BE APPROVED AND THE CONTRACTING PARTIES ARE COMMITTED TO IT; • RIGHTS AND PAYMENT TERMS ARE IDENTIFIABLE; • THE CONTRACT HAS COMMERCIAL SUBSTANCE; AND • THE CONSIDERATION IS PROBABLE OF COLLECTION. (THE CONTRACT DOES NOT RESULT TO A CHANGE IN THE RISK, TIMING OR AMOUNT OF THE ENTITY’S FUTURE CASH FLOWS)

No revenue is recognized if the contract does not meet the criteria above. Any consideration received is recognized as liability.

Step 2: Identify the performance obligations in the contract Each promise in a contract to transfer a distinct good or service is treated as a separate performance obligation. Identifying distinct goods or services A good or service is distinct if: • the customer can benefit from it, either on its own or together with other resources that are readily available to the customer (e.g., the good or service is regularly sold separately); and • the good or service is separately identifiable (i.e., not an input to a combined output, does not significantly modify the other promises, or not highly interrelated with the other promises). A good or service that is not distinct shall be combined with the other promises in the contract. Combined promises are treated as a single performance obligation. Step 3: Determine the transaction price • The entity shall determine the transaction price because this is the amount at which revenue will be measured. • Transaction price is “the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (e.g., some sales taxes).” The consideration may include fixed amounts, variable amounts, or both. Step 4: Allocate the transaction price to the performance obligations • The transaction price shall be allocated to each performance obligation identified in a contract based on the relative stand-alone prices of the distinct goods or services promised to be transferred. •

The stand-alone selling price is the price at which a promised good or service can be sold separately to a customer.

Estimating the stand-alone selling price If the stand-alone selling price is not directly observable, the entity shall estimate it using one or a combination of the following methods: • • •

Adjusted market assessment approach – the entity evaluates the market in which it sells goods or services and estimates the price that a customer in that market would be willing to pay for those goods or services. Expected cost plus a margin approach – the entity forecasts its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. Residual approach – the entity estimates the stand-alone selling price as the total transaction price less the sum of the observable stand-alone selling prices of other goods or services promised in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation • A performance obligation is satisfied when the control over a promised good or service is transferred to the customer. • Revenue is measured at the amount of the transaction price allocated to the satisfied performance obligation. • Performance obligations are classified into the following: • Performance obligation that is satisfied over time • Performance obligation that is satisfied at a point in time Performance obligations satisfied over time For a performance obligation that is satisfied over time, revenue is recognized over time AS...