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IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
FIVE STEP MODEL Step 1: Identify the contract(s) with customer Step 2: Identify the performance of obligations in the contract Step 3: Determine the Transaction price Step 4: Allocate the transaction price to performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Step 1: Identify the contract(s) with customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
Enforceability of the rights and obligation in a contract is a matter of law.
Contracts can be written, oral or implied by an entity’s customary business practices.
Step 1: Identify the contract(s) with customer
A contract is within the scope of the model only when all of the following criteria are met
The parties of the contract have approved the contract.. And are committed to perform their respective obligation
The entity can identify each party’s rights regarding the goods or services to be transferred.
The entity can identify the payment for the goods or services to transferred
The contract has commercial substance and
It is probable that the entity will collect the consideration…
Step 2: Identify the performance of obligations in the contract
A performance obligation is a promise to transfer to the customer either: A good or service (or a bundle of goods or services) that is distinct
or
A series of distinct goods or services that are substantially the same and that have the same pattern transfer to the customer
Includes implied promises which do not need to be enforceable by law.
(e.g implied by customary business practices, published policies or specific statements)
Step 2: Identify the performance of obligations in the contract
A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:
Each distinct good or services in the series that the entity promises to transfer to the customer would meet the criteria to be a performance obligation over time.
and
The same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.
Step 2: Identify the performance of obligations in the contract
A good or service that is promised to customer is distinct if both of the following criteria are met:
The customer can be benefit from the good or service either on its own or together with other resources 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.
If not distinct, combine that good or service with other promised goods or services until it identifies a bundle of goods or services that distinct.
Step 2: Identify the performance of obligations in the contract
PERFORMANCE OBLIGATION- SINGLE VS. SEPARATE In each of the following cases, identify the performance obligation (s) Case A. Aircraft Company signs a contract to sell airplanes to Singapore Airlines for P300 million. Aircraft also agreed to maintain the planes in the amount of P60 million for three years. Case B. Delta Motors sells an automobile to Speed Auto Dealers at a price that includes six months of telematics services such as navigation and remote diagnostics. These telematics services are regularly sold on a stand alone basis by Delta Motors from a monthly fee. After six month period the consumer can renew these services on a fee basis with Delta Motors. Case C. NovTech Inc. licenses customer-relationship software to XYZ Company. In addition to providing the software itself, NovTech promises to perform consulting services by extensively customizing the software to XYZ’s Information Technology environment, for a total consideration of P1,800,000. Case D. ABC Computer Inc. manufactures and sells computers that include warranty to make good on any defect in its computers for 120 days. In addition, it sells separately extended warranty, which provides protection from defects for 3 yrs beyond the 120 days. Case E. FitX is an online fitness community, offering access to workout routines, nutrition advice and FitX coaches. Customers pay a P4,000 fee to become ed on the website and then pay P500 per month for access to all FitX Services.
Step 2: Identify the performance of obligations in the contract
PERFORMANCE OBLIGATION- SINGLE VS. SEPARATE In each of the following cases, identify the performance obligation (s) Case H. MasterDust Vacuums sells the ultra vacuum cleaner. Each Ultra has six-month warranty that covers any product defects. When customers purchase an Ultra, they also have the option to purchase an extended two-year warranty that covers any breakage or maintenance. The extended warranty sells for the same amount regardless of whether it is purchased at the time as the Ultra or at some other time.
Case G. Buff & FitNess Center is a health club that offer various gym services. Assume Buff & FitNess offers a deal whereby enrolling in a new hip for P14,000 provides a year of unlimited access to facilities and also entitles the member to receive a voucher redeemable for 25% off yoga classes for one year. The yoga classes are offered to gym as well as to general public. A new hip normally sells for P16,800 and a one year enrollment in yoga classes sells an additional P7,000.
Step 2: Identify the performance of obligations in the contract
PERFORMANCE OBLIGATION- SINGLE VS. SEPARATE In each of the following cases, identify the performance obligation (s) Case H. NOP Company enters into a contract to build, run, and maintain a highly complex piece of electronic equipment for a period of 5 yrs. Commencing upon delivery of the equipment. There is a fixed fee for each build, run, and maintenance deliverables, and any progress payments made are non-refundable. All the deliverables has a stand alone value. There is a verifiable evidence of the selling price for the building and maintenance but not for running equipment. Case I. Entity J is a software development company that provides hosting services to a variety of consumer product entities. Entity J offers a hosted inventory management software product that requires the customer to purchase hardware from Entity J. the hardware, is always sold in a package and the customer cannot use the hardware on its own or with resources readily available to it. In Addition, customers may purchase professional services from Entity J to migrate historical data and create interfaces with existing back office ing systems. Entity J always delivers the hardware first, followed by professional services and finally, the on going hosting services.
Step 3: Determine the Transaction price
An entity shall consider the of the contract and it customary business practices to determine the transaction price.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to customer, excluding amounts collected on behalf of third parties
The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
Step 3: Determine the Transaction price
When determining the transaction price an entity shall consider the effects of all of the following:
Variable consideration: An entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. Constraining estimates of variable consideration: amount of variable consideration estimated should include amount only to the extent that it is highly probable that a significant reversal of revenue recognized will not occur.
The existence of a significant financing component in the contract: adjust the promised amount of consideration for the effects of the time value of money.
Step 3: Determine the Transaction price
When determining the transaction price an entity shall consider the effects of all of the following: (continuation)
Non cash consideration: an entity shall measure the non cash consideration at fair value. If cannot be reasonably estimated, entity shall use the stand alone selling price of the goods or services promised to the customer in exchange for the consideration Consideration payable to a customer: Reduction of the transaction price and, therefore of revenue unless the payment to the customer is in exchange for a distinct good or service.
Step 3: Determine the Transaction price Variable consideration and constraining estimates of variable consideration Variability may be explicitly stated in the contract. In addition to the of the contract, the promised consideration is variable if either of the following exist:
The customer has a valid expectation arising from an entity’s customary business practices, published policies or specific statements that the entity will accept an amount of consideration that is less than the price of stated in the contract.
Other facts and circumstances indicate that the entity’s intention, when entering into a contract, is to offer a price concession to the customer.
Step 3: Determine the Transaction price Variable consideration and constraining estimates of variable consideration Methods in estimating the amount of variable consideration:
Expected value: the sum of probability-weighted amounts in range of possible consideration amounts
The most likely amount: the single most likely amount in a range of possible consideration amounts.
Note: an entity shall apply one method consistently throughout the contract when estimating the effect of uncertainty on an amount of variable consideration to which the entity will be entitled.
Step 3: Determine the Transaction price Variable consideration and constraining estimates of variable consideration Factors that would increase the likelihood or magnitude of a revenue reversal
The amount of consideration is highly susceptible to factors outside the entity’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
The entity’s experience (or other evidence) with similar types of contracts is limited or has limited predictive value.
The entity has a practice of either offering a broad range of price concessions or changing the payment and conditions of similar contracts in similar circumstances.
The contract has a large number and broad range of possible consideration amounts.
Step 3: Determine the Transaction price
The existence of significant financing component
The objective when adjusting the promised amount of consideration for a significant financing component is for an entity to recognize revenue at an amount that reflects that price that would have been paid if the customer would have paid cash. An entity need not adjust if the period between the transfer of promised good or service to customer and payment will be one year or less. An entity shall present the effects of financing (interest revenue or interest expense separately from revenue in the statement of comprehensive income.
Step 3: Determine the Transaction price
TRANSACTION PRICE (REVENUE IS CONSTRAINED)
On May 1,2017 QRS Construction Company, entered into a contract to construct a commercial building for a customer on a customer’s property for a consideration of P7,500,000 and a bonus of P1,500,000 if the building is completed within 24 months. On the inception date, the entity expects total construction cost of P5,250,000 to complete the building. The entity s for the promised bundle of goods and services as a single performance obligation satisfied over time in accordance with IFRS 15 because the customer controls the asset it is created or enhance. at contract inception, the entity cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur with respect to inclusion of bonus to contract price. Completion of the building is highly susceptible to factors outside the entity’s influence including weather and regulatory approvals. In addition, the entity has limited experience with this similar types of contracts. The entity determines that the input measure, on the basis of costs incurred provides an Appropriate measure of progress towards complete satisfaction of the performance obligation. As of December 31,2017, the construction costs incurred to date by QRS Construction Company is P3,150,000. in the first quarter of 2018, the parties to the contract agree to modify the contract by changing the design of the building. As a result, the fixed consideration and expected cost increase by P1,125,000 and P900,000, respectively. In addition, the allowable time for achieving the P1,500,000 bonus is extended by 6 months or to 30 months from the original contract inception date. At the date of modification, on the basis of its experience and the remaining work to be performed, which is primary inside the building and not subject to weather and conditions, the entity concludes that it is highly probable that including the bonus the transaction price will not result in a significant reversal in the amount of cumulative revenue recognized.
Despite the changes, the contractor evaluates that the remaining goods and services to be provided using the modified contract are not distinct from the goods and services transferred on or before the date of contract modification; that is, the contract remains a single performance obligation. For the year ended December 31, 2018, QRS Company incurred the transaction cost of P1,462,500. Compute the balance of construction in progress as of December 31,2018 and realized gross profit to be recognized by QRS Company for the year ended December 31,2018?
Step 3: Determine the Transaction price
ESTIMATING OF VARIABLE CONSODERATION
XYZ Corporation enters into a contract with a customer to build a warehouse for P5,000,000 with a performance bonus of P2,500,000 that will be paid base on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed upon completion date. The contract requirements are similar to contract that XYZ has performed previously, and a management believes that such experience is predictive to contract. Management estimates that there is a 60% probability that the contract will be completed by the agreed upon completion date, a 30% probability that it will be completed 1 week late, and only a 10% probability that it will be completed 2 weeks late. Compute for the total transaction price.
Step 3: Determine the Transaction price
ESTIMATING OF VARIABLE CONSODERATION AND CONSIDERING THE EFFECT OF THE CONSTRAINT
Entity X provides transportation to botanical garden customers to and from accommodation in the area under a 1 year agreement. It is required to provide scheduled transportation throughout the year for a fixed fee of P50,000 annually. Entity X also is entitled to performance bonuses for ontime performance and average customer at times. Its performance may yield a bonus from 0 to 75,000 under the contract. Based on the history of the botanical garden, customer travel patterns and its current expectations, Entity X estimates the probabilities for different amounts of bonus within the range as follows: Bonus 0 P25,000 P50,000 P75,000
Probability Outcome 20% 25% 15% 40%
Compute for the total transaction price using the expected value and using most likely amount.
Step 3: Determine the Transaction price
TRANSACTION PRICE- VOLUME DISCOUNT
DEF Company offers its customers a 3% volume discount if they purchase at least P4,000,000 of its product during the calendar year. On March 31,2017, DEF has made sales of P1,400,000 to JKL Company. In the previous 2 years, DEF sold over P6,000,000 to JKL Company in the period April 1 to Dec 31. How much revenue should DEF recognized for the first 3 months of 2017? Prepare the journal entry assuming that DEF’s customer meets the discount threshold. Prepare the journal entry assuming that DEF’s customer fails to meet the discount.
Step 4: Allocate the transaction price to performance obligation contracts The objective of allocation is to allocate the transaction price to each performance obligation in an amount that depicts the consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. An entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand alone selling price basis except for allocating discounts and consideration that includes variable amounts.
Step 4: Allocate the transaction price to performance obligation contracts
ALLOCATION BASED ON THE STAND-ALONE SELLING PRICE
OBSERVABLE PRICE AVAILABLE
USE ESTIMATED PRICE
• Adjusted market assessment approach • Expected cost plus a margin approach • Residual approach
USE THE OBSERVABLE PRICE
Step 4: Allocate the transaction price to performance obligation contracts Changes in Transaction Price
An entity shall allocate the performance obligations in the contract any subsequent changes in the transaction price on the same basis as a contract inception.
An entity shall for a change in the transaction price that arises from contract modification based on the contract modification guidance.
Step 4: Allocate the transaction price to performance obligation contracts CONTRACT MODIFICATION
A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract.
A contract modification is ed for as a separate contract if both of the following conditions are present: The scope of the contract increases because of the addition of promised goods or services that are distinct
AND
The price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the contract
Step 4: Allocate the transaction price to performance obligation contracts CONTRACT MODIFICATION If a contract modification is not ed for as separate contract, an entity shall for the promised goods or services not yet transferred at the date of the contract modification in whichever of the following ways: A. as if it was a termination of the existing contract and a creation of a new one, if the remaining goods or services are distinct from the goods or services transferred on or before the date of contract modification
B. As if it was a part of the existing contract if the remaining goods or services are not distinct and therefore, form part of a single performance obligation (cumulative catch up) c. If the remaining goods or services are a combination of items (a) and (b), then for the effects of the modification on the unsatisfied performance obligations in the modified contract in a manner that is consistent with the objectives of this paragraph.
Step 4: Allocate the transaction price to performance obligation contracts MULTIPLE CONTRACT OBLIGATION
ABC Company is an experienced manufacturer of equipment use in the construction industry. ABC’s products range from the small to large individual pieces of automated machinery to complex systems containing numerous components. Unit selling prices range from P1,200,000 to P8,000,000 and are quoted inclusive of installation and training. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for installed equipment to perform to specifications. ABC has the following arrangements with KLM Company: KLM purchase equipment from ABC for a price of P4,000,000 and chooses ABC to do installation. ABC charges the same price for the equipment irrespective of whether it dies the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work because of relationships with other customers.) the price of the installation service is estimated to have a fair value of P40,000. The fair value of the training sessions is estimated at P100,000, other companies can also perform these training services. KLM is obliged to pay ABC the P4,000,000 upon the delivery and installation of the equipment. ABC delivers the equipment and completes the installation of the equipment on November 01, 2017. training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years. The equipment has a costs of P3,000,000.
What are the performance obligations for purposes of ing for the sale of equipment? If there is more than 1 performance obligation, how should the payment of P4,000,000 be allocated to various components?
Step 4: Allocate the transaction price to performance obligation contracts CONTRACT MODIFICATIONS- “DINSTINCT” AND “STAND ALONE SELLING PRICE”
WYX Company has a contract to sell 300 products to a customer for P30,000 at various points in time over a six-month period. After 180 products have been delivered, WYX modifies the contract by promising to deliver 60 more products for an additional P5,700. WYX regularly sells the products separately. How will the additional 60 products affect the ing for the original contract? How much is the total revenue after the modification? What if the additional products are not priced at the proper standalone selling price or if they are not distinct- how will the answer (a) and (b) change?
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation
An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied at a point in time Control of an Asset
Ability to direct the use of, and obtain substantially all of the remaining benefits from the asset
Includes the ability to prevent other entities from directing the use of, and obtaining the benefits from an asset
An entity shall also consider in evaluating control any agreement to repurchase the asset
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied at a point in time Indicators of transfer of control
The entity has a present right to payment for the asset
The customer has a legal title to the asset
The entity has transferre d physical possession of the asset
The customer has a significant risk and rewards of ownership of the asset
The customer has accepted the asset
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied over time An entity transfers control of a good service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
or
The entity’s performance creates or enhances an asset that the customers controls as the asset created or enhance
or
The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for the performance completed to date
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied over time
Measuring progress towards complete satisfaction of a performance obligation Methods for measuring progress
OUTPUT METHOD • The most faithful depiction of an entity’s performance of there is no preferable measure of progress. • Directly measures the value of the goods and services transferred to the customer
INPUT METHOD • Recognize revenue based on an entity’s efforts or inputs towards satisfying a performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied over time
Measuring progress towards complete satisfaction of a performance obligation
Single Method of measuring progress of each performance obligation satisfied over time an shall be applied consistently to similar performance obligations and in similar circumstances
As circumstances change over time, an entity shall update the its measure of progress to reflect any changes in the outcome of the performance obligation
Such changes shall be ed for as a change in ing estimate.
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation CONTRACT ASSETS- CONDITIONAL RIGHTS TO RECEIVE CONSIDERATION On January 1, 2017, EFG Company enters into a contract to transfer Product B to HIJ Company for P500,000. The contract specifies that payment of product A will not occur until Product B is also delivered. In other words, payment will not occur until both Product A an Bare transferred to HIJ. EFG determines that standalone prices are P150,000 and P350,000 for Product B. EFG delivers the Product A to HIJ on February 1,2017. On March 1,2017 EFG delivers Product B to EFG. What journal entries should EFG Company make in regards to this contract in 2017? CONTRACT LIABILITY- UNEARNED SALES REVENUE
On March 1, 2017,NOP Company enters into a contract to transfer product to RST Inc. On July 31,2017. It is Agreed that RST will pay the full price of P60,000 in advance on April 1,2017. the contract is noncancellabe. RST however does not pay until April 15, 2017, and NOP delivers the product on July 31, 2017. the cost of the product is P45,000.
What is the journal entries should NOP Company make in regards to this contract in 2017?
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation REVENUE RECOGNITION FOR FRANCHISES (AT POINT IN TIME VS. OVER A PERIOD OF TIME. EFG operates and franchises restaurants around the world. On January 1,2017, EFG entered into a franchise agreement with a franchisee. As part of its franchise agreement, EFG requires the franchisee to pay non refundable upfront franchise fee of P570,000 upon opening a restaurant and on going payment of royalties, based on 10% of franchisee’s sales. As part of the franchise agreement, EFG provides pre-operating services, including supply installation of cooking equipment and cash s, valued at P180,000, which is the stand alone selling price of the pre opening services. In addition the franchisee agreement includes a license of intellectual property such as EFG’s trademark and trade name to the franchisee. EFG has determined that the license provides a right to access the intellectual property over time. EFG has determined the standalone selling price of the license is P420,000. The franchise agreement has a term of 10 years. On January 1,2017, the franchisee paid the non refundable upfront franchise fee of P570,000 to EFG. The franchisor evaluates the arrangement and determines it meets the criteria to be ed for as a contract with a customer under IFRS 15. EFG determines its pre-opening services and license of intellectual property are each distinct and, therefore, need to be ed for a separate performance obligations. As of December 31,2017, EFG already satisfied its performance obligation to supply and install cooking equipment and cash to the franchisee. For the year ended December 31,2017, the franchisee reported sales revenue of P600,000. Compute for the total revenue shall be recognized by EFG for the year ended December 31,2017?
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation RECOGNITION OVER TIME In each of the following cases, identify the criteria in recognizing revenue over time CASE A. XYZ Co. enters into a contract to provide weekly cleaning services to a customer for 2 years. The promised cleaning services are ed for as a single performance obligation. Another entity would not need to re-perform the cleaning services that XYZ Co. has provided to date. CASE B. ABC Co. enters into an agreement to build integrated IT System that interfaces sales, procurement and ing functions. ABC Co. is expected to take one year to complete the work. During the development of the integrated system, ABC Co. works extensively with the customer to design and configure the system as well as to run tests to check its operability. CASE C. HIJ Co. enters into a contract to construct a highly customized piece of equipment subject to specifications provided by the customer. If the customer were to terminate the contract for reasons other than HIJ’s failure to perform as promised, the contract requires the customer to compensate HIJ Co. for its cost incurred plus a 10% margin. The contract also contain an enforceable restriction to HIJ’s ability to direct the equipment for another use.
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- RIGHT OF RETURN
ABC Company sells 400 products for P100 each to XYZ Company for cash. ABC allows XYZ to return any product which unused or because of dissatisfaction within 30 days and receive a full refund. The cost of each product is P60. to determine the transaction price, ABC decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, ABC estimates that: • Twelve products will be returned. • The costs of recovering the products will be immaterial • The returned products are expected to be resold at a profit How should ABC Record this sale? Prepare journal entry when a return occurs.
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- REPURCHASE AGREEMENT
QRS Inc., an equipment dealer, sells equipment on January 1,2017, to HIJ Company for P200,000. it agrees to repurchase this equipment from HIJ Company on December 31,2018, for a price of P242,000. Assuming interest rate of 10% is imputed from the agreement.
Should QRS Inc., record a sale for this transaction? Prepare a journal entries on January 1,2017, December 31, 2017 and 2018
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- BILL AND HOLD ARRANGEMENT
FGH Company sells P900,000 with costs of P560,000 of the fire places on March 1, 2017 to a local coffee shop, LMN, which is planning to expand its locations around the city. Under the agreement, LMN asks FGH to retain these fire places in its warehouses until the new coffee shops that will house the fire place are ready. Title es to LMN at the time the agreement is signed.
When should FGH recognize the revenue from this bill-and-hold arrangement? Prepare the necessary journal entry (if any) on March 1,2017.
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- CONSIGNMENTS CASE A. ABC Manufacturing Company ships merchandise costing P72,000 on consignment to XYZ stores. ABC pays P7,500 of freight costs, and XYZ pays P4,500 for local advertising costs that are reimbursable from ABC. By the end of the period, XYZ has sold 2/3 of the consigned merchandise for P80,000 cash. XYZ notifies ABC of the sales, retains 10%commission, and remits the cash due to ABC. What are the journal entries that the consignor and the consignee make to record this transaction? CASE B. ABC Company consigned five tablets with cost of P16,000 each to XYZ Company. The tablets were to be sold on either cash or credit basis to a commission of 15% of selling price. The ABC Company paid shipping costs of P4,000 on the shipment. Correspondingly, XYZ Company paid P6,400 on the freight of the shipment. On the last day of the year, XYZ Company reported that it had sold three of the tablets, two for cash at P30,000 each and one on credit at P36,000, of which 25% was collected as down payment. XYZ Company remitted all the cash due. The amount of cash remitted by XYZ Company? the consignment profit is??
FIVE STEP MODEL Step 1: Identify the contract(s) with customer Step 2: Identify the performance of obligations in the contract Step 3: Determine the Transaction price Step 4: Allocate the transaction price to performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Step 1: Identify the contract(s) with customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
Enforceability of the rights and obligation in a contract is a matter of law.
Contracts can be written, oral or implied by an entity’s customary business practices.
Step 1: Identify the contract(s) with customer
A contract is within the scope of the model only when all of the following criteria are met
The parties of the contract have approved the contract.. And are committed to perform their respective obligation
The entity can identify each party’s rights regarding the goods or services to be transferred.
The entity can identify the payment for the goods or services to transferred
The contract has commercial substance and
It is probable that the entity will collect the consideration…
Step 2: Identify the performance of obligations in the contract
A performance obligation is a promise to transfer to the customer either: A good or service (or a bundle of goods or services) that is distinct
or
A series of distinct goods or services that are substantially the same and that have the same pattern transfer to the customer
Includes implied promises which do not need to be enforceable by law.
(e.g implied by customary business practices, published policies or specific statements)
Step 2: Identify the performance of obligations in the contract
A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:
Each distinct good or services in the series that the entity promises to transfer to the customer would meet the criteria to be a performance obligation over time.
and
The same method would be used to measure the entity’s progress towards complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.
Step 2: Identify the performance of obligations in the contract
A good or service that is promised to customer is distinct if both of the following criteria are met:
The customer can be benefit from the good or service either on its own or together with other resources 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.
If not distinct, combine that good or service with other promised goods or services until it identifies a bundle of goods or services that distinct.
Step 2: Identify the performance of obligations in the contract
PERFORMANCE OBLIGATION- SINGLE VS. SEPARATE In each of the following cases, identify the performance obligation (s) Case A. Aircraft Company signs a contract to sell airplanes to Singapore Airlines for P300 million. Aircraft also agreed to maintain the planes in the amount of P60 million for three years. Case B. Delta Motors sells an automobile to Speed Auto Dealers at a price that includes six months of telematics services such as navigation and remote diagnostics. These telematics services are regularly sold on a stand alone basis by Delta Motors from a monthly fee. After six month period the consumer can renew these services on a fee basis with Delta Motors. Case C. NovTech Inc. licenses customer-relationship software to XYZ Company. In addition to providing the software itself, NovTech promises to perform consulting services by extensively customizing the software to XYZ’s Information Technology environment, for a total consideration of P1,800,000. Case D. ABC Computer Inc. manufactures and sells computers that include warranty to make good on any defect in its computers for 120 days. In addition, it sells separately extended warranty, which provides protection from defects for 3 yrs beyond the 120 days. Case E. FitX is an online fitness community, offering access to workout routines, nutrition advice and FitX coaches. Customers pay a P4,000 fee to become ed on the website and then pay P500 per month for access to all FitX Services.
Step 2: Identify the performance of obligations in the contract
PERFORMANCE OBLIGATION- SINGLE VS. SEPARATE In each of the following cases, identify the performance obligation (s) Case H. MasterDust Vacuums sells the ultra vacuum cleaner. Each Ultra has six-month warranty that covers any product defects. When customers purchase an Ultra, they also have the option to purchase an extended two-year warranty that covers any breakage or maintenance. The extended warranty sells for the same amount regardless of whether it is purchased at the time as the Ultra or at some other time.
Case G. Buff & FitNess Center is a health club that offer various gym services. Assume Buff & FitNess offers a deal whereby enrolling in a new hip for P14,000 provides a year of unlimited access to facilities and also entitles the member to receive a voucher redeemable for 25% off yoga classes for one year. The yoga classes are offered to gym as well as to general public. A new hip normally sells for P16,800 and a one year enrollment in yoga classes sells an additional P7,000.
Step 2: Identify the performance of obligations in the contract
PERFORMANCE OBLIGATION- SINGLE VS. SEPARATE In each of the following cases, identify the performance obligation (s) Case H. NOP Company enters into a contract to build, run, and maintain a highly complex piece of electronic equipment for a period of 5 yrs. Commencing upon delivery of the equipment. There is a fixed fee for each build, run, and maintenance deliverables, and any progress payments made are non-refundable. All the deliverables has a stand alone value. There is a verifiable evidence of the selling price for the building and maintenance but not for running equipment. Case I. Entity J is a software development company that provides hosting services to a variety of consumer product entities. Entity J offers a hosted inventory management software product that requires the customer to purchase hardware from Entity J. the hardware, is always sold in a package and the customer cannot use the hardware on its own or with resources readily available to it. In Addition, customers may purchase professional services from Entity J to migrate historical data and create interfaces with existing back office ing systems. Entity J always delivers the hardware first, followed by professional services and finally, the on going hosting services.
Step 3: Determine the Transaction price
An entity shall consider the of the contract and it customary business practices to determine the transaction price.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to customer, excluding amounts collected on behalf of third parties
The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
Step 3: Determine the Transaction price
When determining the transaction price an entity shall consider the effects of all of the following:
Variable consideration: An entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. Constraining estimates of variable consideration: amount of variable consideration estimated should include amount only to the extent that it is highly probable that a significant reversal of revenue recognized will not occur.
The existence of a significant financing component in the contract: adjust the promised amount of consideration for the effects of the time value of money.
Step 3: Determine the Transaction price
When determining the transaction price an entity shall consider the effects of all of the following: (continuation)
Non cash consideration: an entity shall measure the non cash consideration at fair value. If cannot be reasonably estimated, entity shall use the stand alone selling price of the goods or services promised to the customer in exchange for the consideration Consideration payable to a customer: Reduction of the transaction price and, therefore of revenue unless the payment to the customer is in exchange for a distinct good or service.
Step 3: Determine the Transaction price Variable consideration and constraining estimates of variable consideration Variability may be explicitly stated in the contract. In addition to the of the contract, the promised consideration is variable if either of the following exist:
The customer has a valid expectation arising from an entity’s customary business practices, published policies or specific statements that the entity will accept an amount of consideration that is less than the price of stated in the contract.
Other facts and circumstances indicate that the entity’s intention, when entering into a contract, is to offer a price concession to the customer.
Step 3: Determine the Transaction price Variable consideration and constraining estimates of variable consideration Methods in estimating the amount of variable consideration:
Expected value: the sum of probability-weighted amounts in range of possible consideration amounts
The most likely amount: the single most likely amount in a range of possible consideration amounts.
Note: an entity shall apply one method consistently throughout the contract when estimating the effect of uncertainty on an amount of variable consideration to which the entity will be entitled.
Step 3: Determine the Transaction price Variable consideration and constraining estimates of variable consideration Factors that would increase the likelihood or magnitude of a revenue reversal
The amount of consideration is highly susceptible to factors outside the entity’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
The entity’s experience (or other evidence) with similar types of contracts is limited or has limited predictive value.
The entity has a practice of either offering a broad range of price concessions or changing the payment and conditions of similar contracts in similar circumstances.
The contract has a large number and broad range of possible consideration amounts.
Step 3: Determine the Transaction price
The existence of significant financing component
The objective when adjusting the promised amount of consideration for a significant financing component is for an entity to recognize revenue at an amount that reflects that price that would have been paid if the customer would have paid cash. An entity need not adjust if the period between the transfer of promised good or service to customer and payment will be one year or less. An entity shall present the effects of financing (interest revenue or interest expense separately from revenue in the statement of comprehensive income.
Step 3: Determine the Transaction price
TRANSACTION PRICE (REVENUE IS CONSTRAINED)
On May 1,2017 QRS Construction Company, entered into a contract to construct a commercial building for a customer on a customer’s property for a consideration of P7,500,000 and a bonus of P1,500,000 if the building is completed within 24 months. On the inception date, the entity expects total construction cost of P5,250,000 to complete the building. The entity s for the promised bundle of goods and services as a single performance obligation satisfied over time in accordance with IFRS 15 because the customer controls the asset it is created or enhance. at contract inception, the entity cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur with respect to inclusion of bonus to contract price. Completion of the building is highly susceptible to factors outside the entity’s influence including weather and regulatory approvals. In addition, the entity has limited experience with this similar types of contracts. The entity determines that the input measure, on the basis of costs incurred provides an Appropriate measure of progress towards complete satisfaction of the performance obligation. As of December 31,2017, the construction costs incurred to date by QRS Construction Company is P3,150,000. in the first quarter of 2018, the parties to the contract agree to modify the contract by changing the design of the building. As a result, the fixed consideration and expected cost increase by P1,125,000 and P900,000, respectively. In addition, the allowable time for achieving the P1,500,000 bonus is extended by 6 months or to 30 months from the original contract inception date. At the date of modification, on the basis of its experience and the remaining work to be performed, which is primary inside the building and not subject to weather and conditions, the entity concludes that it is highly probable that including the bonus the transaction price will not result in a significant reversal in the amount of cumulative revenue recognized.
Despite the changes, the contractor evaluates that the remaining goods and services to be provided using the modified contract are not distinct from the goods and services transferred on or before the date of contract modification; that is, the contract remains a single performance obligation. For the year ended December 31, 2018, QRS Company incurred the transaction cost of P1,462,500. Compute the balance of construction in progress as of December 31,2018 and realized gross profit to be recognized by QRS Company for the year ended December 31,2018?
Step 3: Determine the Transaction price
ESTIMATING OF VARIABLE CONSODERATION
XYZ Corporation enters into a contract with a customer to build a warehouse for P5,000,000 with a performance bonus of P2,500,000 that will be paid base on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed upon completion date. The contract requirements are similar to contract that XYZ has performed previously, and a management believes that such experience is predictive to contract. Management estimates that there is a 60% probability that the contract will be completed by the agreed upon completion date, a 30% probability that it will be completed 1 week late, and only a 10% probability that it will be completed 2 weeks late. Compute for the total transaction price.
Step 3: Determine the Transaction price
ESTIMATING OF VARIABLE CONSODERATION AND CONSIDERING THE EFFECT OF THE CONSTRAINT
Entity X provides transportation to botanical garden customers to and from accommodation in the area under a 1 year agreement. It is required to provide scheduled transportation throughout the year for a fixed fee of P50,000 annually. Entity X also is entitled to performance bonuses for ontime performance and average customer at times. Its performance may yield a bonus from 0 to 75,000 under the contract. Based on the history of the botanical garden, customer travel patterns and its current expectations, Entity X estimates the probabilities for different amounts of bonus within the range as follows: Bonus 0 P25,000 P50,000 P75,000
Probability Outcome 20% 25% 15% 40%
Compute for the total transaction price using the expected value and using most likely amount.
Step 3: Determine the Transaction price
TRANSACTION PRICE- VOLUME DISCOUNT
DEF Company offers its customers a 3% volume discount if they purchase at least P4,000,000 of its product during the calendar year. On March 31,2017, DEF has made sales of P1,400,000 to JKL Company. In the previous 2 years, DEF sold over P6,000,000 to JKL Company in the period April 1 to Dec 31. How much revenue should DEF recognized for the first 3 months of 2017? Prepare the journal entry assuming that DEF’s customer meets the discount threshold. Prepare the journal entry assuming that DEF’s customer fails to meet the discount.
Step 4: Allocate the transaction price to performance obligation contracts The objective of allocation is to allocate the transaction price to each performance obligation in an amount that depicts the consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. An entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand alone selling price basis except for allocating discounts and consideration that includes variable amounts.
Step 4: Allocate the transaction price to performance obligation contracts
ALLOCATION BASED ON THE STAND-ALONE SELLING PRICE
OBSERVABLE PRICE AVAILABLE
USE ESTIMATED PRICE
• Adjusted market assessment approach • Expected cost plus a margin approach • Residual approach
USE THE OBSERVABLE PRICE
Step 4: Allocate the transaction price to performance obligation contracts Changes in Transaction Price
An entity shall allocate the performance obligations in the contract any subsequent changes in the transaction price on the same basis as a contract inception.
An entity shall for a change in the transaction price that arises from contract modification based on the contract modification guidance.
Step 4: Allocate the transaction price to performance obligation contracts CONTRACT MODIFICATION
A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract.
A contract modification is ed for as a separate contract if both of the following conditions are present: The scope of the contract increases because of the addition of promised goods or services that are distinct
AND
The price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the contract
Step 4: Allocate the transaction price to performance obligation contracts CONTRACT MODIFICATION If a contract modification is not ed for as separate contract, an entity shall for the promised goods or services not yet transferred at the date of the contract modification in whichever of the following ways: A. as if it was a termination of the existing contract and a creation of a new one, if the remaining goods or services are distinct from the goods or services transferred on or before the date of contract modification
B. As if it was a part of the existing contract if the remaining goods or services are not distinct and therefore, form part of a single performance obligation (cumulative catch up) c. If the remaining goods or services are a combination of items (a) and (b), then for the effects of the modification on the unsatisfied performance obligations in the modified contract in a manner that is consistent with the objectives of this paragraph.
Step 4: Allocate the transaction price to performance obligation contracts MULTIPLE CONTRACT OBLIGATION
ABC Company is an experienced manufacturer of equipment use in the construction industry. ABC’s products range from the small to large individual pieces of automated machinery to complex systems containing numerous components. Unit selling prices range from P1,200,000 to P8,000,000 and are quoted inclusive of installation and training. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for installed equipment to perform to specifications. ABC has the following arrangements with KLM Company: KLM purchase equipment from ABC for a price of P4,000,000 and chooses ABC to do installation. ABC charges the same price for the equipment irrespective of whether it dies the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work because of relationships with other customers.) the price of the installation service is estimated to have a fair value of P40,000. The fair value of the training sessions is estimated at P100,000, other companies can also perform these training services. KLM is obliged to pay ABC the P4,000,000 upon the delivery and installation of the equipment. ABC delivers the equipment and completes the installation of the equipment on November 01, 2017. training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years. The equipment has a costs of P3,000,000.
What are the performance obligations for purposes of ing for the sale of equipment? If there is more than 1 performance obligation, how should the payment of P4,000,000 be allocated to various components?
Step 4: Allocate the transaction price to performance obligation contracts CONTRACT MODIFICATIONS- “DINSTINCT” AND “STAND ALONE SELLING PRICE”
WYX Company has a contract to sell 300 products to a customer for P30,000 at various points in time over a six-month period. After 180 products have been delivered, WYX modifies the contract by promising to deliver 60 more products for an additional P5,700. WYX regularly sells the products separately. How will the additional 60 products affect the ing for the original contract? How much is the total revenue after the modification? What if the additional products are not priced at the proper standalone selling price or if they are not distinct- how will the answer (a) and (b) change?
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation
An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied at a point in time Control of an Asset
Ability to direct the use of, and obtain substantially all of the remaining benefits from the asset
Includes the ability to prevent other entities from directing the use of, and obtaining the benefits from an asset
An entity shall also consider in evaluating control any agreement to repurchase the asset
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied at a point in time Indicators of transfer of control
The entity has a present right to payment for the asset
The customer has a legal title to the asset
The entity has transferre d physical possession of the asset
The customer has a significant risk and rewards of ownership of the asset
The customer has accepted the asset
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied over time An entity transfers control of a good service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
or
The entity’s performance creates or enhances an asset that the customers controls as the asset created or enhance
or
The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for the performance completed to date
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied over time
Measuring progress towards complete satisfaction of a performance obligation Methods for measuring progress
OUTPUT METHOD • The most faithful depiction of an entity’s performance of there is no preferable measure of progress. • Directly measures the value of the goods and services transferred to the customer
INPUT METHOD • Recognize revenue based on an entity’s efforts or inputs towards satisfying a performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation Performance obligations satisfied over time
Measuring progress towards complete satisfaction of a performance obligation
Single Method of measuring progress of each performance obligation satisfied over time an shall be applied consistently to similar performance obligations and in similar circumstances
As circumstances change over time, an entity shall update the its measure of progress to reflect any changes in the outcome of the performance obligation
Such changes shall be ed for as a change in ing estimate.
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation CONTRACT ASSETS- CONDITIONAL RIGHTS TO RECEIVE CONSIDERATION On January 1, 2017, EFG Company enters into a contract to transfer Product B to HIJ Company for P500,000. The contract specifies that payment of product A will not occur until Product B is also delivered. In other words, payment will not occur until both Product A an Bare transferred to HIJ. EFG determines that standalone prices are P150,000 and P350,000 for Product B. EFG delivers the Product A to HIJ on February 1,2017. On March 1,2017 EFG delivers Product B to EFG. What journal entries should EFG Company make in regards to this contract in 2017? CONTRACT LIABILITY- UNEARNED SALES REVENUE
On March 1, 2017,NOP Company enters into a contract to transfer product to RST Inc. On July 31,2017. It is Agreed that RST will pay the full price of P60,000 in advance on April 1,2017. the contract is noncancellabe. RST however does not pay until April 15, 2017, and NOP delivers the product on July 31, 2017. the cost of the product is P45,000.
What is the journal entries should NOP Company make in regards to this contract in 2017?
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation REVENUE RECOGNITION FOR FRANCHISES (AT POINT IN TIME VS. OVER A PERIOD OF TIME. EFG operates and franchises restaurants around the world. On January 1,2017, EFG entered into a franchise agreement with a franchisee. As part of its franchise agreement, EFG requires the franchisee to pay non refundable upfront franchise fee of P570,000 upon opening a restaurant and on going payment of royalties, based on 10% of franchisee’s sales. As part of the franchise agreement, EFG provides pre-operating services, including supply installation of cooking equipment and cash s, valued at P180,000, which is the stand alone selling price of the pre opening services. In addition the franchisee agreement includes a license of intellectual property such as EFG’s trademark and trade name to the franchisee. EFG has determined that the license provides a right to access the intellectual property over time. EFG has determined the standalone selling price of the license is P420,000. The franchise agreement has a term of 10 years. On January 1,2017, the franchisee paid the non refundable upfront franchise fee of P570,000 to EFG. The franchisor evaluates the arrangement and determines it meets the criteria to be ed for as a contract with a customer under IFRS 15. EFG determines its pre-opening services and license of intellectual property are each distinct and, therefore, need to be ed for a separate performance obligations. As of December 31,2017, EFG already satisfied its performance obligation to supply and install cooking equipment and cash to the franchisee. For the year ended December 31,2017, the franchisee reported sales revenue of P600,000. Compute for the total revenue shall be recognized by EFG for the year ended December 31,2017?
Step 5: Recognize revenue when (or as) the entity satisfies performance obligation RECOGNITION OVER TIME In each of the following cases, identify the criteria in recognizing revenue over time CASE A. XYZ Co. enters into a contract to provide weekly cleaning services to a customer for 2 years. The promised cleaning services are ed for as a single performance obligation. Another entity would not need to re-perform the cleaning services that XYZ Co. has provided to date. CASE B. ABC Co. enters into an agreement to build integrated IT System that interfaces sales, procurement and ing functions. ABC Co. is expected to take one year to complete the work. During the development of the integrated system, ABC Co. works extensively with the customer to design and configure the system as well as to run tests to check its operability. CASE C. HIJ Co. enters into a contract to construct a highly customized piece of equipment subject to specifications provided by the customer. If the customer were to terminate the contract for reasons other than HIJ’s failure to perform as promised, the contract requires the customer to compensate HIJ Co. for its cost incurred plus a 10% margin. The contract also contain an enforceable restriction to HIJ’s ability to direct the equipment for another use.
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- RIGHT OF RETURN
ABC Company sells 400 products for P100 each to XYZ Company for cash. ABC allows XYZ to return any product which unused or because of dissatisfaction within 30 days and receive a full refund. The cost of each product is P60. to determine the transaction price, ABC decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, ABC estimates that: • Twelve products will be returned. • The costs of recovering the products will be immaterial • The returned products are expected to be resold at a profit How should ABC Record this sale? Prepare journal entry when a return occurs.
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- REPURCHASE AGREEMENT
QRS Inc., an equipment dealer, sells equipment on January 1,2017, to HIJ Company for P200,000. it agrees to repurchase this equipment from HIJ Company on December 31,2018, for a price of P242,000. Assuming interest rate of 10% is imputed from the agreement.
Should QRS Inc., record a sale for this transaction? Prepare a journal entries on January 1,2017, December 31, 2017 and 2018
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- BILL AND HOLD ARRANGEMENT
FGH Company sells P900,000 with costs of P560,000 of the fire places on March 1, 2017 to a local coffee shop, LMN, which is planning to expand its locations around the city. Under the agreement, LMN asks FGH to retain these fire places in its warehouses until the new coffee shops that will house the fire place are ready. Title es to LMN at the time the agreement is signed.
When should FGH recognize the revenue from this bill-and-hold arrangement? Prepare the necessary journal entry (if any) on March 1,2017.
OTHER REVENUE RECOGNITION ISSUES OTHER REVENUE RECOGNITION ISSUES- CONSIGNMENTS CASE A. ABC Manufacturing Company ships merchandise costing P72,000 on consignment to XYZ stores. ABC pays P7,500 of freight costs, and XYZ pays P4,500 for local advertising costs that are reimbursable from ABC. By the end of the period, XYZ has sold 2/3 of the consigned merchandise for P80,000 cash. XYZ notifies ABC of the sales, retains 10%commission, and remits the cash due to ABC. What are the journal entries that the consignor and the consignee make to record this transaction? CASE B. ABC Company consigned five tablets with cost of P16,000 each to XYZ Company. The tablets were to be sold on either cash or credit basis to a commission of 15% of selling price. The ABC Company paid shipping costs of P4,000 on the shipment. Correspondingly, XYZ Company paid P6,400 on the freight of the shipment. On the last day of the year, XYZ Company reported that it had sold three of the tablets, two for cash at P30,000 each and one on credit at P36,000, of which 25% was collected as down payment. XYZ Company remitted all the cash due. The amount of cash remitted by XYZ Company? the consignment profit is??
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