Financial Accounting

Chapter 2 - Part I
The Income Statement and the
supplementary information in
the Notes

Revenue from contracts with

customers
Contents

Handbook

1. Structure and information of the Chapter 10

Income Statement

2. Components of the Operating Results Chapter 11

Chapter 12
3. Components of the Financial Results
Chapter 10

Structure and
information of the
Income Statement
Introduction
▪ The income statement (Profit and Loss account or P&L)
reports the income earned and expenses incurred during a
financial year.

▪ Net income (profit or loss for the year) is the difference

between the income and expenses for the year

▪ It is a dynamic financial statement. Income and expenses are

reflected on a cumulative basis.

▪ The income statement also shows management’s

stewardship of the entity’s resources and reports on the
entity’s financial performance and the components of
investor profitability.
Introduction

Increases in assets or reductions in liabilities, which therefore give rise to Contracts

increases in equity other than contributions from shareholders.
INCOME Events
There are three sources of income: contracts, events and changes in
value. Change in
value

Decreases in assets or reductions in liabilities, which therefore give rise to Contracts

decreases in equity other than contributions from shareholders.
EXPENSE Events
There are three sources of income: contracts, events and changes in
value. Change in
value
Relationship between the balance sheet
and the income statement​
Relationship between the balance sheet
and the income statement​

1 Profit & Loss for the year is part of 2 There is a specific relationship
the Equity. between some balance sheet
accounts and other Income
The difference between income Statement accounts.
and expenses in the period will be
incorporated to Equity. ▪ PPE and depreciation expense
Shareholders will decide if they ▪ Trade receivables & Income
want that profit to remain in Equity ▪ Financial debt & Financial
(Retained Earnings or Reserves) or expenses
if they want it to be distributed as
dividends.
Relationship between the balance sheet
and the income statement​
Relationship between the balance sheet
and the income statement​

Revenues grew by
18.5% over 2022.
This growth was
more than 40%
during 2021
Relationship between the balance sheet
and the income statement​

Trade Receivables
increased by 9,1% during
2022 and 37% during
2021, respectively.

Trade receivables
increase is mainly
explained by the
increase of Revenue.
However, we must also
consider the evolution of
the average collection
period
Relationship between the balance sheet
and the income statement​

PPE increased by 3,5%

in 2022.
Relationship between the balance sheet
and the income statement​

Depreciation, amortization and

impairment of fixed assets increased
almost 23%.
Relationship between the balance sheet
and the income statement​

Depreciation of PPE only increased by 3,6%. Most of the expense recognized in the section is related to
impairment losses.
Structure and information of the
Income Statement IASB defers the effective date of amendments to IAS 1 - PQ Magazine
Structure and information of the
Income Statement
Nature of expense method (IAS 1 – 102)
Nature of expense method classifies
expenses according to their nature
based on the type of economic
expenses incurred.

An entity aggregates expenses within

profit or loss according to their nature
(for example, depreciation, purchases
of materials, transport costs, employee
benefits and advertising costs), and
does not reallocate them among
functions within the entity.
This method may be simple to apply because no allocations of
expenses to functional classifications are necessary.
Structure and information of the
Income Statement
Structure and information of the
Income Statement
Function of expense or cost of sales
method (IAS 1 – 103) Function of expense method groups expenses
depending upon the purpose for which these
costs are incurred.

The function of expense method allocates and

combines expense items according to the activity
from which the item arises. For example, cost of
sales may combine expenses that arise from the
entity’s production activities, such as raw material
costs, labor costs and depreciation.

This method can provide more relevant information

to users than the classification of expenses by
nature, but allocating costs to functions may require
arbitrary allocations and involve considerable
judgement.
Structure and information of the
Income Statement

Gross Profit or Gross Margin is a

good measure of the profitability of
the core business of the entity

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Structure and information of the
Income Statement
The structure of the income statement must provide relevant information on the sources of income and expenses. The
classification of income and expenses in the Income Statement will depend on the nature of them:
▪ Continuing Operations: Activities that the company will continue to develop in the future:
▪ Operating activities: Corresponding to the management of operating resources and related to the day-to-day
business of the company.
▪ Financing Activities: Corresponding to the management of financial resources (assets or liabilities)

▪ Discontinued Activities: Results corresponding to a component of an entity that either has been disposed of or is
classified as held for sale (IFRS 5)
Structure and information of the
Income Statement
IASB has completed its project of reviewing primary financial statements to enhance the usefulness of the information
presented and disclosed in the financial statements. IFRS 18 replaces International Accounting Standard 1 (IAS 1)
The new standard will provide investors with more transparent and comparable information on companies' financial
results, aiding better investment decisions.
This standard will affect all companies using IFRS standards. It will be effective for annual accounting periods beginning
on or after January 1, 2027, with early application permitted for companies.
▪ Improvement of Income Statement Comparability: There are 3 new categories in the
classification of income and expenses (operation, investment, and financing) to improve
the structure of this statement and requires reporting two new regulatorily defined
subtotals: operating result and result before financing and taxes.
▪ Greater Transparency in Management Performance Measurements: IFRS 18 requires
companies to disclose explanations about company-specific measures related to the
income statement.
▪ Greater Granularity: IFRS 18 provides more detailed guidance on how to organize
information and whether it should be provided in the primary financial statements or the
notes.
 Revenue from contracts with customers​
Structure and information Changes in inventories of finished goods and work in progress​
Supplies​
of the Income Statement Other operating income​
Other operating expenses​
Expenses for employee benefits​
EBITDA
Amortization and depreciation​
Impairment on non-current operating assets​
Capital grants transferred to income​
Breakdown of the basic Results from disposal of non-current operating assets​
structure of the income Operating result
Finance income​
statement (according to
Finance expenses​
the nature of the Changes in fair value of financial instruments​
expense) Exchange gains/(losses)​
Impairment and gains/(losses) on disposal of financial instruments​
Financial result
Results of associated entities accounted for using the equity method​
Earnings before taxes
Income tax expense​
Profit/(Loss) from continuing operations
Profit/(Loss) from discontinued operations​
Profit/(Loss) for the period (net income)
Operating
Activities

Continuing
Operations

Financial
Activities
Operating
Activities

Continuing
Operations

Financial
Activities

Discontinued
Operations
Class Exercise 1
Prepare the entity's income statement from the following income and
expense items. Use the model based on the nature of expenses.
Items Euros
Sale of products 280.000
Changes in finished products (due to closing inventories being lower than opening inventories) 16.000
Government operating grants 9.000
Financial income 6.500
Increase in the value of financial assets held for trading 14.000
Supplies 140.000
Repairs and maintenance 11.000
Utilities 32.000
Labor and social security expenses 78.000
Depreciation expenses 13.000
Interest on loans 9.500
Foreign exchange losses 12.000
Income tax expense 7.500
Class Exercise 1
Revenue from contracts with customers 280.000
Changes in inventories of finished goods and work in progress 16.000
Supplies (140.000)
Other operating income 9.000
Other operating expenses (43.000)
Expenses for employee benefits (78.000)
EBITDA 44.000
Amortization and depreciation (13.000)
Operating result 31.000
Finance income 6.500
Finance expenses (9.500)
Changes in fair value of financial instruments 14.000
Exchange gains/(losses) (12.000)
Financial result (1.000)
Earnings before taxes 30.000
Income tax (7.500)
Profit for the period (net income) 22.500
Class Exercise 2
The closing balance of the profit and loss accounts of AIR Space Inc. is as follows:

Items Euros
Cost of labor 15.000
Cost of services from external parties and utilities 3.000
Depreciation 700
Dividends received from financial investments 1.000
Foreign exchange gains 200
Impairment of accounts receivable 400
Impairment of non-current operating assets 260
Income tax expense 400
Interest on loans 2.500
Gains from the sale of PPE 750
Cost of merchandise purchases 30.000
Sales revenue from merchandise 60.000
Class Exercise 2

Items Euros Classification Balan

Cost of labor 15.000 Operating Expense (15
Cost of services from external parties and utilities 3.000 Operating Expense (3
Depreciation 700 Operating Expense
Dividends received from financial investments 1.000 Finance income
Foreign exchange gains 200 Finance income
Impairment of accounts receivable 400 Operating Expense
Impairment of non-current operating assets 260 Operating Expense
Income tax expense 400 Income Tax expense
Interest on loans 2.500 Finance expense (2
Gains from the sale of PPE 750 Operating income
Cost of merchandise purchases 30.000 Operating Expense (30
Sales revenue from merchandise 60.000 Operating income 6
Class Exercise 2
31/12/2022
Revenue from contracts with customers
Supplies
Expenses for employee benefits
Other operating expenses
EBITDA
Depreciation and amortization
Impairment on non-current operating assets
Results from disposal of non-current operating assets
Operating results (EBIT)
Finance income
Finance expenses
Exchange gains/(losses)
Financial results
Earnings before taxes (EBT)
Income tax
Profit for the period (Net Income)
Class Exercise 2

31/12/2022 Items Euros

Revenue from contracts with customers 60.000
Supplies (30.000)
Cost of labor 15.000
Expenses for employee benefits (15.000) Cost of services from external parties and utilities 3.000
Other operating expenses (3.400) Depreciation 700
EBITDA 11.600
Dividends received from financial investments 1.000
Depreciation and amortization (700)
Impairment on non-current operating assets (260) Foreign exchange gains 200
Results from disposal of non-current operating assets 750 Impairment of accounts receivable 400
Operating results (EBIT) 11.390
Impairment of non-current operating assets 260
Finance income 1.000
Finance expenses (2.500) Income tax expense 400
Exchange gains/(losses) 200 Interest on loans 2.500
Financial results (1.300) Gains from the sale of PPE 750
Earnings before taxes (EBT) 10.090
Income tax (400)
Cost of merchandise purchases 30.000
Profit for the period (Net Income) 9.690 Sales revenue from merchandise 60.000
Income Statement structure (reminder)

Alternative Performance Measures or

GAAP Measures
Non-GAAP Measures

Earnings Before Interest + Operating Income Earnings Before Interest, Taxes, Depreciation and
and Taxes (EBIT) - Operating Expenses Amortization (EBITDA)
+ Finance Income + EBIT
Finance Results
- Finance Expenses - Depreciation and amortization expenses

Earnings Before Taxes +/- EBIT

(EBT) +/- Finance Results Over the last few years, there has been
some controversy over APMs as companies
+ EBT typically present their adjusted Ebitda, which
Net Income (NI)
+/- Income Tax reduces comparability and adds a lot of
complexity for users of financial information.
Income Statement structure (reminder)
Income Statement structure (reminder)
Chapter 11

Components of the
Operating Results
Contents

▪ Introduction
▪ Production for the period
▪ Acquisition of resources from third parties: Supplies and other operating expenses
▪ Expenses for employee benefits
▪ Results from capital assets
 Revenue from contracts with customers
Changes in inventories of finished goods and work in progress
Supplies
Work carried out by the company for its capital assets
Other operating income
Other operating expenses
Chapter 11 Expenses for employee benefits
EBITDA
Structure of the Amortization and depreciation
Impairment on non-current operating assets
income statement Capital grants transferred to income
Results from disposal of non-current operating assets
(according to the Operating results
Finance income
nature of the Finance expenses
Changes in fair value of financial instruments
expense) Exchange gains/(losses)
Impairment and gains/(losses) on disposal of financial instruments
Chapter 12 Financial results
Results of associated entities accounted for using the equity method
Earnings before taxes
Income tax expense
Profit/(Loss) from continuing operations
Profit/(Loss) from discontinued operations
Profit/(Loss) for the period (net income)
Introduction

Income and expenses from

main and auxiliary activities
of the entity:

• Main components are

recurrent

• Direct correlation
between expenses and
income

Financial Results Operating Results

Chapter 12 Chapter 11
Production for the period
Revenue from contracts with customers
Changes in inventories of finished goods and work in progress
Production for the period:
Supplies
+ Income from the main activity, also known as sales Work carried out by the company for its capital assets
Other operating income
revenue.
Other operating expenses
Expenses for employee benefits
+ The increase in products inventories (finished,
EBITDA
intermediate or in-process), since it represents Amortization and depreciation
production that has not yet been sold. Impairment on non-current operating assets
Capital grants transferred to income
- The decrease in product inventories (finished, Results from disposal of non-current operating assets
intermediate or in-process), due to sales of products Operating results
manufactured in the previous period.
+ The work carried out by the entity on its own fixed
assets.
+ Other operating income.
Production for the period
▪ Revenue refers to the total income generated by a business or organization from its primary
operations, such as selling goods or providing services, during a specific period of time.
▪ Changes in inventories of finished goods and work in progress implies the recognition of the cost of
goods sold (COGS) as inventories are sold or used in the production process.
▪ Work carried out by the company for its capital assets is an income related to the capitalization of
costs in relation to works performed by the entity when that work has increased the future economic
benefits of the asset (extension of the useful life, enhancement of the capacity, improvement in the
efficiency of the asset). This means that the costs are added to the carrying amount of the asset on the
balance sheet.
▪ Other operating income typically includes any income or revenues that arise from activities that are
not part of its core operating activities. These revenues are considered unusual or infrequent in nature
and do not result from the company's primary business operations (rental income, insurance
recoveries, legal settlements, government grants, etc.)
Production for the period
According to the following information from the income statement of an entity, what has been the production
for the period? What does the variation in finished and work-in-progress inventories in the year 2021 and in the
year 2022 reflect?

2022 2021
Revenue from contracts with customers 300,000 250,000
Change in inventories of finished goods and work
(15,000) 20,000
in progress
Production for the period? 285,000 270,000

▪ In 2022, the value of inventories of finished goods and WIP __________________

DECREASED compared to 2021.
▪ In 2021, the value of inventories of finished goods and WIP __________________
INCREASED compared to 2020.
Revenue from contracts with customers
Revenue from contracts with customers
Income from the main activity (Sales and/or revenue)
• Originates from the regular activities carried out by an entity (recurring).
• Arises as a result of contracts with customers. A contract is an agreement between two or
more parties that creates enforceable rights
and obligations.
Revenue from contracts with customers
IFRS 15 came into effect
in 2018 to
accommodate changes
coming from the
extraordinary
expansion in digital and
intangible goods and
services, the rapid
growth of subscription
services and the
creation of new online
platforms with
innovative incentives.
The revenue
recognition model
under IFRS 15 is
structured through a 5-
step model:
Revenue from contracts with customers
Recognize
Allocate the
Identify and revenue as or
Determine the transaction
Identify the separate when each
transaction price to
Contract performance performance
price performance
obligations obligation is
obligations
satisfied

Recognition Measurement

1) Existence of the contract 3) What is the transaction price

2) What commitments are made 4) How is it allocated to the various
5) When the commitments are fulfilled commitments?
Revenue from contracts with customers
A contract with a customer is in the scope of the standard when the contract is legally
enforceable and certain criteria are met. If the criteria are not met, then the contract
does not exist for the purpose of applying the general model of the standard, and any
consideration received from the customer is generally recognized as a deposit (liability).

A contract exists if:

1. The parties have approved the contract (orally or in writing).
2. It is possible to identify the commitments of each party (rights to good or services)
3. It is possible to identify the payment terms
4. The contract has economic substance, which occurs when the expected cash flows to the entity
change after the contract is made
5. The collection to which it is entitled is likely
Revenue from contracts with customers
Examples
Entity A signs a three-year framework supply contract with a customer. The framework
contract sets the prices for each product, payment terms, and warranties. The customer
will later make purchases by issuing a non-cancellable purchase order specifying the
products and quantities to be delivered.

Is there a contract?
The framework contract does not allow for the identification of each party's commitments. This is
because, although product prices and payment terms are established, the specific products and
quantities to be transferred are not known until the customer places an order. Therefore, the rights and
obligations of each party regarding the products to be transferred are not identifiable.
Revenue from contracts with customers
Examples
The pharmaceutical company, Entity A, sells 1,000 units to a customer for an agreed
consideration of 1,000,000 euros. This is the first time they are selling to a customer in a
new region experiencing financial difficulties. For this reason, Entity A expects to collect
only 800,000 euros of the agreed consideration. The sale is happening because Entity A
anticipates a future economic recovery in the regional market, and this sale serves as an
opportunity to establish contact with this customer and others in the region for future
endeavors.

Is there a contract?
The entity has signed the contract, and the terms are agreed upon, although there are doubts about the
full collection of the price. The uncertainty about collection implies an implicit reduction in the price and
suggests that the transaction price is not 1,000,000 euros, but rather that the consideration is variable.
The best estimate of this consideration would be the transaction price. Therefore, a contract does exist.
 Revenue from contracts with customers
Key takeaways
▪ The assessment must focus on enforceability of rights and
obligations, not form of the contract. This may require significant
judgement in some cases or may result in different assessments
for similar contracts in different jurisdictions
▪ Collectability is only a gating question, designed to prevent
entities from applying the revenue model to problematic
contracts and recognizing revenue and a large impairment loss at
the same time.
▪ Collectability threshold is applied to the amount to the entity
expects to be entitled
Revenue from contracts with customers
Performance obligations are those commitments in the contract with clients to transfer a
good or service or a set thereof. The entity must identify different performance
obligations in the contract as a previous stage to decide when the income shall be
recognized.

Deliver goods and/or services

Performance obligations

Receive goods and /or services

Seller Pay the Price (consideration) Customer

Revenue from contracts with customers
The analysis must focus on the economic substance of the transaction. If the transferred
products or services are distinct, the contract will contain several obligations.
Revenue from contracts with customers
Products or services are “substantially different” if both conditions are met:
▪ The customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer
▪ Products and services are distinct in the context of the contract because they are
separately identifiable from other promises in the contract, since:
• The entity does not provide a significant integration services
• The good or service does not modify another good or service promised in the
contract as specified by the customer (e.g., a software developer customizes an
application to be used in the customer's IT environment).
• The good or service is not highly dependent on other goods or services promised in
the contract (e.g., sale of a final product with prior delivery of a number of
prototypes).
Revenue from contracts with customers
Revenue from contracts with customers
Revenue from contracts with customers
Revenue from contracts with customers
Revenue from contracts with customers
Revenue from contracts with customers
Examples
ALBATROS is a telephone company. It has just launched a campaign that offers a 12-
month service for a fixed monthly fee of telephony and data involving the delivery of a
mobile phones and free access to data via WIFI at home and cable TV.

How many performance obligations are there?

• Telephone service for mobiles (12 months)
• Data services for mobiles (12 months)
• Mobile phone handset (at the contract signing)
• Telephone service at home (12 months)
• Data service at home (12 months)
• Cable TV services (12 months)
Revenue from contracts with customers
Examples
Entity A, a construction company, signs a contract to build a hospital with client B. The
construction management and execution are the responsibility of A. The design took into
account the specifications of client B. All construction phases are interrelated, and for
that reason, no recognitions of work executions occur until completion.

Are each construction phase (structure, construction, and

finishing) independent obligations?

The various construction phases could be developed separately by the client; however, Entity A provides
an integration service so that within the context of the contract, all these intermediate components
cannot be separated as distinct performance obligations.
Revenue from contracts with customers
Examples
Entity A, a software developer, supplies a software program, installation, any occurring
updates, and telephone support to address inquiries.

How many performance obligations are there?

There are four different performance obligations. The four deliveries are distinct goods or services that
can be used independently and are not interconnected within the context of the contract.
If the installation were a significant customization, then the software and installation would be
considered a single item because the contract would include a substantial integration service.
In any case, updates, as well as the telephone service, are distinct services from the ones mentioned
earlier. Although the service provided with each update is different from the previous one, the entity
considers them as a single obligation because they follow the same transfer pattern. The same applies to
the telephone support service.
Revenue from contracts with customers

How many performance obligations are there?

Can these obligations be separated?
Revenue from contracts with customers
Revenue from contracts with customers
Revenue from contracts with customers
Revenue from contracts with customers
Key takeaways
▪ The analysis must focus on the economic substance of the
transaction.
▪ One contract will contain several obligations if:
• They are substantially different (the customer can operate the goods on
its own or together with other resources.
• They are distinct in the context of the contract (the delivery commitment
of the various obligations is specified in the contract:
o The entity does not provide a significant integration service.
o The product or service does not significantly modify or customise other
products or services promised in the contract.
o The product or service is not highly dependent on the other products or
services promised in the contract.
Revenue from contracts with customers
An entity shall recognise revenue when or as the entity satisfies a performance
obligation by transferring a promised good or service to a customer. A good or service is
transferred when or as the customer obtains control of that asset. This analysis must be
performed primarlily from the perspective of the customer.

The satisfaction of the performance

obligation(s) may happen:
▪ At a point in time (more common Recognise revenue at the point in time at which control
in the delivery of goods) is transferred
▪ Gradually over time (usually You need to identify and apply an appropriate
referring to the provision of methodology to recognize revenue
services).
Revenue from contracts with customers
Control refers to the ability of the customer to direct the use of the good and to obtain
substantially all the remaining benefits from it
Revenue from contracts with customers
Performance obligations can be satisfied over time in the
following scenarios:
▪ The customer simultaneously receives and consumes the
benefits provided by the entity’s performance as the
entity performs (e.g., cleaning or security services)
▪ The entity’s performance creates or enhances an asset
that the customer controls as the asset is created or
enhanced (e.g., constructs a building on the customer's
land)
▪ 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 performance completed
to date (e.g., construction of a specific prototype, with the
customer committing to pay for the work done)
Revenue from contracts with customers
Examples
OPTIFIBRA provides a service that gives customers access to a fibre optic network for six
months periods. Both parties document the service in an irrevocable contract for 24
months. Payment is made at the beginning of each period.

When is the obligation fulfilled?

The obligation is fulfilled over time.
▪ The performance obligation is fulfilled as soon as the service is provided because the customer
consumes these services as he/she receives them.
▪ The advance payment received generates a performance obligation on the seller that is cancelled
when the service is rendered.
Revenue from contracts with customers
Examples
ByteGenius Tech is a company specialised in software development. This entity has been
hired by a financial entity to collaborate with the IT and marketing teams in a digital
application development. The project will last 36 months.

When is the obligation satisfied?

The obligation is satisfied over time.
▪ ByteGenius Tech develops an asset under the client control, so the performance obligation is satisfied
over time because the transfer of control occurs as services are performed
Revenue from contracts with customers
Example
The Indian Government has signed a contract with the AIRTECH for the development of a
prototype to be integrated into one of the aircraft they operate. The prototype can only
be used by the Indian Government because it meets some of its specific requirements
not needed by other customers. In fact, engineers from the Government are leading the
project to ensure the prototype meets their specifications. AIRTECH, to prevent the
Government from canceling the contract, establishes a clause where the buyer will pay
the costs incurred plus a 15% margin. The project is expected to last for 18 months.​

When is the obligation satisfied?

AIRTECH develops an asset that can only be controlled by the customer. The contract does not provide
for phased transfer; however, the manufacturer (AIRTECH) cannot use the asset, nor can they transfer it,
and they are guaranteed the recovery of incurred costs plus a margin.
Therefore, the entity satisfies the obligation over time.​
Revenue from contracts with customers
Revenue Recognition for obligations satisfied at
a point in time
Revenue shall be recognized at the moment when the performance obligation is satisfied.

Here are some indicators that may signify transfer at a point in

time:
▪ The entity has a present right to payment for the asset.​
▪ The customer has legal title to the asset.​
▪ The entity has transferred physical possession of the asset.​
▪ The customer has the significant risks and rewards of
ownership of the asset.​
▪ The customer has accepted the asset.
Revenue from contracts with customers
Examples
SERAMOT sells goods to a customer in Colombia. The agreement includes a clause with
incoterms of CIF (cost, insurance & freight), which implies that the seller assumes the
costs of transport and insurance but transfers the risks of the goods at the port of
destination.

When is the obligation satisfied?

The performance obligation occurs when transferring the risks of the goods. This moment is when the
merchandise is unloaded at the port of destination. From that point, the buyer can determine the
destination of the goods.
Revenue from contracts with customers
Revenue Recognition for obligations satisfied
over time
How to measure the progress towards complete satisfaction of a performance obligation
that is satisfied over time​?

Output methods Input methods

• Direct measurements of the value of the

goods or services transferred to the • Efforts or inputs to the satisfaction of a
customer.​ performance obligation.​
• For example, surveys of performance • For example, resources consumed, labor
completed to date, appraisals of results hours expended, costs incurred, time
achieved, milestones reached, time elapsed elapsed or machine hours used.
and units produced, or units delivered.
 Revenue from contracts with customers
Examples
REAL ESTATE HOLDING is contracted for the construction of a penitentiary centre. The
contract value amounts to 35 million euros. The estimated cost of the construction of the
centre is 30 million euros. The estimated duration of the construction of the centre is 24
months. Revenue recognition will be done by applying the input method (cost based)
Cost Income
Total Revenue 35.000.000 Quarter Quarter
Period Accumulated Period Accumulated
Total Costs 30.000.000 Q1 2022 2.000.000 2.000.000 Q1 2022 2.333.333 2.333.333
Gross Margin 5.000.000
Q2 2022 3.500.000 5.500.000 Q2 2022 4.083.333 6.416.667
Gross Margin (%) 16,67%
Q3 2022 1.850.000 7.350.000 Q3 2022 2.158.333 8.575.000
Q4 2022 4.250.000 11.600.000 Q4 2022 4.958.333 13.533.333
Input method (cost based): Q1 2023 7.500.000 19.100.000 Q1 2023 8.750.000 22.283.333
Q2 2023 5.250.000 24.350.000 Q2 2023 6.125.000 28.408.333
Percentage of completion = Q3 2023 4.150.000 28.500.000 Q3 2023 4.841.667 33.250.000
𝑪𝒐𝒔𝒕 𝒕𝒐 𝒅𝒂𝒕𝒆
∗ 100% Q4 2023 1.500.000 30.000.000 Q4 2023 1.750.000 35.000.000
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒄𝒐𝒔𝒕

TOTAL 30.000.000 TOTAL 35.000.000

Revenue from contracts with customers
Examples

The risk of this revenue recognition

mechanism is that the costs are still
an estimate.
A change in cost would lead to a re-
Revenue estimation of the margin that
Cost determines the revenue recognised.
Revenue from contracts with customers
Examples
OMEGA lays rail tracks and enters into a contract with RAIL to replace a section of track
for a fixed amount of €500,000. All work in progress is owned by RAIL. OMEGA has
replaced 150 units of track out of a total of 200 units of track to be replaced by the end
of the year. The effort required by OMEGA is the same for each of the 100 track units to
be replaced. OMEGA determines that the performance obligation is satisfied over time
since RAIL controls the work-in-progress asset being created.
Revenue recognition will be done by applying the output method.

Output method (units

replaced):
𝑼𝒏𝒊𝒕𝒔 𝒐𝒇 𝒕𝒓𝒂𝒄𝒌 𝒓𝒆𝒑𝒍𝒂𝒄𝒆𝒅
∗ 100%
𝑻𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕𝒔 𝒕𝒐 𝒃𝒆 𝒓𝒆𝒑𝒍𝒂𝒄𝒆𝒅
Revenue from contracts with customers
An educational institution that offers training services sells an annual course to a customer. The
contract includes the delivery of a tablet at the beginning of the course.
1
How many distinct performance obligations exist? Justify your answer

In the contract, there are two

distinct performance obligations.
The training service and the
delivery of the tablet are separate
goods and services that can be
used independently and are not
interrelated within the context of
the contract.
Revenue from contracts with customers
A software development entity sells a program to a customer. The contract includes installation,
which does not involve significant customization and can be routinely performed by other
2 entities. It also includes one year of customer support service to address inquiries.
How many performance obligations exist? Justify your answer.

In the contract, there are 3 performance obligations because there are three distinct
goods or services that can be used independently and are not interrelated within the
context of the contract.
If the installation were a significant customization, the software and the installation
would be considered a single unit as they are interrelated within the context of the
contract. The contract would include a significant integration service.
The customer support service is a distinct service from the above and is considered a
separate obligation
Revenue from contracts with customers
A company enters into a contract to construct a building that will serve as its client's new
corporate headquarters. The contract includes both the design and all construction phases until
3 the building is completed and delivered in usable condition.
How many performance obligations exist? Justify your answer.

In the contract, there is a single performance obligation. The goods and services are not distinct
within the context of the contract. That is, the entity's commitment to transfer individual goods and
services in the contract is not separately identifiable from other commitments in the contract.
We assume that the entity provides a significant service of integrating the goods and services into the
building that will serve as the corporate headquarters (the combined output) contracted by the
customer since they provide design and construction services together.
Revenue from contracts with customers
On July 1, 2023, an entity that provides accounting and tax advisory services enters into a
contract with a client to provide accounting advisory services and prepare the accounting books
for one year. The total contract amount is €6,000.
4
When is the obligation satisfied? Justify your answer and indicate the revenue figure the entity
should recognise as of December 31, 2023, related to this contract.

The contract contains multiple obligations with the same transfer pattern, and they are identified as
a single performance obligation, the provision of accounting advisory services. The performance
obligation is satisfied as the service is provided because the customer consumes these services as
they are received.
Since the transfer pattern is the same each month, a linear distribution of revenue over time is
reasonable. Therefore, as of December 31, 2023, the entity should report revenue related to this
contract of €3,000 (€6,000 / 12 months x 6 months).
Revenue from contracts with customers
On October 1, 2023, a company that provides cleaning services entered into a contract with a
client for the monthly cleaning of their offices. The total contract amount is €3,000 (full year).
5 When is the obligation satisfied? Justify your answer and indicate the revenue figure the entity
should report as of December 31, 2023, regarding this contract.

The contract contains multiple obligations with the same transfer pattern, and they are identified as
a single performance obligation, the provision of cleaning services. The performance obligation is
satisfied as the service is provided because the customer consumes these services as they are
received.
Since the transfer pattern is the same each month, a linear distribution of revenue over time is
reasonable. Therefore, as of December 31, 2023, the entity should report revenue related to this
contract as €750 (€3,000 / 12 months x 3 months).
Revenue from contracts with customers
On October 1, 2023, a construction company entered into a contract with a client to build an
industrial warehouse on a plot owned by the client. The total contract amount is €60,000, which
will be collected upon completion of the work.
6 When is the obligation satisfied? Justify your answer and indicate the revenue figure the entity
should report as of December 31, 2023, regarding this contract, knowing that as of that date, the
cost-to-cost method indicates that 25% of the total cost of the work has been incurred.

Although the different phases of the project could be developed separately, the entity provides an
integration service, so within the context of the contract, they constitute a single performance
obligation. The performance obligation is satisfied as progress is made in construction because the
entity is creating an asset under the customer's control.
Therefore, as of December 31, 2023, the entity should report revenue equivalent to the value of the
services for which control has been transferred up to that date. In this case, since 25% of the total cost
of the work has been incurred, the revenue to be recognized should be €15,000 (25% of the total
revenue to be recognized, based on the percentage of completion, 60,000 x 25%).
 Revenue from contracts with customers
Example
ZIVA has been hired for the construction of a bridge in Santiago, Chile. The price established in the
contract is 125 million euros. The estimated cost for the construction of the bridge, which is expected to
be completed in 12 months, is 117,50 million euros. Input method (cost based).

1 Taking into account the

Month Cost % Accumulated 2 If the company conducts
January 14.500.000 12% 14.500.000
monthly distribution of quarterly financial closures,
February 12.500.000 11% 27.000.000
estimated costs: and as of the March closure,
March 18.500.000 16% 45.500.000
and the invoiced but
What will be the revenue April 11.250.000 10% 56.750.000
uncollected amount from the
to be recorded by ZIVA May 9.500.000 8% 66.250.000
customer is 40 million euros,
for the month of April? June 7.500.000 6% 73.750.000
what will be the accounting
July 9.500.000 8% 83.250.000
What will be the entry to be recorded by ZIVA?
August 8.450.000 7% 91.700.000
cumulative revenue
September 8.250.000 7% 99.950.000
amount at the end of
October 6.500.000 6% 106.450.000
September?
November 7.250.000 6% 113.700.000
December 3.800.000 3% 117.500.000
Revenue from contracts with customers
Example Gross Margin: 6,383%

Month Cost % Accumulated Month Revenue Margin Accumulated

January 14.500.000 12% 14.500.000 15.425.532 925.531,91 15.425.532
February 12.500.000 11% 27.000.000 13.297.872 797.872,34 28.723.404
March 18.500.000 16% 45.500.000 19.680.851 1.180.851,06 48.404.255
April 11.250.000 10% 56.750.000 11.968.085 718.085,11 60.372.340
May 9.500.000 8% 66.250.000 10.106.383 606.382,98 70.478.723
June 7.500.000 6% 73.750.000 7.978.723 478.723,40 78.457.447
July 9.500.000 8% 83.250.000 10.106.383 606.382,98 88.563.830
August 8.450.000 7% 91.700.000 8.989.362 539.361,70 97.553.191
September 8.250.000 7% 99.950.000 8.776.596 526.595,74 106.329.787
October 6.500.000 6% 106.450.000 6.914.894 414.893,62 113.244.681
November 7.250.000 6% 113.700.000 7.712.766 462.765,96 120.957.447
December 3.800.000 3% 117.500.000 4.042.553 242.553,19 125.000.000
Revenue from contracts with customers
If the company conducts quarterly financial closures, and as of the March closure, and the invoiced but
uncollected amount from the customer is 40 million euros, what will be the accounting entry to be
recorded by ZIVA?
Account description Db Cr
Revenue (Operating income) 48.404.255
ST Account Receivable 40.000.000
ST Account Receivable (Unbilled Revenue) 8.404.255

Account receivable Account receivable

Revenue generated (accrued)
corresponding to the amount corresponding to the amount
according to the “input
that has been billed or not billed or invoiced to the
method”
invoiced to the client client
Revenue from contracts with customers
And what if the amount invoiced by ZIVA to the client is 50 million euros, what will be the accounting
entry to be recorded by ZIVA?

Account description Db Cr
Revenue (Operating income) 48.404.255
ST Account Receivable 50.000.000
ST Account Payable (Advance from customers) 1.595.745

Account receivable “Advance from customers” is

Revenue generated (accrued)
corresponding to the amount the amount corresponding to
according to the “input
that has been billed or the billed amount that has not
method”
invoiced to the client been accrued as revenue
Revenue from contracts with customers
Recognize
Allocate the
Identify and revenue as or
Determine the transaction
Identify the separate when each
transaction price to
Contract performance performance
price performance
obligations obligation is
obligations
satisfied

Recognition Measurement

1) Existence of the contract 3) What is the transaction price

2) What commitments are made 4) How is it allocated to the various
5) When the commitments are fulfilled commitments?
Revenue from contracts with customers
The transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer (excluding
amounts collected on behalf of third parties – e.g. sales taxes). To determine this
amount, the entity shall consider several factors.

The transaction price shall be estimated at contract inception. This initial estimation shall be updated at
each reporting period for any changes in circumstances. When determining the transaction price, an entity
assumes that the goods or services will be transferred to the customer according to the terms of the
existing contract (without considering the possibility of a contract being cancelled, renewed or modified)
and its traditional business practices:
• Fixed price component: The sale or provision of services price is the “cash value”
• Discounts and refunds of any type reduce the sale price (large-volume sales, for deliveries outside the agreed time limit and
through a settlement in cash, etc.)
• Variable considerations that depend on some future event: the best estimate of them should be included as a component of the
transaction price unless it is highly probable that the entity will have to pay them back to the custom
• Taxes charged to customers which are required by the regulations in the country and subsequently paid to the tax administration
does not form part of the price.
Revenue from contracts with customers
Revenue from contracts with customers
Variable considerations The entity will be entitled to
recognize variable amounts as
If the consideration promised in a contract includes a
revenue IF:
variable amount, an entity shall estimate the amount of
consideration to which the entity will be entitled in • There is a high probability of
exchange for transferring the promised goods or services collecting the variable
to a customer. amounts; and
An amount of consideration can vary because of • There will be no significant
discounts, rebates, refunds, credits, price concessions, revenue reversal
incentives, performance bonuses, penalties or other
similar items. For example, an amount of consideration
would be variable if either a product was sold with a right
of return or a fixed amount is promised as a performance
bonus on achievement of a specified milestone.
Revenue from contracts with customers
Revenue from contracts with customers
When estimating the transaction price for a contract with variable consideration, the
entity’s initial measurement objective will be to determine which of the following
methods best predicts the variable consideration:

Expected The entity considers the sum of profitability-weighted amounts for a range of possible
situations and consideration amounts. This method may be appropriate if the entity has
Value a large number of contracts with similar conditions or features.

The entity considers the single most likely amount from a range of possible
Most likely
consideration amounts. This may be an appropriate estimate of the amount of the
amount
variable consideration if the contract has few possible outcomes.
Revenue from contracts with customers
Examples
Revenue from contracts with customers
Examples
Revenue from contracts with customers
Value Added Tax
VAT (Value Added Tax) is an indirect tax that applies to the sale of goods and the provision
of services.
Sellers charge this tax to their customers and collect it on behalf of the tax authorities; this
is commonly referred to as "output VAT“. This amount is not considered revenue but rather
a liability due to the obligation to remit it to the tax authority.
Buyers bear and pay the tax, known as "input VAT“. This amount is recognized as an asset (if
refundable), representing their entitlement to a refund or offset of the amount they paid.

Entity A provides a service to Entity B for an amount of €10,000 plus a 21% VAT. Payment is made in cash.
Account description Db Cr
Revenue (Operating income) 10.000
Cash 12.100
ST Account Payable (Output VAT) 2.100
Revenue from contracts with customers
Examples
AMAZIN sells goods on credit (with deferred payment) for €62,000. The invoice includes a trade
discount of €2,000. The transaction is subject to a 21% VAT (VAT amount = €60,000 x 0.21 = €12,600).
Analyze the transaction price and prepare the journal entry to be recorded

Transaction price Account description Db Cr

Cash Price 62.000 Revenue (Operating income) 60.000
ST Account Receivable 72.600
Discount (2.000)
ST Account Payable (Output VAT) 12.600
Transaction price 60.000
The VAT amount has two effects:
Value Added Tax 12.600
• It is an obligation to pay to the tax authorities: liability
• It is an increase in assets (an increase in accounts receivable).
Revenue from contracts with customers
Example
INNOVENIA has entered into a contract to build a new manufacturing plant for client. The contract
price is €100 million plus an incentive fee of €10 million if the plant is completed by a certain date. The
contractor will not receive any of the €10 million fee if the facility is not completed by the specified
date. The incentive is payable in full on completion of the facility. The contractor believes, based on its
experience, that there is a 95% probability that the contract will be completed successfully before the
target date. How should the contractor determine the transaction price?

The entity estimates that there is a 95% probability that it will meet the deadline and therefore receive
the incentive. This means that it is highly probable that there will be no material revenue reversal.
Since there are two possible outcomes (meeting the deadline and not meeting the deadline), the most
appropriate method for the contractor to estimate the variable consideration is the most likely amount
method. The transaction price of the contract is therefore €110 million, which includes the €110 million
fixed contract price and the €10 million incentive fee.
Revenue from contracts with customers
Example
ODALAS has entered into a contract with a customer to build a facility for €200,000 with a performance
bonus of €50,000 paid based on the date of completion. The amount of the performance bonus
decreases by 10% per week for each week beyond the agreed completion date. The contractor believes
that its past experience is predictive for this contract and that the expected value method is the most
predictive in this case. The contractor estimates that there is a 70% probability that the contract will be
completed by the agreed completion date, a date, a 20% probability that it will be completed one week
late and a 10% probability that it will be that it will be completed two weeks late. How should the
contractor determine the transaction price?

Probability- According to the expected value method, the transaction

Consideration Probability weighted
price is calculated as the weighted average, taking into
consideration
account the probability of each scenario occurring.
€250,000 70% 175,000
€245,000 20% 49,000
€240,000 10% 24,000
Transaction price €248,000
Revenue from contracts with customers
Example
ODALAS has entered into a contract with a customer to build a facility for €200,000 with a performance
bonus of €50,000 paid based on the date of completion. The amount of the performance bonus
decreases by 10% per week for each week beyond the agreed completion date. The contractor believes
that its past experience is predictive for this contract and that the expected value method is the most
predictive in this case. The contractor estimates that there is a 70% probability that the contract will be
completed by the agreed completion date, a date, a 20% probability that it will be completed one week
late and a 10% probability that it will be that it will be completed two weeks late. How should the
contractor determine the transaction price?

Probability- According to the expected value method, the transaction

Consideration Probability weighted
price is calculated as the weighted average, taking into
consideration
account the probability of each scenario occurring.
€250,000 70% 175,000
€245,000 20% 49,000
€240,000 10% 24,000
Transaction price €248,000
Revenue from contracts with customers
Out of class activity – Determining the transaction price
On 1 October 2023, Company A sells goods for €10,000. Since the payment is made in cash, the company
grants a €300 discount to the customer. The goods are delivered immediately. This transaction is subject
to a 21% VAT.
Record the effect of this transaction in the journal on 1 October 2023.

On 1 October 2023, an entity sells goods on credit for €15,000. Due to a 9-month payment deferral, an
additional €900 in interest is included on the invoice. The goods are delivered immediately. The
transaction is subject to a 21% VAT.
Question: Prepare the journal entry at the date of sale and for 31 December 2023
Revenue from contracts with customers
The transaction price should be allocated to each performance obligation(generally
each distinct good or service) based on the relative standalone selling prices of the
goods or services being provided to the customer.
However, when specified criteria are met a discount or variable consideration is
allocated to one or more, but nota all, performance obligations.

Determine Stand- Allocate the

Alone selling prices transaction price
 Revenue from contracts with customers
Determining Stand-Alone selling prices

The best evidence of standalone selling price is the price an entity charges for
that good or service when the entity sells it separately in similar circumstances to
similar customers.
 Revenue from contracts with customers
Determining Stand-Alone selling prices

Stand-Alone selling • Prices are observable because the entity sells that product or service
price is directly separately in similar circumstances to similar cutomers
observable • Prices are directly observable in the contract

• The entity shall estimate the stand-alone selling price considering all
Stand-Alone selling information (market conditions, entity-specific conditions, class of customer,
price is not directly etc.). The entity shall maximise the use of observable inputs and apply
observable estimation methods consistently in similar circumstances.
• IFRS 15 provide three different methods to help entities in this assessment.
Revenue from contracts with customers

Determining
Stand-Alone
selling prices
when it is
not directly
observable The entity sells the same good or
service to different customers for a
broad range of amounts; or

The entity has not yet established a

price for that good or service and
the good or service has not
previously been sold
 Revenue from contracts with customers

Standalone
Performance obligation 1 % P1 Revenue 1
selling price (A/Dx100%)
(A) (TP x P1)

Standalone Revenue 2
Performance obligation 2 % P2 Transaction
selling price (B/Dx100%) (TP x P1)
(B) price (TP)

Standalone % P3 Revenue 3
Performance obligation 3 selling price (A/Dx100%) (TP x P1)
(C)

Total standalone
100%
selling prices
(D = A+B+C)
Usually, ∑Standalone selling prices > Transaction price
Revenue from contracts with customers
Example
MTS Inc. sells machinery and offers a two-year maintenance service as well. The price of machinery plus
maintenance is €100,000. The entity also provides maintenance services and sells machinery separately.
The maintenance contract is priced at €10,000 annually and the machine, when sold separately, is priced
at €95,000. When the machinery is sold together with the maintenance, the full amount is invoiced at
the time of the installation of the machinery and payment is made in cash.

Performance obligations Performance obligation satisfaction

Machine delivery At point time (transfer of control in the delivery)

2 year maintenance Over time (transfer of control gradually during 24 months)

They are distinct because the customer

can use them either individually or
together with others. They are also distinct
in the context of the contract because the
supply obligation is separate.
Revenue from contracts with customers
Example

Stand-Alone selling price is directly observable. The allocation of price is prepared considering the
weight of each producto or service in the context of the contract

Performance obligations Stand-Alone Price Price allocation

Machine delivery 95.000 82,61% 82.609

2 year maintenance 20.000 17,39% 17.391

115.000 100.000
Revenue from contracts with customers
Example
At the date of sale and delivery of the machine

Account description Db Cr
Revenue (Operating income) - Machine supplu 82.609
Short term account payable (maintenance - advance from customers) 17.391
Short term account payable (output VAT) 21.000
Cash 121.000
17.391 / 24
months=
Every month, due to the gradual satisfaction of the maintenance service
725 euro
Account description Db Cr
Revenue (Operating income) - Machine supplu 725
Short term account payable (maintenance - advance from customers) 725
Revenue from contracts with customers
Example
BETA has entered into a contract with a customer to sell products X, Y and Z for a total transaction price
of €100,000. On a standalone basis, BETA regularly sells Product X for €25,000 and Product Y for €45,000.
Product Z is a new product that has not been sold before, has no fixed price and is not sold by
competitors in the market. Products X and Y are not regularly sold together at a discounted price.
Product Z is delivered on 1 March and products X and Y are delivered on 1 April.
How should BETA determine the standalone selling price of product Z?

BETA may use the BETA has observable evidence that Products X
residual approach to and Y sell for €25,000 and €45,000,
estimate the standalone Product X 25.000 respectively, for a total of €70,000. The
selling price of product Z Product Y 45.000 residual approach would result in an
because it has not sold Product Z 30.000 estimated standalone selling price of €30,000
or priced product Z for Product Z (€100,000 total transaction
before price less €70,000).
Revenue from contracts with customers
Out of class activity – Allocating the transaction price
Company A sells air conditioners and installs them in buildings. The installation is highly specialised. The
company offers a 6-month legal warranty and can also provide additional warranties. In addition,
Company A offers a maintenance package to its customers. Given this range of products and services,
the company offers a comprehensive package at a price of € 5,000, which includes. Air conditioner + 12-
month additional warranty + Free 24-month maintenance contract
The standalone selling prices of each product and service are as follows:
▪ Air conditioner: €4,800
▪ Additional annual warranty: €500
▪ Annual maintenance: €1,000

Questions:
1. Specify the steps of revenue recognition, indicating the obligations identified in this transaction.
2. Calculate the revenue that should be allocated to each performance obligation.
Revenue from contracts with customers
Full exercise – Activity 1
OPENSOFT sells customer GOTEAM an employee time recording software. The software can be installed
by GOTEAM without assistance. However, GOTEAM has contracted a customisation service from
OPENSOFT in order to be able to link it to the labour management software that he already has installed
in his company, but which did not have the time recording functionality.

There is a single performance obligation that includes the acquisition of the software and the
customisation.
Although the installation of the software could be a separate obligation, in the context of the contract the
two are interconnected, as an integration service is provided.
Revenue from contracts with customers
Full exercise – Activity 2
On 1 October 2022, entity A signs a mobile phone contract with customer B for a period of 12 months.
Under the terms of the contract, entity A provides customer B with a phone and the "Full mobile"
telephony plan including data, calls and text messages for a price of 35 euros per month. Entity A
delivers the phone to the customer upon signature of the contract. The customer pays this amount in
cash at the end of each month.
Entity A sells the phone separately at a price of 200 euros and also offers the "Full mobile" plan for 12
months without a phone for a price of 25 euros per month.

The contract includes two performance obligations: (1) the delivery of the phone and (2) the full mobile
phone plan service.
The phone and the "Full mobile" plan service are independent performance obligations in this contract
because entity A does not provide a significant integration service. The customer could purchase the
phone and the phone plan separately, so these goods and services are not highly dependent or
interrelated.
Revenue from contracts with customers
Full exercise – Activity 2

Stand-Alone selling price is directly observable. The allocation of price is prepared considering the
weight of each producto or service in the context of the contract

Performance obligations Stand-Alone Price Price allocation

Phone delivery 200 40% 168

Full Mobile plan service 300 60% 252

500 420
Revenue from contracts with customers
Full exercise – Activity 2
Revenue corresponding to the satisfaction of the performance obligation 1 (delivery of the phone) must be
recorded at the initial moment. The performance obligation is satisfied when the phone is delivered to the
client.
We recognize an account receivable (unbilled revenue) because the entity has not issued the invoice. This
will happen at the end of the month.

Date Account Debit Credit

01/10/2022 Revenue 168
01/10/2022 Account Receivable (unbilled revenue) 168
Revenue from contracts with customers
Full exercise – Activity 2
At the end of each month until the contract is finished, we will recognize:
1) Collection of the monthly price invoiced to the client
2) Monthly revenue corresponding to the satisfaction of the second performance obligation (full mobile
plan service)

Date Account Debit Credit

31/10/2022 Account Receivable (unbilled revenue) 35
31/10/2022 Cash 35

Date Account Debit Credit

31/10/2022 Revenue 21
31/10/2022 Account Receivable (unbilled revenue) 21
Revenue from contracts with customers
Full exercise – Activity 2
Revenue Account Receivable Cash
Debit Credit Debit Credit Debit Credit
01/10/2022 168 168
31/10/2022 21 21 35 35
30/11/2022 21 21 35 35
31/12/2022 21 21 35 35
31/01/2023 21 21 35 35
28/02/2023 21 21 35 35
31/03/2023 21 21 35 35
30/04/2023 21 21 35 35
31/05/2023 21 21 35 35
30/06/2023 21 21 35 35
31/07/2023 21 21 35 35
31/08/2023 21 21 35 35
30/09/2023 21 21 35 35
Revenue from contracts with customers
Full exercise – Activity 3
TTTP sells multifunction copier machines. It has historically provided maintenance services for no
additional consideration to end customers who purchase the machines from its distributor. The entity
does not explicitly commit to maintenance services during negotiations with the distributor.
In June 2022, TTTP has sold a copier machine to customer D for 300,000 euros plus 21% VAT. There are
small companies on the market providing maintenance services for €10,000 plus VAT per year.

There are two different performance obligations:

▪ Delivery of the machine
▪ Maintenance services: Although not explicitly, TTTP has been providing maintenance services that are
not formalised or specified in writing in a contract with the customer. It is therefore understood to
have created a valid expectation on the part of customers that such maintenance would be carried out.
The fact that other companies perform this maintenance in an alternative way suggests that it is really
a differentiated service that the customer could use independently from the purchase of the machine.
Revenue from contracts with customers
Full exercise – Activity 3
In the allocation of the transaction price, we shall use the residual approach since:
▪ There is not an observable stand-alone selling price
▪ There is not information about the cost incurred by the entity and the expected margin
Therefore, we will allocate the independent observable sales price to the maintenance service obligation
and the difference with the total transaction price will be allocated to the machinery delivery.

Performance obligations Price allocation

Machine delivery 290.000

Maintenance services 10.000

300.000
Revenue from contracts with customers
Full exercise – Activity 3
In the initial moment, when the machine is delivered…
Date Account Debit Credit
01/06/2022 Revenue 290.000,00
01/06/2022 Account Receivable 363.000,00
01/06/2022 Account Payable (Output VAT) 63.000,00
01/06/2022 Account Payable (Advance from customers) 10.000,00
Revenue from contracts with customers
Full exercise – Activity 3
Every month during the first year…
Date Account Debit Credit
30/06/2022 Revenue 833,33
30/06/2022 Account Payable (Advance from customers) 833,33

Every month 833 € (corresponding to 10.000 EUR / 12 months) shall be recorded as revenue.
That amount was invoiced in the initial moment and therefore it must be recorded against the “Advance
from customers” account.
Revenue from contracts with customers
Full exercise – Activity 3
Revenue Account Receivable Advance from Customers
Debit Credit Debit Credit Debit Credit
01/06/2022 290.000,00 363.000,00 10.000,00
30/06/2022 833,33 833,33
31/07/2022 833,33 833,33
31/08/2022 833,33 833,33
30/09/2022 833,33 833,33
31/10/2022 833,33 833,33
30/11/2022 833,33 833,33
31/12/2022 833,33 833,33
31/01/2023 833,33 833,33
28/02/2023 833,33 833,33
31/03/2023 833,33 833,33
30/04/2023 833,33 833,33
31/05/2023 833,33 833,33
Revenue from contracts with customers
Full exercise – Activity 4
WBYH enters into a contract with a client to build a house under the client's guidelines on land owned
by the client. The contract price is €200,000 and includes a clause that WBYH is guaranteed to be paid
the cost of the work plus a reasonable profit margin in the event that the client terminates the contract
before completion of the project, although this is considered unlikely.
Also included in the contract and included in the price is the maintenance of the property for three years
after completion of the work, which is valued at €1,000 per year.
The company will charge 50% plus VAT on signing the contract and the rest on completion (21% VAT).
Construction starts on 1 July 2022 and will finish one year later.
There are two different performance obligations:
▪ Construction of the house
▪ 3-year maintenance
Revenue from contracts with customers
Full exercise – Activity 4
▪ Construction of the house – Revenue must be recorded gradually over time during 1 year as the work is
carried out, since control (risks and benefits) is transferred as the work is performed.
▪ 3 year maintenance – Revenue associated to the maintenance services must be recorded over time as
well because the service is offered and consumed by the customer as time goes by, counting a period
of three years from the completion of the work.
Revenue from contracts with customers
Full exercise – Activity 4
At the time of signing the contract

Date Account Debit Credit

01/07/2022 Cash 121.000,00
01/07/2022 Account Payable (Advance from customers) 100.000,00
01/07/2022 Account Payable (Output VAT) 21.000,00

We collect 121.000 € (100.000 € corresponding to the initial 50% of the project plus 21.000 € VAT)
No revenue must be recorded since the project has not started and the two performance obligations will
be satisfied gradually over time.
Revenue from contracts with customers
Full exercise – Activity 4
At the year end, considering that 50% of project has been completed

Date Account Debit Credit

31/12/2022 Revenue 98.500,00
31/12/2022 Account Payable (Advance from customers) 98.500,00

The entity shall recognize 98.500 € revenue (corresponding to the 50% of the construction revenue –
197.000 / 2)
The entity received this amount in the initial moment. Therefore, the advance from customers must be
derecognized.
Revenue from contracts with customers
Full exercise – Activity 4
In July 2023, once the house is finished
Date Account Debit Credit
31/07/2023 Cash 121.000,00
31/07/2023 Revenue 98.500,00
31/07/2023 Account Payable (Output VAT) 21.000,00
31/07/2023 Account Payable (Advance from customers) 1.500,00

The entity shall recognize 98.500 € revenue (corresponding to the 50% of the construction revenue –
197.000 / 2)
No maintenance service revenue must be recognized yet. Therefore, 1.500 € are recorded as a new
advance from customers.
Production for the period
Revenue from contracts with customers
Changes in inventories of finished goods and work in progress
Production for the period:
Supplies
+ Income from the main activity, also known as sales Work carried out by the company for its capital assets
Other operating income
revenue.
Other operating expenses
Expenses for employee benefits
+ The increase in products inventories (finished,
EBITDA
intermediate or in-process), since it represents Amortization and depreciation
production that has not yet been sold. Impairment on non-current operating assets
Capital grants transferred to income
- The decrease in product inventories (finished, Results from disposal of non-current operating assets
intermediate or in-process), due to sales of products Operating results
manufactured in the previous period.
+ The work carried out by the entity on its own fixed
assets.
+ Other operating income.