ADVACC 1 – Accounting for Special Transactions I

Ateneo de Zamboanga University

SCHOOL OF MANAGEMENT AND ACCOUNTANCY
Accountancy Department
1st Semester, 2024-2025

IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS

Part 1: Five-Step Model Framework

Objective of the Standard

The objective of this Standard is to establish the principles that an entity shall apply to
report useful information to users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising from a contract with a
customer.

Scope of IFRS 15

An entity shall apply this Standard to all contracts with customers, except the following:

(a) lease contracts within the scope of IFRS 16 Leases;

(b) insurance contracts within the scope of IFRS 17 Insurance Contracts. However, an
entity may choose to apply this Standard to insurance contracts that have as their
primary purpose the provision of services for a fixed fee in accordance with
paragraph 8 of IFRS 17;
(c) financial instruments and other contractual rights or obligations within the scope
of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS
11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28
Investments in Associates and Joint Ventures; and
(d) non-monetary exchanges between entities in the same line of business to
facilitate sales to customers or potential customers. For example, this Standard
would not apply to a contract between two oil companies that agree to an exchange
of oil to fulfil demand from their customers in different specified locations on a
timely basis.

SELF-TEST QUESTIONS:

Question 1: To address inconsistencies and weaknesses, a comprehensive revenue

recognition model was developed entitled the:

a. Revenue Recognition Principle.

b. Principle-based Revenue Accounting.
c. Rules-based Revenue Accounting.
d. Revenue from Contracts with Customers.

Question 2: The converged standard on revenue recognition:

a. reduces the number of disclosures required for revenue reporting.

b. increases the complexity of financial statement preparation.
c. recognizes and measures revenue based on changes in assets and liabilities.
d. simplifies revenue recognition practices across entities and industries.

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Jean Chlairene T. Am-is

ADVACC 1 – Accounting for Special Transactions I

THE FIVE-STEPS MODEL FRAMEWORK

Step 1: Identify the contract with the customer.

Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to each performance obligation.
Step 5: Recognize revenue when a performance obligation is satisfied.

STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER

What is a contract under IFRS 15?

A contract is an agreement between two or more parties that creates enforceable rights
and obligations. Enforceability of the rights and obligations in a contract is a matter of
law. Contracts can be written, oral or implied by an entity’s customary business practices.

Criteria for accounting a contract under IFRS 15

An entity shall account for a contract with a customer that is within the scope of this
Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices) and are committed to
perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be
transferred;
(c) the entity can identify the payment terms for the goods or service to be transferred;
(d) the contract has commercial substance (i.e. the risk, timing or amount of the
entity’s future cash flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be
entitled in exchange for the goods or services that will be transferred to the
customer.

Wholly unperformed contracts

A contract does not exist if each party to the contract has the unilateral enforceable right
to terminate a wholly unperformed contract without compensating the other party (or
parties). A contract is wholly unperformed if both of the following criteria are met:

(a) the entity has not yet transferred any promised goods or services to the customer;
and
(b) the entity has not yet received, and is not yet entitled to receive, any
consideration in exchange for promised goods or services.

Combination of contracts

An entity shall combine two or more contracts entered into at or near the same time with
the same customer (or related parties of the customer) and account for the contracts as a
single contract if one or more of the following criteria are met:

(a) the contracts are negotiated as a package with a single commercial objective;
(b) the amount of consideration to be paid in one contract depends on the price or
performance of the other contract; or

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ADVACC 1 – Accounting for Special Transactions I

(c) the goods or services promised in the contracts (or some goods or services
promised in each of the contracts) are a single performance obligation.

Contract modifications

An entity shall account for a contract modification as a separate contract if both of the
following conditions are present:

(a) the scope of the contract increases because of the addition of promised goods or
services that are distinct; and
(b) 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
particular contract.

If a contract modification is not accounted for as a separate contract, an entity shall

account for the promised goods or services not yet transferred at the date of the contract
modification (i.e. the remaining promised goods or services) in whichever of the
following ways is applicable:

(a) An entity shall account for the contract modification as if it were a termination of
the existing contract and the creation of a new contract, if the remaining goods
or services are distinct from the goods or services transferred on or before the date
of the contract modification.
(b) An entity shall account for the contract modification as if it were a part of the
existing contract if the remaining goods or services are not distinct and, therefore,
form part of a single performance obligation that is partially satisfied at the date
of the contract modification.

SELF-TEST QUESTIONS

Question 3: A contract:

a. must be in writing to be an enforceable contract.

b. is an agreement that creates enforceable rights and obligations.
c. is enforceable if each party can unilaterally terminate the contract.
d. does not need to have commercial substance.

Question 4: Signing of the contract by the two parties is:

a. not recorded until one or both parties perform under the contract.
b. recorded at the time the contract is approved by both parties.
c. not recorded until both parties perform under the contract.
d. recorded immediately after the contract is signed.

Question 5: A company must account for a contract modification as a new contract if:

a. Goods or services are interdependent on each other.

b. The promised goods or services are distinct.
c. The company has the right to receive consideration equal to standalone price.
d. Goods or services are distinct and company has right to receive the standalone price.

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STEP 2: IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT

What is a performance obligation?

At contract inception, an entity shall assess the goods or services promised in a contract
with a customer and shall identify as a performance obligation each promise to transfer
to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or

(b) a series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.

Same pattern of transfer

A series of distinct goods or services has the same pattern of transfer to the customer if
both of the following criteria are met:

(a) each distinct good or service in the series that the entity promises to transfer to
the customer would meet the criteria to be a performance obligation satisfied over
time; and
(b) 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.

Distinct

A good or service that is promised to a customer is distinct if both of the following criteria
are met:

(a) 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 (i.e. the good or
service is capable of being distinct); and
(b) the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (ie the promise to transfer the
good or service is distinct within the context of the contract).

Not separately identifiable

Factors that indicate that two or more promises to transfer goods or services to a customer
are not separately identifiable include, but are not limited to, the following:

(a) the entity provides a significant service of integrating the goods or services with
other goods or services promised in the contract into a bundle of goods or services
that represent the combined output or outputs for which the customer has
contracted.
(b) one or more of the goods or services significantly modifies or customizes, or are
significantly modified or customized by, one or more of the other goods or
services promised in the contract.
(c) the goods or services are highly interdependent or highly interrelated.

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SELF-TEST QUESTIONS

Question 6: A performance obligation exists when

a. a company receives the right to receive consideration.

b. a contract is approved and signed.
c. a company provides a distinct product or service.
d. a company provides interdependent product or service.

Question 7: When multiple performance obligations exists in a contract, they should

be accounted for as a single performance obligation when:

a. each service is interdependent and interrelated.

b. the performance obligations are distinct but interdependent.
c. the product is distinct within the contract.
d. determination cannot be made.

Question 8: An entity, a contractor, enters into a contract to build a hospital for a

customer. The entity is responsible for the overall management of the project and
identifies various goods and services to be provided, including engineering, site
clearance, foundation, procurement, construction of the structure, piping and wiring,
installation of equipment and finishing. Are the goods and services provided in the
contract distinct? No. The goods and services are not distinct because they are highly
interrelated and integrated into one combined output (the completed hospital),
which constitutes a single performance obligation.
STEP 3: DETERMINE THE TRANSACTION PRICE

What is 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 a customer,
excluding amounts collected on behalf of third parties (for example, some sales taxes).
The consideration promised in a contract with a customer may include fixed amounts,
variable amounts, or both.

Methods of estimating variable consideration

If the consideration promised in a contract includes a variable amount, 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.

An entity shall estimate an amount of variable consideration by using either of the

following methods, depending on which method the entity expects to better predict
the amount of consideration to which it will be entitled:

(a) The expected value—the expected value is the sum of probability-weighted

amounts in a range of possible consideration amounts. An expected value may be
an appropriate estimate of the amount of variable consideration if an entity has a
large number of contracts with similar characteristics.

(b) The most likely amount—the most likely amount is the single most likely amount
in a range of possible consideration amounts (ie the single most likely outcome of

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ADVACC 1 – Accounting for Special Transactions I

the contract). The most likely amount may be an appropriate estimate of the
amount of variable consideration if the contract has only two possible outcomes
(for example, an entity either achieves a performance bonus or does not).

Significant financing component

In determining the transaction price, an entity shall adjust the promised amount of
consideration for the effects of the time value of money if the timing of payments
agreed to by the parties to the contract (either explicitly or implicitly) provides the
customer or the entity with a significant benefit of financing the transfer of goods or
services to the customer

An entity shall consider all relevant facts and circumstances in assessing whether a
contract contains a financing component and whether that financing component is
significant to the contract, including both of the following:

(a) the difference, if any, between the amount of promised consideration and the
cash selling price of the promised goods or services; and
(b) the combined effect of both of the following:
a. the expected length of time between when the entity transfers the
promised goods or services to the customer and when the customer pays
for those goods or services; and
b. the prevailing interest rates in the relevant market.

No significant financing component

A contract with a customer would not have a significant financing component if any of
the following factors exist:

(a) the customer paid for the goods or services in advance and the timing of the
transfer of those goods or services is at the discretion of the customer.
(b) a substantial amount of the consideration promised by the customer is variable
and the amount or timing of that consideration varies on the basis of the
occurrence or non-occurrence of a future event that is not substantially within
the control of the customer or the entity.
(c) the difference between the promised consideration and the cash selling price of
the good or service arises for reasons other than the provision of finance to either
the customer or the entity, and the difference between those amounts is
proportional to the reason for the difference.

Non-cash consideration

To determine the transaction price for contracts in which a customer promises

consideration in a form other than cash, an entity shall measure the non-cash
consideration (or promise of non-cash consideration) at fair value.

If an entity cannot reasonably estimate the fair value of the non-cash consideration, the
entity shall measure the consideration indirectly by reference to the stand-alone selling
price of the goods or services promised to the customer (or class of customer) in
exchange for the consideration.

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ADVACC 1 – Accounting for Special Transactions I

Consideration paid or payable to customer

Consideration payable to a customer includes cash amounts that an entity pays, or

expects to pay, to the customer (or to other parties that purchase the entity’s goods or
services from the customer).

GENERAL RULE: An entity shall account for consideration payable to a customer as a

reduction of the transaction price and, therefore, of revenue unless the payment to the
customer is in exchange for a distinct good or service that the customer transfers to the
entity.

EXCEPTIONS:

1. If consideration payable to a customer is a payment for a distinct good or service

from the customer, then an entity shall account for the purchase of the good or
service in the same way that it accounts for other purchases from suppliers.

2. If the amount of consideration payable to the customer exceeds the fair value of
the distinct good or service that the entity receives from the customer, then the
entity shall account for such an excess as a reduction of the transaction price.

3. If the entity cannot reasonably estimate the fair value of the good or service
received from the customer, it shall account for all of the consideration payable
to the customer as a reduction of the transaction price.

SELF-TEST QUESTIONS:

Question 9: The transaction price

a. excludes discounts, volume rebates, coupons and free products, or services.

b. is the amount of consideration that a company expects to receive from a customer
c. excludes time value of money if the contract involves a significant financing
component.
d. does not consider noncash consideration such as donations, gifts, equipment or
labor.

Question 10: Companies can use the expected value to estimate variable consideration
when

a. the contract has only two possible outcomes.

b. a company has a small number of contracts with similar characteristics.
c. a company can use the most likely amount in a range of possible outcomes.
d. a company has a large number of contracts with similar characteristics.

Question 11: If a contract involves a significant financing component,

a. the time value of money is used to determine the fair value of the transaction.
b. the time value of money is not required to determine transaction price, if the
payment is more than a year.
c. the transaction amount should be based on the current sales price of goods or
services.
d. interest is not accrued as a result of the financing component.

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Question 12: Noncash consideration should be

a. recognized on the basis of fair value of what is given up.

b. recognized on the basis of original cost paid by customer.
c. recognized on the basis of fair value of what is received.
d. recognized on the basis of fair value of equivalent goods or services.

Question 13: Consideration paid or payable to customers

a. includes volume rebates which increases the cost to the customer.

b. includes discounts which reduces the cost of purchases to the company.
c. reduces the consideration received and the revenue to be recognized.
d. includes prompt settlement discount which increases revenues.

STEP 4: ALLOCATING THE TRANSACTION PRICE TO THE PERFORMANCE

OBLIGATIONS IN THE CONTRACT

BASIS FOR ALLOCATION

An entity shall allocate the transaction price to each performance obligation identified in
the contract on a relative stand-alone selling price basis.

To allocate the transaction price to each performance obligation on a relative stand-alone

selling price basis, an entity shall determine the stand-alone selling price at contract
inception of the distinct good or service underlying each performance obligation in the
contract and allocate the transaction price in proportion to those stand-alone selling
prices.

STAND-ALONE SELLING PRICE

The stand-alone selling price is the price at which an entity would sell a promised good
or service separately to a customer. The best evidence of a stand-alone selling price is the
observable price of a good or service when the entity sells that good or service separately
in similar circumstances and to similar customers. A contractually stated price or a list
price for a good or service may be (but shall not be presumed to be) the stand-alone
selling price of that good or service.

If a stand-alone selling price is not directly observable, an entity shall estimate the stand-
alone selling price. Suitable methods for estimating the stand-alone selling price of a good
or service include, but are not limited to, the following:

(a) Adjusted market assessment approach—an entity could evaluate the market in
which it sells goods or services and estimate the price that a customer in that
market would be willing to pay for those goods or services.

(b) Expected cost plus a margin approach—an entity could forecast its expected costs
of satisfying a performance obligation and then add an appropriate margin for
that good or service.

(c) Residual approach—an entity may estimate the stand-alone selling price by
reference to the total transaction price less the sum of the observable stand-alone

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selling prices of other goods or services promised in the contract. However, an

entity may use a residual approach to estimate the stand-alone selling price of a
good or service only if one of the following criteria is met:

a. the entity sells the same good or service to different customers (at or near
the same time) for a broad range of amounts (i.e. the selling price is highly
variable because a representative stand-alone selling price is not discernible
from past transactions or other observable evidence); or

b. the entity has not yet established a price for that good or service and the
good or service has not previously been sold on a stand-alone basis (i.e.
the selling price is uncertain).

ALLOCATION OF DISCOUNTS

When does a discount arise?

A customer receives a discount for purchasing a bundle of goods or services if the sum
of the stand-alone selling prices of those promised goods or services in the contract
exceeds the promised consideration in a contract.

How is a discount allocated?

The entity shall allocate a discount proportionately to all performance obligations in the
contract, except when an entity has observable evidence that the entire discount relates
to only one or more, but not all, performance obligations in a contract.

An entity shall allocate a discount entirely to one or more, but not all, performance
obligations in the contract if all of the following criteria are met:

(a) the entity regularly sells each distinct good or service (or each bundle of distinct
goods or services) in the contract on a stand-alone basis;
(b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of
some of those distinct goods or services at a discount to the stand-alone selling
prices of the goods or services in each bundle; and
(c) the discount attributable to each bundle of goods or services is substantially the
same as the discount in the contract and an analysis of the goods or services in
each bundle provides observable evidence of the performance obligation (or
performance obligations) to which the entire discount in the contract belongs.

ALLOCATION OF VARIABLE CONSIDERATION

Variable consideration that is promised in a contract may be attributable to the entire

contract or to a specific part of the contract, such as either of the following:

(a) one or more, but not all, performance obligations in the contract; or
(b) one or more, but not all, distinct goods or services promised in a series of distinct
goods or services that forms part of a single performance obligation.

An entity shall allocate a variable amount (and subsequent changes to that amount)
entirely to a performance obligation or to a distinct good or service that forms part of a
single performance obligation if both of the following criteria are met:

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(a) the terms of a variable payment relate specifically to the entity’s efforts to satisfy
the performance obligation or transfer the distinct good or service (or to a specific
outcome from satisfying the performance obligation or transferring the distinct
good or service); and
(b) allocating the variable amount of consideration entirely to the performance
obligation or the distinct good or service is consistent with the allocation
objective when considering all of the performance obligations and payment terms
in the contract.

CHANGES IN THE TRANSACTION PRICE

Basis for allocation

An entity shall allocate to the performance obligations in the contract any subsequent
changes in the transaction price on the same basis as at contract inception.
Consequently, an entity shall NOT reallocate the transaction price to reflect changes in
stand-alone selling prices after contract inception. Amounts allocated to a satisfied
performance obligation shall be recognized as revenue, or as a reduction of revenue, in
the period in which the transaction price changes.

SELF-TEST QUESTIONS:

Question 14: The transaction price for multiple performance obligations should be
allocated

a. based on selling price from the company’s competitors.

b. based on what the company could sell the goods for on a standalone basis.
c. based on forecasted cost of satisfying performance obligation.
d. based on total transaction price less residual value.

Question 15: When the bundle price is less than the sum of the standalone prices, the
discount should be allocated to

a. the product (or products) associated with the discount.

b. the entire bundle of products or services.
c. the product cost, thereby increasing product margin.
d. the selling price of product or services provided.

STEP 5: RECOGNIZE REVENUE WHEN A PERFORMANCE OBLIGATION IS

SATISFIED

CORE PRINCIPLE

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.

For each performance obligation identified, an entity shall determine at contract

inception whether it satisfies the performance obligation over time or satisfies the
performance obligation at a point in time. If an entity does not satisfy a performance
obligation over time, the performance obligation is satisfied at a point in time.

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TRANSFER OF CONTROL TO THE CUSTOMER

Goods and services are assets, even if only momentarily, when they are received and used
(as in the case of many services). Control of an asset refers to the ability to direct the use
of, and obtain substantially all of the remaining benefits from, the asset. Control
includes the ability to prevent other entities from directing the use of, and obtaining the
benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or
savings in outflows) that can be obtained directly or indirectly in many ways, such as:

(a) using the asset to produce goods or provide services (including public services);
(b) using the asset to enhance the value of other assets;
(c) using the asset to settle liabilities or reduce expenses;
(d) selling or exchanging the asset;
(e) pledging the asset to secure a loan; and
(f) holding the asset.

PERFORMANCE OBLIGATIONS SATISFIED OVER TIME

An entity transfers control of a good or service over time and, therefore, satisfies a
performance obligation and recognizes revenue over time, if one of the following criteria
is met:
(a) the customer simultaneously receives and consumes the benefits provided by
the entity’s performance as the entity performs
(b) the entity’s performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced; or
(c) 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.

Recognition of revenue

For each performance obligation satisfied over time, an entity shall recognize revenue
over time by measuring the progress towards complete satisfaction of that performance
obligation. The objective when measuring progress is to depict an entity’s performance
in transferring control of goods or services promised to a customer (i.e. the satisfaction
of an entity’s performance obligation).

Appropriate methods of measuring progress include output methods and input

methods. In determining the appropriate method for measuring progress, an entity shall
consider the nature of the good or service that the entity promised to transfer to the
customer.

General Rule: Recognize revenue only when entity can reasonably measure progress

An entity shall recognize revenue for a performance obligation satisfied over time only
if the entity can reasonably measure its progress towards complete satisfaction of the
performance obligation. An entity would not be able to reasonably measure its progress
towards complete satisfaction of a performance obligation if it lacks reliable information
that would be required to apply an appropriate method of measuring progress.

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Exception: Cost-recovery method

In some circumstances (for example, in the early stages of a contract), an entity may not
be able to reasonably measure the outcome of a performance obligation, but the entity
expects to recover the costs incurred in satisfying the performance obligation. In those
circumstances, the entity shall recognize revenue only to the extent of the costs incurred
until such time that it can reasonably measure the outcome of the performance
obligation.

Question 16: A company has satisfied its performance obligation when the
a. company has received payment for goods or services.
b. company has significant risks and rewards of ownership.
c. company has legal title to the asset.
d. company has transferred physical possession of the asset.

Question 17: An entity enters into a contract with a customer, a government agency,
to build a specialized satellite. The entity builds satellites for various customers, such
as governments and commercial entities. The design and construction of each satellite
differ substantially, on the basis of each customer’s needs and the type of technology
that is incorporated into the satellite. Is the performance obligation satisfied over time
or at a point in time? The performance obligation is satisfied over time because the satellite is
highly customized for the customer and has no alternative use, and the
contractor has an enforceable right to payment for work completed to date.

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