Philippine Financial

Reporting Standard
(PFRS) 15: The New
Revenue Recognition
Standard

13 September 2018
Cagayan de Oro City

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 Presentation Outline

§ Introduction
§ FRSC: Who we are

§ PFRS 15: An overview

§ PIC issuances on PFRS 15 adoption by the real estate
industry
§ Q&A

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 Financial Reporting Standards Council
(FRSC)

§ Established by the Professional Regulatory

Commission under the Implementing Rules and
Regulations of the Philippine Accountancy of Act of
2004 to assist the Board of Accountancy (BOA) in:
§ Establishing generally accepted accounting principles in the
Philippines
§ Converging Philippine accounting standards with international
accounting standards
§ Developing implementation guidance on accounting standards

§ To assist the FRSC in providing implementation guidance

on accounting standards, it formed the Philippine
Interpretations Committee (PIC)

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 Membership

► FRSC
► Regulators (BOA, SEC, BSP, Insurance Commission)
► COA
► FINEx
► Philippine Institute of CPAs (PICPA)

► PIC
► Regulators
► FINEx
► Academe
► Accounting Firms

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 PFRS 15: An Overview

§ International Financial Reporting Standard

(IFRS) 15, Revenue from contract with customers,
was issued in May 2014 by the International Accounting
Standards Board (IASB)
§ IFRS 15 was adopted by the FRSC in 2016 as
PFRS 15
§ PFRS 15 replaces PAS 18, Revenue, PAS 11,
Construction Contracts, and related interpretations
effective January 1, 2018
§ Contains the accounting principles for all revenue
arising from contracts with customers

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 Philippine Interpretations Committee (PIC)
Issuances on PFRS 15

§ The PIC acknowledges the complexity of adopting

PFRS 15 to the real estate industry and has issued the
following interpretations:
1. PIC Q&A 2016-04 - addresses the timing of revenue
recognition for real estate under pre-completion stage
2. PIC Q&A 2018-12 - addresses the other implementation
issues affecting the real estate industry

The conclusions contained in the above Q&As are

based on the specific facts and circumstances
discussed therein. Actual circumstances of the
developer could differ and could result to a different
conclusion.
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 PIC Q&A 2016-04
Sale of Residential Property
under Pre-completion
Contracts

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 Can developers continue applying Percentage-of-
Completion (POC) method?

§ The developer can continue recognizing revenue over

time (i.e., based on POC) if the following conditions are
met:
1. The developer’s performance does not create an asset
with an alternative use to the entity; and,
2. The developer has an enforceable right to payment for
performance completed to date.

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 Can developers continue applying Percentage-of-
Completion (POC) method?

Condition Analysis
Constructed asset has Met - The developer cannot resell the
no alternative use property identified in the CTS to another
buyer.

Developer has right to Met - The Maceda Law cannot be

payment for enforced unless the developer agrees to
performance the cancellation (through notarized notice
completed to date of cancellation) and without such consent,
the developer can continue development
and take legal action against the buyer for
specific performance.

CONCENSUS: As both conditions are met, the developer can

recognize revenue as the residential property is being constructed
(i.e., based on POC).

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 PIC Q&A 2018-12
PFRS 15 Implementation
Issues affecting the Real
Estate Industry

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 Identifying the Revenue Contract
Is the Reservation Agreement the Revenue Contract?

§ The reservation agreement is not the revenue contract

for the sale or real estate property for the following
reasons:
§ The object of this agreement is the reservation right given by
the developer to the buyer and not the property itself.
§ The buyer is not obliged to pay the contract price of the
property unless he decides to proceed with the purchase.

§ The reservation fee will be initially recorded as a

deposit from a customer or a liability and subsequently
will be recognized as revenue either when the future
performance obligation is transferred (i.e., if the buyer
proceeds with the purchase) or when the reservation
fee is forfeited.
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 Identifying performance obligations

§ Three scenarios covered by the Q&A:

A. Sale of lot only
B. Sale of house and lot
C. Sale of condominium unit

§ In all three scenarios, the developer only has one

performance obligation
A. A lot with associated infrastructure (roads, drainage, etc.)
B. A single package of house and lot
C. A condominium unit with access to promised amenities

Implication: NO allocation of contract price to the different

components (e.g., the house and the lot) and only one
percentage of completion is applied to each contract.
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 Determining the transaction price
Significant Financing Component

§ Typically, the customer’s schedule of payments is not

aligned with the percentage of completion (POC).
§ This mismatch could result to significant financing either
by the customer to the developer or vice versa
§ Customer pays ahead of the POC – the developer to recognize
interest expense on the advanced payment
§ POC is ahead of the customer’s payment – the developer to
recognize interest income on the unpaid amount

§ The PIC Q&A provides guidance on the interest rate to

apply. It also provides illustrative examples on
calculating the significant financing component.

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 Determining the Percentage-of-Completion (POC)

§ The developer may use either output method or input

method in measuring progress
§ Chosen method must be applied consistently for each
performance obligation (cannot be a mix of both methods)
§ If the output method is used, all costs incurred to-date is
recognized in profit or loss immediately

§ The following costs should be excluded from the POC

calculation:
§ Land
§ Uninstalled materials
§ Connection fees
§ Borrowing costs
§ The Q&A provides illustrative examples on POC
calculation
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 Other Topics covered by the Q&A

§ Accounting for commissions/other incentives given to

sales agents
§ Accounting for Common Usage Service Area (CUSA)
Charges

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 Effective Date

§ PFRS 15, including the PIC Q&As, is effective for

annual periods beginning on or after January 1, 2018
§ The SEC is currently looking at providing adoption relief
to real estate developers
§ Awaiting SEC Circular that will lay down relief to be provided to
real estate developers on the adoption of PFRS 15 and the
related PIC Q&As

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 Questions?

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 Thank you!

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