Joint Arrangements

Chapter 6
Joint Arrangement
• Joint arrangement is an arrangement of which two or more parties
have joint control.
Contractual Arrangement
• A contractual arrangement for the sharing of joint control over an
investee distinguishes an interest in a joint arrangement from other
types of investments, such as investment in equity securities
measured at fail value, investment in associate, and investment in
subsidiary.
Joint Control
• Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing
control.
 Nature of Type of Interest in Standard Accounting
relationship investment voting rights
with investee of investee
 Regular FVPL or FVOCI Less than 20% PFRS 9 Fair value
investor asset
 Significant Investment in 20% to 50% PAS 28 Equity method
influence associate
 Control Investment in 51% to 100% PFRS 3 and PFRS 10 Consolidated
subsidiary
 Joint control a. Joint PFRS 11 and other Recognize own assets, liabilities,
operation relevant PFRSs revenues and expenses plus share
Contractually in the assets, liabilities, revenues
agreed and expenses of the joint operation.
b. Joint venture PFRS 11 and PAS 28 Equity method
Types of Joint Arrangement
a. Joint operation – is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the assets and
obligations for the liabilities of the arrangement.
b. Joint venture – is a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the
arrangement.
Rights and Obligations Arising from the
Arrangement
• If the contractual arrangement confers to the parties that have joint
control rights to the assets and obligations for the liabilities of the
joint arrangement, the joint arrangement is a joint operation.
• If the contractual arrangement confers to the parties that have joint
control rights to the net assets of the joint arrangement, the joint
arrangement is a joint venture.
Assessment of Rights and Obligations
a. A joint arrangement that is not structured through a separate
vehicle is a joint operation.
b. A joint arrangement in which the assets and liabilities relating to
the arrangement are held in a separate vehicle can be either a joint
venture or a joint operation.
Joint Operations
• A joint operator recognizes its own assets, liabilities, income and
expenses plus its share in the joint operation’s assets, liabilities,
income and expenses. These items are accounted for under other
PFRSs applicable to the particular assets, liabilities, income and
expenses.
Accounting for Joint Operation Transactions
• Separate books of accounts ay or may not be used for a joint
operation.
No Separate Records are Maintained
• Separate books of accounts may not be used most especially when
the joint operation is relatively short-lived.
Separate Records are Maintained
• When separate records are maintained, the joint operation
transactions are recorded in those separate books in the regular
manner, similar to an ordinary business.
Interest in Joint Operation whose Activity
Constitutes a Business
• A business is an integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing a
return in the form of dividends, lower costs or other economic
benefits directly to investors or other owners, members or
participants.
• A business combination is accounted for by recognizing goodwill for
the excess of the consideration transferred over the fair value of the
net identifiable assets acquired.
Joint Ventures
• Under the equity method, the investment is initially recognized at
cost and subsequently adjusted for the investor’s share in the
investee’s changes in the equity.
Presentation in Statement of Financial
Position
• Investments accounted for under the equity method are presented in
the statement of financial position as non-current assets, except
when they are classified as held for sale under PFRS 5 Non-current
Assets Held for Sale and Discontinued Operations.
Transactions Between a Venturer and a Joint
Venture
• Gains and losses resulting from upstream and downstream
transactions between an investor and a joint venture are recognized
in the investor’s financial statements only to the extent of unrelated
investors’ interests in the joint venture.
Participant to a Joint Arrangement with no
Joint Control
a. A joint operation accounts for its interest using the accounting
applied by a joint operator if the party has rights to the assets, and
obligations for the liabilities, of the joint operation. In the absence
of such rights and obligations, the party uses other PFRSs applicable
to the interest.
b. A joint venture accounts for its interest using PFRS 9 Financial
Instruments, unless it has significant influence over the joint
venture, in which case it shall apply PAS 28.
Separate Financial Statements
a. A joint operator accounts for its interest using the accounting
described earlier.
b. A joint venturer accounts for its interest using PAS 27 Separate
Financial Statements at fair value or using the equity method.
c. A party that participates in a joint operation or a joint venture
accounts for its interest using the accounting described above.
Construction Contracts
Chapter 7
Introduction
• Revenue – is income arising in the course of an entity’s ordinary
activities.
• Contract – is an agreement between two or more parties that creates
enforceable rights and obligations.
• Customer – is a party that has contracted with an entity to obtain
goods or services that are an output of the entity’s ordinary activities
in exchange for consideration.
Core Principle Under PFRS 15
• An entity recognizes revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods
or services.
Definition of Construction Contract
• Construction contract – is a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology
and function or their ultimate purpose or use.
Application of the Basic Principles of PFRS 15
• Step 1: Identify the contract with the customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations
• Step 5: Recognize revenue when a performance obligation is satisfied
Combination of Contracts
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
c. Some or all of the goods or services promised in the contracts are a
single performance obligation.
Satisfaction of Performance Obligations
a. Over time; or
b. At a point in time.
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.
Fixed price contract – a construction contract in which the contractor
agrees to a fixed contract price or a fixed rate per unit of output.
Cost plus contract – a construction contract in which the contractor is
reimbursed for allowable or defined costs, plus a fee.
Cost-plus-variable-fee contract – the contractor is reimbursed for the
costs plus a percentage of those costs.
Cost-plus-fixed-fee contract – the contractor is reimbursed for the
costs plus a fixed amount.
Stand-alone selling price is the price at which a promised good or
service can be sold separately to a customer.
Performance Obligations Satisfied Over Time
• An entity recognizes revenue from a performance obligation that is
satisfied over time based on the entity’s measurement of its progress
towards the complete satisfaction of the obligation in the contract.
Methods of Measuring Progress
• An entity shall use a single method of measuring progress
consistently for each performance obligation satisfied over time and
shall remeasure its progress at the end of each reporting period.
Input Methods
• Input methods recognize revenue on the basis of efforts or inputs
expended relative to the total expected inputs needed to fully satisfy
a performance obligation.
Cost-to-Cost
• Cost-to-cost method refers to the estimation of stage of completion
by reference to the proportion that contract costs incurred for work
performed to date bear to the estimated total contract costs.
Formula 1
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝑡𝑜 𝑑𝑎𝑡𝑒
• 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑐𝑜𝑠𝑡𝑠

Total costs incurred to date represent the cumulative costs incurred

from contract inception up to the current reporting date.
Estimated total contract costs (Estimated total costs at completion)
pertain to the forecasted total costs of completing the contract.
Estimated costs to complete pertain to the anticipated additional
costs required to fully complete the contract.
Formula 2
• 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 =
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝑡𝑜 𝑑𝑎𝑡𝑒
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝑡𝑜 𝑑𝑎𝑡𝑒+𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 𝑡𝑜 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑒
Efforts-Expended (Labor Hours-Based)
Method
• Under this method, the percentage of completion is based on efforts
expended in completing the contract – normally in direct labor hours,
rather than on costs.
Contract Costs
a. Incremental costs of obtaining a contract
b. Costs to fulfill a contract
Incremental Costs of Obtaining a Contract
• Incremental costs of obtaining a contract – are costs incurred in
obtaining a contract with a customer that the entity would not have
incurred had the contract not been obtained.
Costs to Fulfill a Contract
• Cost incurred in fulfilling a contract that are within the scope of other
standards are accounted for in accordance with those standards.
• Cost incurred in fulfilling a contract that are outside the scope of
other standards are recognized as asset if all of the following criteria
are met:
a. The costs are directly related to a contract or specifically
identifiable anticipated contract.
b. The costs generate or enhance resources that will be used to
satisfy performance obligations in the future; and
c. The costs are expected to be recovered.
Amortization and Impairment
• Contract costs recognized as asset are amortized on a systematic basis
that is consistent with the transfer of the related goods or services to
the customer.
Adjustments to the Measure of Progress
• A weakness of the input methods is that there may not be a direct
relationship between the inputs and the transfer of control of the
asset to the customer.
Presentation
• When either party to a contract has performed, the contract is
presented in the statement of financial position as a contract liability
or a contract asset. An unconditional right to consideration is
presented separately as a receivable.
Contract liability – is an entity’s obligation to transfer goods or
services to a customer for which the entity has received consideration
from the customer.
Contract asset – is an entity’s right to consideration in exchange for
goods or services that the entity has transferred to a customer when
the right is conditioned on something other than the passage of time.
Receivable – is an entity’s right to consideration that is unconditional.
Output Methods
• Output methods recognize revenue on the basis of direct
measurements of the value to the customer of the goods or services
transferred to date relative to the remaining goods or services
promised under the contract.
Changes in the Measure of Progress
• The measure of progress is updated as circumstances change over
time to reflect any changes in the outcome of the performance
obligation.
Reasonable Measures of Progress
• Revenue for a performance obligation satisfied over time is
recognized only if the progress towards the complete satisfaction of
the performance obligation can be reasonably measured.
Variable Consideration
• If the consideration includes a variable amount, the entity shall
estimate the amount to which it will be entitled in exchange for
transferring the promised goods or services to the customer.
Expected value – the sum of probability-weighted amounts in a range
of possible amounts.
Most likely amount – the single most likely amount in a range of
possible amounts.
Constraining Estimates of Variable
Consideration
• The estimated amount of variable consideration is included in the
transaction price only to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable
consideration is subsequently resolved.
Constraining Estimates of Variable
Consideration
• The entity determines the probability of the penalty being charged
and includes the variable consideration only if it is highly probable
that the penalty will not be charged.
Incentive Payments
• Incentive payments are additional amounts paid to the contractor if
specified performance standards are met or exceed.
Cost Escalations
• Cost escalation is a contractual provision that stipulates an increase in
the contract price in the event of an increase in certain costs.
Contract Modifications
• A contract modifications is a change in the scope and price of a
contract that is approved by the contracting parties, in writing, orally
or implied by customary business practices.
Variations on the Contract (Change Orders)
• A variation is an instruction by the customer for a change in the scope
of the work to be performed under the contract.
Changes in the Transaction Price
• If the change in the transaction price is attributable to a variable
consideration that existed before a modification that was accounted
for as a termination of the original contract and the creation of a new
contract, the change in the transaction price is allocated to the
performance obligations in the original contract.
• In all other cases contract, the change in the transaction price is
allocated to the unsatisfied performance obligations in the modified
contract.
Claims for Reimbursements on the Contract
• A claim is an amount that the contractor seeks to collect from the
customer or another party as reimbursement for costs not ncluded in
the contract price.
Significant Financing Component in a
Contract
• When determining the transaction price, the promised consideration
is discounted if the timing of the agreed payments provides the
customer or the entity with a significant benefit of financing the
transfer of goods or services.
Non-cash Consideration
• The contributed goods or services are treated as non-cash
consideration and included in the transaction price if the entity
obtains control over them.
Uncertainty in the Collectability of Contract
Revenue
• Contract inception
If the uncertainty in the collectability of contract revenue arises at
contract inception, the entity does not recognize any revenue from
the contract.
• Subsequent period
If the uncertainty in the collectability of contract revenue arises
subsequent to contract inception, the uncollectability is accounted
for as impairment of trade receivable and contract asset.
Accounting for Franchise
Operations - Franchisor
Chapter 8
Introduction
• An entity applies PFRS 15 Revenue from Contracts with Customers to
account for revenues from contracts with customers. PFRS 15
supersedes PAS 18 Revenue.
Core Principle Under PFRS 15
• An entity recognizes revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods
or services.
Licensing
• The licensing section of PFRS 15 provides specific principles that
related directly to the accounting for franchises. The specific
principles are to be applied in addition to the general principles.
Franchise
• A franchise is a contractual arrangement under which the franchisor
grants the franchisee the right to sell certain products or services, to
use certain trademarks or trade names, or to perform certain
functions, usually within a designated geographical area.
Types of Franchises
1. Contractual arrangement between two private entities or
individuals.
2. Contractual arrangement between a private entity or an individual
and the government.
Between Two Private Entities or Individuals
• The franchisor, having developed a unique concept or product,
protects that concept or product through a patent, copyright, or
trademark or trade name. The franchisee acquires the right to exploit
the franchisor’s idea or product by signing a franchise agreement.
Between a Private Entity or an Individual and
the Government
• A municipality allows a private entity to use public property in
performing its services.
Application of the Principles of PFRS 15
• Step 1: Identify the contract with the customer
• Step 2: Identify the performance obligations in the contract
Specific Principles: Licensing Section
• A contract to grant a license to a customer may include other
promises to provide additional goods or services to the customer,
whether explicitly stated in the contract or implied by the entity’s
customary business practices.
Promise to Grant License is not Distinct
• If the promise to grant a license is not distinct from the other
promises in the contract, all of the promises are accounted for
together as a single performance obligation.
Promise to Grant License is Distinct
• If the promise to grant the license is distinct from the other promises
in the contract, the promise to grant the license is treated as a
separate performance obligation.
Right to Access
• The customer has the right to access the entity’s intellectual property
as it exists throughout the license period if the customer cannot
direct the use of, and obtain substantially all of the remaining benefits
from, the license at the point in time at which the license is granted.
Right to Use
• The customer has the right to use the entity’s intellectual property as
it exists at the point in time at which the license is granted if the
customer can direct the use of, and obtain substantially all of the
remaining benefits from, the license at the point in time at which the
license is granted.
Sales-Based or Usage-Based Royalties
a. The subsequent sale or usage occurs; and
b. The performance obligation to which the sales-based or usage-
based royalty has been allocated has been satisfied.
Franchise Fees
• Franchise fees refer to the fees that the franchisee agrees to pay to
the franchisor in a franchise agreement.
Initial franchise fee – this is the one-off payment made by the
franchisee to the franchisor to obtain the franchise right.
Continuing franchise fees – these are the periodic payments made by
the franchisee to the franchisor for the ongoing franchisee support.
Sale of equipment and other tangible assets – the franchisor provides
equipment and other tangible assets to the franchisee for a separate
fee.
Contract Costs
a. Incremental costs of obtaining a contract
b. Costs to fulfill a contract
Incremental Costs of Obtaining a Contract
• Incremental costs are costs that would not have been incurred has
the contract not been obtained.
Costs to Fulfill a Contract
• Costs incurred in fulfilling a contract that are within the scope of
other standards are accounted for using those standards.
• Costs incurred in fulfilling a contract that are outside the scope of
other standards are recognized as asset if they are directly related to
a contract, generate or enhance resources that will be used in
satisfying performance obligations in the future, and expected to be
recovered.
Amortization and Impairment
• Contract costs recognized as asset are amortized on a systematic basis
that is consistent with the transfer to the customer of the goods or
services to which the asset relates.
Significant Financing Component in a
Contract
• When determining the transaction price, the promised consideration
is discounted if the timing of the agreed payments provides the
customer with a significant benefit of financing the transfer of goods
or services.
Uncertainty in the Collectability of Contract
Revenue
• If the uncertainty in the collectability of contract revenue arises at
contract inception, the contract would not qualify under Step 1 and
thus no revenue is recognized.
Repossessed Franchises
• A franchisor may recover franchise rights through repossession if the
franchisee decides not to pursue the franchise agreement.
Consignment Sales
Chapter 9
Introduction
• An entity applies PFRS 15 Revenue from Contracts with Customers to
account for revenues from contracts with customers. PFRS 15
supersedes PAS 18 Revenue.
Consignment Arrangements
• Under a consignment arrangement, an entity delivers goods to
another party who undertakes to sell the goods to end customers on
behalf of the consignor.
Principal vs. Agent Considerations
• When another party is involved in providing goods or services to a
customer, the entity shall determine whether it is acting as a principal
or an agent.
Consignment Sales
Chapter 9
Introduction
• An entity applies PFRS 15 Revenue from Contracts with Customers to
account for revenues from contracts with customers. PFRS 15
supersedes PAS 18 Revenue.
Consignment Arrangements
• Under a consignment arrangement, an entity delivers goods to
another party who undertakes to sell the goods to end customers on
behalf of the consignor.
Principal vs. Agent Considerations
• When another party is involved in providing goods or services to a
customer, the entity shall determine whether it is acting as a principal
or an agent.