Strong Philippine Financial Reporting Standard (PFRS /strong ) 15: Strong The /strong

Philippine FinancialReporting Standard(PFRS) 15: The NewRevenue RecognitionStandard13 September 2018Cagayan de Oro CityPage 0

Presentation Outline§Introduction§Page 1FRSC: Who we are§PFRS 15: An overview§PIC issuances on PFRS 15 adoption by the real estateindustry§Q&A

Financial Reporting Standards Council(FRSC)§Established by the Professional RegulatoryCommission under the Implementing Rules andRegulations of the Philippine Accountancy of Act of2004 to assist the Board of Accountancy (BOA) in:§Establishing generally accepted accounting principles in thePhilippines§Converging Philippine accounting standards with internationalaccounting standards§Developing implementation guidance on accounting standards§ To assist the FRSC in providing implementation guidanceon accounting standards, it formed the PhilippineInterpretations Committee (PIC)Page 2

Membership Page 3FRSC Regulators (BOA, SEC, BSP, Insurance Commission) COA FINEx Philippine Institute of CPAs (PICPA)PIC Regulators FINEx Academe Accounting Firms

PFRS 15: An Overview§ International Financial Reporting Standard(IFRS) 15, Revenue from contract with customers,was issued in May 2014 by the International AccountingStandards Board (IASB)§ IFRS 15 was adopted by the FRSC in 2016 asPFRS 15§ PFRS 15 replaces PAS 18, Revenue, PAS 11,Construction Contracts, and related interpretationseffective January 1, 2018§ Contains the accounting principles for all revenuearising from contracts with customersPage 4

Philippine Interpretations Committee (PIC)Issuances on PFRS 15§ The PIC acknowledges the complexity of adoptingPFRS 15 to the real estate industry and has issued thefollowing interpretations:1. PIC Q&A 2016-04 - addresses the timing of revenuerecognition for real estate under pre-completion stage2. PIC Q&A 2018-12 - addresses the other implementationissues affecting the real estate industryThe conclusions contained in the above Q&As arebased on the specific facts and circumstancesdiscussed therein. Actual circumstances of thedeveloper could differ and could result to a differentconclusion.Page 5

PIC Q&A 2016-04Sale of Residential Propertyunder Pre-completionContractsPage 6

Can developers continue applying Percentage-ofCompletion (POC) method?§ The developer can continue recognizing revenue overtime (i.e., based on POC) if the following conditions aremet:1. The developer’s performance does not create an assetwith an alternative use to the entity; and,2. The developer has an enforceable right to payment forperformance completed to date.Page 7

Can developers continue applying Percentage-ofCompletion (POC) method?ConditionAnalysisConstructed asset hasno alternative useMet - The developer cannot resell theproperty identified in the CTS to anotherbuyer.Developer has right topayment forperformancecompleted to dateMet - The Maceda Law cannot beenforced unless the developer agrees tothe cancellation (through notarized noticeof cancellation) and without such consent,the developer can continue developmentand take legal action against the buyer forspecific performance.CONCENSUS: As both conditions are met, the developer canrecognize revenue as the residential property is being constructed(i.e., based on POC).Page 8

PIC Q&A 2018-12PFRS 15 ImplementationIssues affecting the RealEstate IndustryPage 9

Identifying the Revenue ContractIs the Reservation Agreement the Revenue Contract?§ The reservation agreement is not the revenue contractfor the sale or real estate property for the followingreasons:§ The object of this agreement is the reservation right given bythe developer to the buyer and not the property itself.§ The buyer is not obliged to pay the contract price of theproperty unless he decides to proceed with the purchase.§ The reservation fee will be initially recorded as adeposit from a customer or a liability and subsequentlywill be recognized as revenue either when the futureperformance obligation is transferred (i.e., if the buyerproceeds with the purchase) or when the reservationfee is forfeited.Page 10

Identifying performance obligations§ Three scenarios covered by the Q&A:A. Sale of lot onlyB. Sale of house and lotC. Sale of condominium unit§ In all three scenarios, the developer only has oneperformance obligationA. A lot with associated infrastructure (roads, drainage, etc.)B. A single package of house and lotC. A condominium unit with access to promised amenitiesImplication: NO allocation of contract price to the differentcomponents (e.g., the house and the lot) and only onepercentage of completion is applied to each contract.Page 11

Determining the transaction priceSignificant Financing Component§ Typically, the customer’s schedule of payments is notaligned with the percentage of completion (POC).§ This mismatch could result to significant financing eitherby the customer to the developer or vice versa§ Customer pays ahead of the POC – the developer to recognizeinterest expense on the advanced payment§ POC is ahead of the customer’s payment – the developer torecognize interest income on the unpaid amount§ The PIC Q&A provides guidance on the interest rate toapply. It also provides illustrative examples oncalculating the significant financing component.Page 12

Determining the Percentage-of-Completion (POC)§ The developer may use either output method or inputmethod in measuring progress§ Chosen method must be applied consistently for eachperformance obligation (cannot be a mix of both methods)§ If the output method is used, all costs incurred to-date isrecognized in profit or loss immediately§ The following costs should be excluded from the POCcalculation:§ Land§ Uninstalled materials§ Connection fees§ Borrowing costsPage 13§ The Q&A provides illustrative examples on POCcalculation

Other Topics covered by the Q&A§ Accounting for commissions/other incentives given tosales agents§ Accounting for Common Usage Service Area (CUSA)ChargesPage 14

Effective Date§ PFRS 15, including the PIC Q&As, is effective forannual periods beginning on or after January 1, 2018§ The SEC is currently looking at providing adoption reliefto real estate developers§ Awaiting SEC Circular that will lay down relief to be provided toreal estate developers on the adoption of PFRS 15 and therelated PIC Q&AsPage 15

Questions?Page 16

Thank you!Page 17

Page 4 PFRS 15: An Overview §International Financial Reporting strong Standard /strong (IFRS) 15, strong Revenue /strong 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, strong Revenue /strong , PAS 11, Construction Contracts, and related interpretations effective January 1, 2018