Revenue Recognition Judgements on a Construction Contract

Under PFRS 15, the bonus and penalty are variable consideration. BuildRight should estimate them using either the expected value or the most likely amount, depending on which method better predicts the entitlement. The bonus is included in the transaction price only to the extent it is highly probable that a significant reversal will not occur when the uncertainty is resolved. At 8 months, with only 45% completion, there is no strong evidence that completion within 15 months is highly probable; recognizing the full P500,000 now is aggressive and likely fails the constraint. The penalty should be estimated and deducted from the transaction price if it is probable; ignoring it overstates revenue. The estimate is updated at each reporting date. The CFO's position is not supportable without evidence, such as a detailed project schedule showing early completion.

PFRS 15 treats a modification as a separate contract only if it adds distinct goods or services and the price increases by an amount that reflects the standalone selling price of those goods or services. The mezzanine floor is distinct because it is not integrated with the original warehouse. However, the price of P1,200,000 is below the standalone price of P1,500,000, so the modification is not a separate contract. Because the remaining work is distinct from the work already transferred, BuildRight accounts for the modification as a termination of the original contract and the creation of a new contract. The new contract's transaction price is the unrecognized portion of the original transaction price plus P1,200,000. Revenue already recognized on the original contract (45% of the original price) is not adjusted. The new contract is accounted for prospectively, and the discount is allocated to the remaining performance obligations.

PFRS 15 requires an assessment of whether BuildRight controls the cladding before it is transferred to the customer. Indicators of control include primary responsibility for fulfillment, inventory risk, and discretion in pricing. BuildRight negotiates the price, bears credit risk, and is responsible for the cladding's specifications. These facts point toward principal treatment because BuildRight appears to control the cladding before transfer. The fact that a subcontractor supplies the cladding does not by itself make BuildRight an agent; the key is control. If BuildRight is merely arranging for the subcontractor to provide the cladding, and the subcontractor is responsible for the specifications and bears inventory risk, then agent treatment might be appropriate. On the given facts, principal treatment is more defensible. The CFO's preference for agent treatment would reduce reported revenue and may not reflect the substance.