Significance of the Implementation of PSAK 72

The enactment of PSAK 72 concerning Revenue from Customer Contracts, which requires implementation since the 2020 accounting year, can have a significant effect on the income position in the company's income statement. For this reason, prior to the closing of the 2020 financial statements, the company's management needs to assess and prepare several things to prevent error in the 2020 financial statements. This article is written by Mikail Jaman, Managing Partner Audit & Assurance, KAP Agus Ubaidillah dan Rekan (TGS AU Partners).

According to PSAK 72 Revenue from Customer Contracts, the recognition of revenue will depend on the implementation of the seller's obligations as stated in the contract, so that it is different from PSAK 23 Revenue which determines the criteria for revenue recognition, especially in the case of delivery of services where revenue recognition is recognized based on the level of completion of service delivery on balance sheet date.

With the effectiveness of PSAK 72 Revenue from Customer Contracts, the company's accounting team, including company management, is required to pay attention to aspects of the clauses in the contract, particularly what is agreed upon, payment rights, and pricing of the goods or services being transacted. The goal is so that the contracts made between the company and its customers do not have a negative impact on the revenue figures in the financial statements.

To make it easier to understand the effect of PSAK 72, let's take an example of a transaction whose revenue recognition can be treated differently according to the contract made.

Examples of cases of the implementation of PSAK 72

Home unit sales transactions

PT ABC is a property company that builds houses (housing complex) and sells the houses they build. The buyer has entered into a sales contract with PT ABC for a housing unit under construction. Each housing unit has a similar building plan and a similar size, the only difference is the location.

Case 1

PT ABC in its sales contract does not have the right to force the home buyer to pay for what has been done (built), the buyer is only obliged to pay if the customer obtains physical ownership of the house.

How is the revenue recognition in case 1 according to PSAK 72?

The recognition of revenue from PT ABC in this transaction is when the physical ownership of the house is handed over from the seller to the buyer. In PSAK 72 the term for revenue recognition is the recognition of income for the execution of an obligation at a-point-of-time.

Case 2

PT ABC in its sales contract has the right to force home buyers to pay for what has been done (built) to date, the buyer is obliged to pay if PT ABC bills the progress term payments to the customer.

How is the income recognition in case 2 according to PSAK 72?

The recognition of revenue from PT ABC in this transaction is to record income from the sale of houses, using the percentage of completion method. PT ABC can record revenue in accordance with the amount billed to customers. According to PSAK 72, this case is categorized as revenue recognition for performance obligations that have been fulfilled over-a-period-of-time.

The Five-Step Model In Revenue Recognition

PSAK 72 Revenue from Customer Contracts introduces a five-step model for revenue recognition. The five steps in recognizing income according to PSAK 72 are as follows:

  1. Identification of contracts with customers;
  2. Identification of performance obligations in the contract;
  3. Determine the transaction price;
  4. Allocation of transaction prices for performance obligations in the contract;
  5. Revenue recognition when (or when) the entity meets a performance obligation.

Identification of Transactions with Customers

What needs to be done at the initial stage of implementation of PSAK 72 is the identification of transactions involving customers. This needs to be done because PSAK 72 is only applied to contracts with customers, so it is necessary to analyze which transactions are with customers.

According to PSAK 72, a customer is a party that has a contract with an entity to obtain goods or services that are output from the entity's normal activities to be exchanged for a fee. The counterparty is not a customer if, for example, the counterparty has a contract with an entity to participate in an activity or process in which the parties to the contract share the risks and benefits resulting from the activity or process (such as developing assets in a collaborative arrangement) rather than to obtain output from the normal activities of the entity.

Thus, the company needs to sort out the transactions between customers and non-customers. The company needs to check whether what is currently considered by the company as customers are really “customers” according to PSAK 72, because if they are not customers, the transaction is not a revenue transaction but a loan-receivable transaction.

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Identification of Contracts Which Shall Not Follow PSAK 72

A contract with a customer needs to be identified therein whether it contains one or more of the following transactions:

  1. Lease transactions
  2. Insurance contract
  3. Financial instrument contracts, and
  4. Non-monetary exchanges between entities in the same line of business to facilitate sales to potential customers or customers.

If it contains any of these transactions, the company must refer to the relevant PSAK. The first thing that is done is to use the provisions of the relevant PSAK (for example, if a transaction contains a lease element, then use PSAK 73) to separate the components related to the 4 types of transactions and components that are not included in the related PSAK. For components that are not included in the relevant PSAK, the income will be determined according to PSAK 72.

Combined Contract and Contract Amendment (Contract Modification)

PSAK 72 absorbs the provisions regarding a combination of several contracts derived from PSAK 34 (Accounting for Construction Contracts), when a company makes more than one contract to customers that are related to one contract to another, revenue recognition cannot be done per each contract, but rather done in combination (become into a single contract).

If there is a contract change (contract modification), for example, it is related to a change in price or quantity, or specifications, then the new contract will affect the nominal price that must be allocated in recognition of the related transaction revenue.

Identification of performance obligations in the contract

Revenue recognition in PSAK 72 emphasizes the implementation of each identified obligation. In a contract (or a combination of contracts / combined contracts) that has been identified, there will be two possibilities, namely the contract has a single performance obligation or several performance obligations.

The company must identify whether there are separated performance obligations (if there are goods or services that can be differentiated) if the following two criteria are met:

  1. The customer benefits from the goods or services either alone or together with other resources that are readily available to the customer (i.e. goods or services that are distinguishable in nature); and
  2. The entity's promises to transfer the goods or services to customers are separately identifiable from other covenants in the contract (ie, promises to transfer goods or services that are distinguishable in the context of the contract).

If those criteria are not met, then there is only a single performance obligation for the contract.

Examples of Identification of Performance Obligation

Examples of identifying performance obligations are as follows:

PT EPC, a construction service company, made a contract with its customer to build a factory for the customer. The entity is responsible for all project management and identifies a variety of goods and services promised, including engineering services, land preparation, foundation building, procurement, structural construction, electrical installation, water, air-conditioner and lighting, machine installation, and completion. In the construction of the factory, one to another promise (goods and services) is related. In normal business practice, PT EPC also provides electrical installation only or lighting, and machinery procurement only to other customers.

To identify how many performance obligations there are in the contract, it is necessary to analyze whether the two criteria according to paragraph 27 of PSAK 72 are fulfilled as follows:

Criterion 1, The goods and services promised can be considered to be distinguishable, that is, customers benefit from the goods and services either separately or together with other available resources. In this case, PT EPC or a similar company also sells these goods and services separately to other customers. Customers can also generate economic benefits from goods and services individually by using, consuming, selling, or storing these goods or services.

Criterion 2, the promise to transfer goods and services can be identified separately. In this case, each promise can not be identified separately, the reason is that PT EPC provides services to integrate goods and services (as input) to the hospital (as a combined output).

Because the two criteria in paragraph 27 of PSAK 72 are not met, the goods and services are not distinct. An entity shall record all goods and services in the contract as a single performance obligation.

When is the time for revenue recognition?

With the issuance of PSAK 72 (including PSAK 73), the financial accounting standard-setter uses the concept of transfer of control to replace risk and benefit transfers as a condition for when revenue recognition can take place. This is in accordance with the contents of paragraph 31 of PSAK 72 as follows:

An entity recognizes revenue when (or while) it completes a performance obligation by transferring the promised goods or services (i.e. assets) to the customer. Assets are transferred when (or during) the customer obtains control of the asset.

Recognition of revenue according to PSAK 72 can occur at:

  1. a-point-of-time or 
  2. over-a-period-of-time (as shown in the first example above). 

At this point, PSAK 72 provides guidance on the recognition of performance obligation revenue (which has been identified), that it must be carried out at over-a-period-of-time if one of the following condition is fulfilled:

  1. the customer simultaneously receives and consumes the benefits provided by the entity's performance when the entity performs its performance obligations.
  2. the entity's performance of creating or enhancing assets (for example, work in progress) that are controlled by the customer as they are created or enhanced.
  3. the entity's performance does not create an asset with alternative uses for the entity (see and the entity has the right to enforceable payments for performance completed to date. customers to pay).

How to measure the revenue that must be recognized?

In the case of revenue recognition over time, revenue is recognized whenever there is progress in the implementation of obligations. Progress in performing the obligations will be measured by a method. 

The company shall apply a single method of measuring progress for each performance obligation completed over time and the company shall apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, the entity remeasures the progress towards completing the full performance obligations that were settled over time. For example, there are several performance obligations in a contract as follows:

  1. Obligation to perform A (recognition of revenue at one point in time)
  2. Obligation to perform B (recognition of revenue over time)
  3. Performance obligation C (recognition of revenue over time)

If the performance obligations B and C are similar, the income measurement method must use the same method (one method / single method).

The calculation of income over time will depend on measuring the progress of the performance of the obligation, namely using the output or input method.

Output Method

The output method recognizes revenue based on a direct measurement of the value of the goods or services transferred to the customer to date relative to the remaining goods or services promised in the contract. Output methods include methods such as performance surveys completed to date, appraisal of results achieved, milestones achieved, time elapsed and units produced or units delivered. When an entity evaluates whether to apply the output method to measure its progress, the entity considers whether the selected outputs will accurately reflect the entity's performance on completion of its performance obligations.

If the company has a right to a customer payment in an amount directly related to the value for the customer for the entity's completed performance to date (for example, a service contract in which the entity bills a fixed amount for each hour of service rendered), the company may recognize revenue. in the amount for which the company has the right to charge.

Input Method

The input method under PSAK 72 recognizes revenue based on the business or input of the entity on completion of performance obligations (for example, resources consumed, labor hours expense, costs incurred, the time elapsed, or machine hours used) relative to the total input expected to complete these performance obligations. If the entity's operations or inputs are charged equally over the period of performance, it may be appropriate for the entity to recognize revenue on a straight-line basis.

Allocation of Transaction Prices for Performance Obligations in the Contract

After the company identifies what the performance obligations are in the contract, whether it is single or several separate performance obligations, what must be done next is to allocate prices for each of these performance obligations.

The price that has been allocated per each performance obligation will be the basis for the value in calculating the income recognition according to the fulfillment of the obligation.

PSAK 72 requires price allocation taking into account the following items, stand-alone selling prices, discount allocations, variable compensation allocations, and changes in transaction prices.

Significant Funding Components

PSAK 72 introduces the treatment of significant financing component where financial income (interest income) must be identified and separated from the amount of total revenue generated from customers. The existence of a significant funding component can be indicated if payments from customers are made longer than the normal payment cycle for similar transactions.

PSAK replaced by PSAK 72?

PSAK 72 regarding Revenue from Contracts with Customers will replace the following PSAK:

  1. PSAK 23 Income
  2. PSAK 34 Construction Contracts
  3. ISAK 10 Customer Loyalty Program
  4. ISAK 21 Real Estate Construction Agreements
  5. ISAK 27 Transfer of Assets From Customers
  6. PSAK 44 Accounting for Real Estate Development Activities
  7. PPSAK 7 Withdrawal of PSAK 44 Accounting for Real Estate Development Activities

As PSAK 72 Revenue from Customer Contracts becomes effective, the recognition of various income transactions previously determined by these PSAKs is regulated by PSAK 72.

Disclaimer

Please note, the material in this article is only to provide a brief explanation, there are several things that are simplified, readers need to examine in more detail the transactions that occur and refer to the provisions in the PSAK manuscript, we are not responsible for the use of this material.

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