This narrative considers key implications IFRS 15 Revenue from Contracts with Customers for real estate entities. It provides an overview of the revenue recognition model in IFRS 15 with a focus on entities that:
- Own, operate and sell real estate
- Provide property management services
- Construct and sell residential property
IFRS 15 introduced a five step process for recognising revenue, as follows:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price for the contract
- Allocate the transaction price to each specific performance obligation
- Recognise the revenue when the entity satisfies each performance obligation
In most real estate arrangements, a signed, written contract specifies the asset to be transferred or services to be provided in exchange for a defined payment. This generally will result in a straight-forward assessment of most of the contract criteria (in IFRS 15 9).
However, entities that sell real estate and provide financing to the buyer may find the collectability evaluation difficult. There is limited application guidance in IFRS 15 to help entities determine whether the terms of seller-provided financing and the borrower’s ability to fulfil those terms, meet the collectability threshold or indicate an implied price concession.
Significant judgement will be required to determine when there is an implied price concession or an impairment loss or whether there is an indication that an arrangement lacks sufficient substance to be considered a contract within the scope of the standard. Real estate revenue Real estate revenue Real estate revenue
IFRS 15 specifies how to account for an arrangement that does not meet the criteria of a contract under the standard, as follows:
The standard states that when a contract with a customer does not meet the criteria in IFRS 15 9 and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred:
- the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or
- the contract has been terminated and the consideration received from the customer is non-refundable. [IFRS 15 15]
The standard goes on to specify that an entity shall recognise the consideration received from a customer as a liability until one of the events described above occurs or until the contract meets the criteria to be accounted for within the revenue model. [IFRS 15 16].