Determine the transaction price

IFRS 15 Real estate Revenue complete and accurate recognition

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IFRS 15 Real estate

Under IFRS 15 real estate entities recognize revenue over the construction period if certain conditions are met.

Key points

  • An entity must judge whether the different elements of a contract can be separated from each other based on the distinct criteria. A more complex judgment exists for real estate developers that provide services or deliver common properties or amenities in addition to the property being sold.
  • Contract modifications are common in the real estate development industry. Contract modifications might needIFRS 15 Real estate to be accounted for as a new contract, or combined and accounted for together with an existing contract.
  • Real estate managers may structure their arrangements such that services and fees are in different contracts. These contracts may meet the requirements to be accounted for as a combined contract when applying IFRS 15.
  • Real estate management entities are often entitled to several different fees. IFRS 15 will require a manager to consider whether the services should be viewed as a single performance obligation, or whether some of these services are ‘distinct’ and should therefore be treated as separate performance obligations.
  • Variable consideration for entities in the real estate industry may come in the form of claims, awards and incentive payments, discounts, rebates, refunds, credits, price concessions, performance bonuses, penalties or other similar items.
  • Real estate developers will need to consider whether they meet any of the three criteria necessary for recognition of revenue over time.

IFRS 15 core principle

The core principle of IFRS 15 is that revenue reflects 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.

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5 steps in IFRS 15 – best quick read

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5 steps in IFRS 15

Under IFRS 15 Revenue from contracts with customers, entities apply the 5 steps in IFRS 15 to determine when to recognize revenue, and at what amount. The model specifies that revenue is recognized when or as an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognized:

  • over time, in a manner that best reflects the entity’s performance; or
  • at a point in time, when control of the goods or services is transferred to the customer.

IFRS 15 provides application guidance on numerous related topics, including warranties and licenses. It also provides guidance on when to capitalize the costs of obtaining a contract and some costs of fulfilling a contract (specifically those that are not addressed in other relevant authoritative guidance – e.g. for inventory).

5 steps in IFRS 15 – What is IFRS 15?

Step 1: Identify the contract with a customer

A contract with a customer is in the scope of IFRS 15 when the contract is legally enforceable and certain criteria are met. If the criteria are not met, then the contract does not exist for purposes of applying the general model of IFRS 15, and any consideration received from the customer is generally recognized as a deposit (liability). Contracts entered into at or near the same time with the same customer (or a related party of the customer) are combined and treated as a single contract when certain criteria are met.

A contract with a customer is in the scope of IFRS 15 when it is legally enforceable and meets all of the following criteria. [IFRS 15.9]

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Revenue definition

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Revenue definition

Revenue is defined in IFRS 15 as: ‘Income arising in the course of an entity’s ordinary activities‘.

IFRS 15 establishes a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services.

The application of the core principle in IFRS 15 is carried out in five steps:

revenue definition

The five-step model is applied to individual contracts. However, as a practical expedient, IFRS 15 permits an entity to apply the model to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects would not differ materially from applying it to individual contracts.

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Step 3 Determining Transaction Price

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Step 3 Determining Transaction Price – is all about correct revenue accounting in respect of the transaction price for the contract as part of IFRS 15 Revenue from contracts with customers. Step 3 Determining Transaction Price IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant. Step 3 Determining Transaction Price 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 INTRO Step 3: Determine … Read more

Sale with a right of return in IFRS 15

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Sale with a right of return in IFRS 15

Under IFRS 15 Revenue from contract with customers, when an entity makes a sale with a right of return it recognises revenue at the amount to which it expects to be entitled by applying the variable consideration and constraint guidance set out in Step 3 of the model (see Step 3 Determine the transaction price). The entity also recognises a refund liability and an asset for any goods or services that it expects to be returned.

  • An entity applies the accounting guidance for a sale with a right of return when a customer has a right to:
    a full or partial refund of any consideration paid;
  • a credit that can be applied against amounts owed, or that will be owed, to the entity; or
  • another product in exchange (unless it is another product of the same type, quality, condition and price – e.g. exchanging a red sweater for a white sweater). [IFRS 15.B20]

An entity does not account for its stand-ready obligation to accept returns as a performance obligation. [IFRS 15.B21–B22]

In addition to product returns, the guidance also applies to services that are provided subject to a refund.Sale with a right of return

The guidance does not apply to:

  • exchanges by customers of one product for another of the same type, quality, condition and price; and
  • returns of faulty goods or replacements, which are instead evaluated under the guidance on warranties. [IFRS 15.B26–B27]

When an entity makes a sale with a right of return, it initially recognises the following: [IFRS 15.B21, B23, B25]

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IFRS 15 the new revenue model – The best read

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A closer look at IFRS 15 the new revenue model – IFRS 15 establishes principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. A closer look at IFRS 15 the new revenue model The revenue model applies to all contracts with customers except leases, insurance contracts, financial instruments, guarantees and certain non-monetary exchanges. The sale of non-monetary financial assets, such as property, plant and equipment, real estate or intangible assets will also be subject to some of the requirements of IFRS 15. A contract with a customer may be partially within the scope of IFRS … Read more

Construction contract – How 2 best account for it in IFRS 15

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A construction contract is a contract specifically negotiated for the construction of (a combination of) assets that are closely interrelated in terms of design

The perfect 5 step-by-step revenue model

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The perfect 5 step-by-step revenue model -IFRS 15 Revenue from Contracts with Customers was issued on 28 May 2014. It supersedes: IAS 18 Revenue; The perfect 5 step-by-step revenue model IAS 11 Construction contracts; The perfect 5 step-by-step revenue model IFRIC 13 Customer Loyalty Programmes; The perfect 5 step-by-step revenue model IFRIC 15 Agreements for the Construction of Real Estate; The perfect 5 step-by-step revenue model IFRIC 18 Transfers of Assets from Customers; and The perfect 5 step-by-step revenue model SIC-31 Revenue – Barter Transactions Involving Advertising Services. The perfect 5 step-by-step revenue model IFRS 15 will improve comparability of reported revenue over a range of industries, companies and geographical areas globally. IFRS 15’s objective is to establish principles that … Read more

Contract enforceability and termination clauses – The best complete 1 read

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Contract enforceability and termination clauses is about those troubles, get your money as entitled or end a contract before you lose too much money. Contract enforceability of rights (AND obligations) in a contract is a matter of law. An entity has to determine the duration of the contract (i.e., the stated contractual term or a shorter period) before applying certain aspects of the revenue model (e.g., identifying performance obligations, determining the transaction price). The contract duration under IFRS 15 is the period in which parties to the contract have present enforceable rights and obligations. An entity cannot assume that there are present enforceable rights and obligations for the entire term stated in the contract and it is likely that an … Read more