Recognise revenue over time

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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Licensing of intellectual property

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Licensing of intellectual property – in summary

The standard provides application guidance for the recognition of revenue attributable to a distinct licence of intellectual property (IP).

The general model is that if the licence is distinct from the other goods or services, then an entity assesses the nature of the licence to determine whether to recognise revenue allocated to the licence at a point in time or over time and to estimate variable consideration.

But with complex topics like licensing of intellectual property, there is also guidance separate from the general model for estimating variable consideration, on the recognition of sales- or usage-based royalties on licences of IP when the licence is the sole or predominant item to which the royalty relates.

What is intellectual property?

One could say almost everything could be intellectual property! Licensing of intellectual property

Here is a description (not a definition!) from the WIPO (World Intellectual Property Organisation):

Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.

IP is in general protected in law by, for example, patents, copyright and trademarks, which enable people to earn recognition or financial benefit from what they invent or create. A difficult balance exists between striking the interests of innovators and the wider public interest, businesses operating in IP have to foster an environment in which creativity and innovation can flourish.

Just take a look at the (public) discussion between open source software (Apache OpenOffice) and licensed software (Microsoft Office365).

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Legally enforceable contract

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Legally enforceable contract – A contract, under the broadest possible definition, is a legally enforceable promise. Contracts are classified in many different ways.

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

No alternative use enforceable payment right

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No alternative use enforceable payment right for work to date is the last phase in the satisfaction of performance obligations in IFRS 15 Revenue recognition. This is part of a primary and fundamental subject in the recognition of revenue. There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts. Revenue recognition at a point in time The general principle is the revenue is recognised at a point in time (and as such it is the most common type of sales transaction at least in volume, just think of: a retailer … Read more

Restrictions on transferred assets

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Restrictions on transferred assets – Stipulations that limit or direct the purposes for which a transferred asset may be used, but do not specify future benefit

1st Best Read and Learn – Performance obligations satisfied over time

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Performance obligations satisfied over time and  Performance obligations satisfied at a point in time are the two choices in IFRS 15. IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced 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. See a summary of IFRS 15 here. Performance obligations satisfied over time This section is part of step 5 Recognise revenue as or when each performance obligation … Read more

Revenue recognition over time

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Revenue recognition over time is the defined term. As a result, revenue recognition at a point of time is the valid recognition principle when the definition of revenue recognition over time is not met.  A vendor satisfies a performance obligation and recognises revenue over time when one of the following three criteria is met: Criterion Example 1. The customer simultaneously receives and consumes the benefits provided by the contractor’s performance as the contractor performs. Routine or recurring services like cleaning services 2. The contractor’s performance creates or enhances an asset that the customer controls as the asset is created or enhances Building an asset on a customer’s site 3. The contractor’s performance does not create an asset with an alternative … Read more

Satisfaction of performance obligations

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Satisfaction of performance obligations – An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to the customer. Control of an asset refers to the ability of the customer to direct the use of and obtain substantially all of the cash inflows, or the reduction of cash outflows, generated by the goods or services. Control also means the ability to prevent other entities from directing the use of, and receiving the benefit from, a good or service. Satisfaction of performance obligations The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time. If an entity does not … Read more