IFRS 15 Real estate Revenue complete and accurate recognition

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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Sale of hardware and installation services

Sale of hardware and installation services provides practical insight in revenue recognition of mixed contracts with customers under IFRS 15. Two very similar sales transactions/contracts but one with only one single performance obligation and the other with separate performance obligations.

Case 1 – separate performance obligations Sale of hardware and installation services

Vendor enters into a contract to provide hardware and installation services to Customer. Vendor always sells the hardware with the installation service, but the installation is not complex such that Customer could perform the installation on its own or use other third parties. Sale of hardware and installation services

Does the transaction consist of one or more performance obligations?

More than one – Vendor should account for … Read more

1 and best accounting revenue in a transfer of land

Here the questions raised is how to account for revenue in a transfer of land. Or to put it more formally how to account for revenue recognition in a real estate contract that includes the transfer of land (as per IFRS 15 Revenue from Contracts with Customers) as per the same 2018 IFRS Interpretations Committee Agenda Decision.

The case

An entity has obtained a piece of land to construct a building on. How should the entity account for the sale of the land and the building to be constructed on the land. revenue in a transfer of land

The contract includes the following features: revenue in a transfer of land

  • The entity and the customer enter
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Restrictions on transferred assets

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

Revenue over time or at a point in time

There are two ways of recognising revenue – recognise revenue over time or 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 over time or at a point in time

The primary IFRS sections are IFRS 15 35 – 37 Over time and IFRS 15 38 At a point in time.Revenue over time or at a point in time

An entity determines at the inception of the contract whether it satisfies each performance obligation over time or at a point in time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. [IFRS 15 32]

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