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

Series provision

Series provision – 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.Series provision

Under IFRS 15 a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer are accounted for as a single performance obligation.

As … Read more

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

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

Legally enforceable contract

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

Long-term supply contracts

Long-term supply contracts – To apply IFRS 15, automotive parts suppliers (APSs) will need to change the way they evaluate long-term supply contracts. APSs need to use significant judgement when they identify separate performance obligations (i.e., units of account), which may be different from those identified under IAS 18.

Tooling equipmentLong-term supply contracts

APSs commonly enter into long-term arrangements with Original Equipment Manufacturers (OEMs) to provide specific parts, such as seat belts or steering wheels. An arrangement typically includes the construction for the tooling, which is required to be used when manufacturing the parts to meet the OEM’s specifications. In many cases, the APS will construct and transfer the legal title for the tooling to the OEM after construction, even though they … Read more

Licences of intellectual property

Licences of intellectual property

The determination of whether a licence is distinct may require judgement. In some software arrangements, a software licence will be distinct because it is the only promise in the contract. In other Licences of intellectual propertyarrangements, the customer will be able to benefit from the licence on its own or with readily available resources and it will be separately identifiable from the other goods or services in the contract (i.e., the other goods or services are also distinct).

An example of a distinct licence is a software package that can be used on its own without customisation or modification and future upgrades are not necessary for the customer to retain continued functionality of the software for a reasonable period Read more