How will IFRS 15 impact the property industry?

A new revenue standard commenced 1 January 2018 and there are six issues that the property industry must consider, says Moore Stephens’ national head of technical accounting, David Holland.

Revenue from Contracts with Customers, known as IFRS 15 or AASB 15, is effective for reporting periods commencing on or after 1 January 2018. Here’s what you should know:

 

1. Timing of revenue recognition

Do your contracts have an enforceable right for payment for performance completed to date? If not, it is likely revenue recognition will be delayed.

2. The number of performance obligations

IFRS 15 requires all performance obligations contained in a contract to be identified, a portion of the transaction price allocated to each obligation, and revenue measured separately for each. In the context of construction contracts this becomes a critical element when applying IFRS 15. 

3. Treatment of contract variations

Contract variations and modifications are commonplace in the construction industry. Revenue associated with variations can’t be recognised under IFRS 15 until it is approved by the parties to the contract. 

4. Variable considerations

Construction contracts often include variable elements such as contract variations and bonuses for meeting certain criteria or time constraints. IFRS 15 restricts how much of this type of revenue is actually recognised. Variable revenue (such as bonus payments) can only be recognised (IFRS15.56): “to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved”.

5. Financing components within contracts

Sales in the property development and construction industry regularly include payments either up front or in arrears of, when revenue is recognised for accounting purposes. IFRS provides extensive guidance on the treatment of any financing component within a revenue contract. Where this component is deemed to be significant then it must be accounted for separately from revenue.

6. Costs of obtaining a contract

IFRS 15 permits only the incremental costs of obtaining a contract to be capitalised. Costs that would have arisen regardless of whether the contract was obtained must be expensed when incurred.

 

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Information provided in this article is general in nature and does not constitute financial advice. You should consult your financial planner prior to making any investment decisions.