An entity is now required to estimate variable consideration at inception of the contract using either an. âexpected v
Update Real Estate & Construction
PRECISE. PROVEN. PERFORMANCE.
IFRS 15 – accounting issues in real estate and construction The new accounting standard IFRS 15, Revenue from Contracts with Customers, came into force from 1 January 2018. Although IFRS 15 does not apply to certain forms of revenue
the customer independently from each other. As a result,
covered by other standards, its impact on the real estate and
completion of each of these modules can constitute a separate
construction sector is expected to be material.
performance obligation.
The key change is one of approach. Current practice looks at
The question of whether revenue should be recognised at a
revenue recognition by reference to what is being done by the
point in time in a particular contract or over time has been settled
seller. The new standard looks at what is being received by
by the standard on the basis of control; that is revenue is to be
the customer.
recognised as control of the goods/services is passed to the client. Construction contracts will continue to be accounted for
Prior to IFRS 15, the revenue and costs from most construction
over time because control of the goods passes as they are
contracts were recognised by reference to the stage of
incorporated into the construction.
completion of the contract activity at the reporting date. Stage of completion was assessed, for example, by the proportion of
What else has changed?
contract costs incurred for the work performed to date relative
IFRS 15 has a more robust model for determining the amount of
to the estimated total costs.
revenue to be recognised – the transaction price. Where a fixed price is agreed between the parties the transaction price is
How should the revenue be recognised now?
simple to determine.
The standard is built around the concept of a ‘performance obligation’ – a promise to transfer a distinct good or service to
However, price variations are omnipresent in construction
a customer. What does your customer want from you? For a
contracts. An entity is now required to estimate variable
construction contact the customer wants to receive a building or,
consideration at inception of the contract using either an
more generally, a tangible fixed asset. At contract inception, the
“expected value approach” or “the most likely amount”. (The
construction company should assess the goods and services
former being the probability weighted average of a range of
that have been promised to the customer and identify as a
estimates, the later the most probable choice between a small
performance obligation a good or a service that is distinct, or a
number of alternative estimates.) The more prescriptive
series of distinct goods or services that are substantially the same
approach will reduce flexibility.
and that have the same pattern of transfer to the customer. Variable consideration should only be included in the transaction The identification of “milestones” is a familiar territory for the
price when it is highly probable that it will be due and that there
real estate and construction companies. However, these may
will not subsequently be a significant reversal of the revenue.
not be the same as performance obligations which relate to the
For example, if an “over time” consultancy contract has a price
separable promises made to the customer rather than important
and both an upside performance bonus and a downside
points in the project management job. For example, if your
performance penalty, this is not necessarily neutral. If your
company signed a contract to provide extension modules to
company expects to achieve the price and the performance
the customer’s offices, each module can be commissioned by
bonus, it should include an estimate of the latter at inception.
Real Estate & Construction
PRECISE. PROVEN. PERFORMANCE.
Contract modifications
are not “distinct” from another contracts and “design and
Moreover, contract modifications will also undergo a different
build” contracts are likely to be accounted for as one performance
treatment. Once approved, the modification needs to be
obligation under IFRS 15, rather than two separate contracts.
evaluated to decide whether it should be accounted for as a
This means that “design” revenue will be recognised over the
separate contract.
period of the “design and build” performance obligation, rather than on completion of the “design” contract.
If both the scope of the contract and the price increase, the modification must be treated as a separate contract. In this
Costs of obtaining a contract
instance, the revenue from the variation will only be recognised
IFRS 15 changes the way the real estate and construction
when the performance obligation with respect of the variation is
companies should treat the costs of obtaining a contract. An
met. What this means is that although the overall profit and loss
example of these costs include a finder’s fee in the context of
effect will not be different from current practice, the parent
a development contracts. Costs which would not have been
contract may result in losses, which will be offset by the gains in
incurred if the contract had not been obtained should be excluded
the variation contract and there may be a timing difference. This
from the costs incurred to date, but can be capitalised and
may also require a change of approach to produce data to
amortised over the revenue recognition pattern of the contracts.
assess the effect.
Other costs, such as pitch costs, should be written off as incurred.
In the event where the variation does not involve a change to
Other practical considerations
both the scope of the contract and the price, but the remaining
Will IFRS 15 affect the reporting of all REAC companies?
goods and services are distinct from those transferred prior to the
Absolutely. There are significant additional disclosure
modification, then the original contract will be treated as
requirements which will affect all companies.
terminated with a new contract being created. The new contract will consist of the remaining component of the existing contract
The changes to the rules on contract modifications and on
and the variation. As a result, the remaining consideration from
variable consideration are likely to affect construction companies
the original contract that was not recognised as revenue and the
In Real Estate some contracts will be adversely affected by the
consideration from the modification are combined and recognised
change of rules allowing recognition over time rather than at a
as the remaining performance obligations are satisfied. An example
point in time.
could include a subcontractor failure, which requires the work to be re-performed. Although there are no additional services
In practical terms, changing accounting requirements can have
requested by the client, the remaining services are distinct from
consequential effects. Consideration must be given to the ability
those transferred prior to the modification. If the client agrees to
to obtain the information to reflect the changes through the
pay an amount, but not the full price, the effect is to freeze the
existing accounting systems in place.
result reported up to the modification and recognise the lower margin over the nominally new contract.
Applying IFRS 15 for the first time will raise challenges. To assist preparers the standard provides a number of transitional
Modifications that don’t meet either of these sets of conditions
exemptions. But remember – IFRS 15 only changes the timing of
will be accounted for within the initial contract by adjusting the
the recognition of revenue and not the amount of cash that is
recognition amounts prospectively similarly to the way most
actually received.
modifications ae dealt with at present. For more information and advice on IFRS 15, please get in touch.
Design and build contracts For a real estate and construction company, it is not uncommon to enter into two separate contracts, one for design work, and
Paul Fenner – Partner
the other for construction. These contracts make the entity
[email protected]
responsible for the design of the project as well as the construction work and do not normally envisage that the client could accept the design element, but then give the construction element to another builder. IFRS 15 contains significantly more guidance than current IFRS when accounting for contracts that
Kristinah Samy – Associate Director
[email protected] www.moorestephens.co.uk
We believe the information in this factsheet to be correct at the time of going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein. Printed and published by © Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide network of independent firms. Moore Stephens LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Authorised and regulated by the Financial Conduct Authority for investment business. DPS39171 March 2018
