Construction of a residential home provides a case to better understand the accounting issues in construction activities. Home-builder B enters into a contract to build a new home for a customer on land owned by Home-builder B. Ownership of the home and land are transferred to the customer when construction is completed. The home-builder is responsible for the overall management of the project and identifies various goods and services to be provided, including design work, procurement of materials, site preparation and foundation pouring, framing and plastering, mechanical and electrical work, installation of fixtures (e.g., windows, doors, cabinetry) and finishing work.
What is going on?
Home-builder B first evaluates whether the customer can benefit from each of the various goods and services, either on their own or together with other readily available resources. Home-builder B determines that these goods and services are regularly sold separately to other customers by other contractors. Construction of a residential home
Therefore, the customer could generate economic benefit from each of the goods and services (either on their own or together with the other goods and services that are readily available to the customer), although they would have to be provided in the context of a different property. Consequently, Home-builder B determines that the goods and services are capable of being distinct. Construction of a residential home
Home-builder B then evaluates whether the goods and services are distinct within the context of the contract. Home-builder B determines that the contract provides a significant service of integrating the various goods and services (the inputs) into the new home (the combined output). Therefore, Home-builder B’s promise to transfer the various individual goods and services in the contract are not separately identifiable from other promises in the contract. Construction of a residential home
That is, the various goods and services are all transferred to the customer as a completed home.
Because both criteria for identifying a distinct good or service are not met, Home-builder B determines the goods and services are not distinct and accounts for all of the goods and services in the contract as a single performance obligation. Construction of a residential home
Some related observations
How amenities (e.g. swimming pools, golf courses, health club facilities) provided by a developer will be accounted for under IFRS 15 is open for judgment. Often, amenities are sold or transferred in connection with the sale of individual units of a real estate project. In evaluating these transactions, entities would consider:
- The parties involved (e.g., customer and homeowner’s association) Construction of a residential home
- Whether separate performance obligations exist and what they are (e.g., goods or services) Construction of a residential home
- To which parties the promises (potentially performance obligations) are made Construction of a residential home
Real estate entities need to assess the existence of separate performance obligations exist within their contracts on a regular basis. These judgements are more complex for home-builders, developers of residential apartments and entities that, in addition to property sales, provide property management services, because the nature of these contracts requires the entity to perform multiple activities that may (or may not) represent separate performance obligations in each separate case.
Construction is the process of constructing a building or infrastructure. Construction differs from manufacturing in that manufacturing typically involves mass production of similar items without a designated purchaser, while construction typically takes place on location for a known client. Construction as an industry comprises six to nine percent of the gross domestic product of developed countries. Construction starts with planning, design, and financing; it continues until the project is built and ready for use.
Large-scale construction requires collaboration across multiple disciplines. A project manager normally manages the budget on the job, and a construction manager, design engineer, construction engineer or architect supervises it. Those involved with the design and execution must consider zoning requirements, environmental impact of the job, scheduling, budgeting, construction-site safety, availability and transportation of building materials, logistics, inconvenience to the public caused by construction delays and bidding. Large construction projects are sometimes referred to as megaprojects.
See also: The IFRS Foundation