A construction contract may, in theory, be broken down into many promises that may need to be accounted for separately, the performance obligations construction industry. However, the contract for the construction service can continue to be accounted for as one performance obligation if the contractor can demonstrate that: Performance obligations construction industry
- it will provide a significant integration service; Performance obligations construction industry
- the goods or services significantly modify or customise other goods or services promised in the contract; or
- the goods and services within the contract are highly dependent on or integrated with other goods or services i.e. not distinct. Performance obligations construction industry
Given the integrated nature of contracting activities and that goods and services within the contract are generally highly dependent on or highly integrated with other goods or services, many construction contracts are likely to contain only a few performance obligations. The delivery of the integrated product and its warranty is an example. This will however have to be demonstrated and documented by the contractor. If the contractor cannot demonstrate the inter-relationship between the elements of the construction contract, then it may be required to recognise revenue across multiple performance obligations.
Performance obligations construction industry – entity 1:
Examples of performance obligations are the construction of a building, the delivery of an apartment, the maintenance of a road and so on.
Building and maintenance contracts are usually considered as separate performance obligations because these promises are separately identifiable, and the customer can benefit from these promises on their own.
Design and build contracts are usually accounted for as one performance obligation because of not meeting criterion IFRS 15 27 (b) (one of the two distinct criterion). The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. These promises usually represent a combined output for the customer (the construction) for which the design is the input. However, if the purpose of the contract is to deliver a separate design after which the client is also able to contract another construction company, the design is separately identifiable. Performance obligations construction industry
When assets are built at clearly different (unconnected) locations these are generally considered to qualify as separate performance obligations. Performance obligations in the construction industry
Performance obligations with the same characteristics can be bundled into portfolios if the entity reasonably expects that the effects on the financial statements of applying IFRS 15 to the portfolio would not differ materially from applying the standard to all performance obligations individually (for example apartments). Performance obligations construction industry
Performance obligations construction industry – entity 2:
Revenue generated in construction is measured over time as control passes to the customer as the asset is constructed.
Progress is measured by reference to the cost incurred on the contract to date compared to the contract’s end of job forecast (the input method). Payment terms are based on a schedule of value that is set out in the contract and fairly reflects the timing and performance of service delivery. Contracts with customers are typically accounted for as one performance obligation (PO).
|Type of construction||Typical contract duration||Nature, timing of satisfaction of performance obligations and significant payment terms Performance obligations construction industry|
|Buildings||13 to 36 months||The entity constructs buildings which include commercial, healthcare, education, retail and residential assets. As part of its construction services, the entity provides a range of services including design and/or build, mechanical and electrical engineering, shell and core and/or fit-out and interior refurbishment. The entity’s customers in this area are a mix of private and public entities. Performance obligations construction industry|
The contract length depends on the complexity and scale of the building and the construction contracts for these services are typically fixed price.
In most instances, the contract with the customer is assessed to only contain one PO as the services provided by the entity, including those where the entity is also providing design services, are highly interrelated. However, for certain types of contracts, services relating to a fit-out and interior refurbishment may sometimes be assessed as a separate PO.
|Infrastructure||1 to 3 months for small scale infrastructure works|
24 to 60 months for large scale complex construction
|The entity provides construction services to three main types of infrastructure assets: highways, railways and other large scale infrastructure assets such as waste, water, and energy plants.|
Performance obligations construction industry
Highways represent the entity’s activities in constructing motorways in the UK and the US. This includes activities such as design and construction of roads, widening of existing motorways or converting existing motorways. The main customers are government bodies. Performance obligations construction industry
Railway construction services primarily in the UK and US include design and managing the construction of railway systems delivering major multi-disciplinary projects, track work, electrification, and power supply. The entity serves both public and private railways including high-speed passenger railways, freight and mixed traffic routes, dense commuter networks, metros, and light rail. Performance obligations construction industry
Other infrastructure assets include construction, design and build services on large scale complex assets predominantly servicing the waste, water and energy sectors.
Contracts relating to these infrastructure assets can take the form of fixed-price or target-cost contracts with shared pain/gain mechanisms. Contract lengths vary according to the size and complexity of the asset build and can range from a few months for small scale infrastructure works to 4–5 years for large scale complex construction works. Performance obligations construction industry
In most cases, the contract itself represents a single PO where only the design and construction elements are contracted. In some instances, the contract with the customer will include maintenance of the constructed asset. The Entity assesses the maintenance element as a separate PO and revenue from this PO is recognised in the Support Services segment
See also: The IFRS Foundation
Performance obligations construction industry
Performance obligations construction industry Performance obligations construction industry Performance obligations construction industry