IFRS 15 has superseded virtually all revenue recognition requirements that Engineering & Construction entities (‘E&C entities’) used. E&C entities no longer have to consider whether contracts are in the scope of IAS 11 Construction Contracts or IAS 18 Revenue. Also, the revenue related Interpretation IFRIC 15 Agreements for the Construction of Real Estate is superseded.
IFRS 15 specifies the accounting for all revenue arising from contracts with customers. It affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other IFRS requirements, such as IFRS 16 Leases). The standard also provides a model for the recognition and measurement of gains and losses on the sale of certain non-financial assets, such as property, plant and equipment and intangible assets.
While many of the concepts in the IFRS 15 model are consistent with those for recognising revenue from construction contracts in IAS 11, the requirements for accounting for certain elements of E&C contracts has changed. In addition, IFRS 15 introduced a number of new disclosure requirements that E&C entities need to keep evaluating.
The good news for contractors is that the progressive revenue recognition similar to current stage-of-completion accounting is largely retained for many long-term construction contracts. Therefore, contractors will often find that applying the new standard to a traditional construction contract results in an accounting outcome broadly similar to IAS 11.
Nevertheless, the devil is in the details. IFRS 15 introduces many new concepts for revenue and cost recognition that are different from IAS 11. Contractors should not assume that their accounting for revenue and costs are not affected by IFRS 15. The new standard completely overhauls the way revenue is estimated and measured and what costs qualify for capitalisation.
Here are the highlights to consider for each important step in applying IFRS 15 for Revenue from Engineering & Construction contracts:
1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when (or as) the entity satisfies each performance obligation
Other topics part of IFRS 15 for E&C entities are:
Other measurement and recognition topics
1 Contracts with customers
2 Contract balances
3 Transaction price allocated to remaining performance obligations
4 Significant judgements
5 Assets recognised from the costs to obtain or fulfil a contract
6 Practical expedients
Revenue from Engineering & Construction contracts Revenue from Engineering & Construction contracts