This narrative considers key implications IFRS 15 Revenue from Contracts with Customers for real estate entities. It provides an overview of the revenue recognition model in IFRS 15 with a focus on entities that:
- Own, operate and sell real estate
- Provide property management services
- Construct and sell residential property
IFRS 15 introduced a five step process for recognising revenue, as follows:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price for the contract
- Allocate the transaction price to each specific performance obligation
- Recognise the revenue when the entity satisfies each performance obligation
An entity recognises revenue only when it satisfies a performance obligation by transferring control of a promised good or service to a customer. Control may be transferred over time or at a point in time.
Control of the good or service refers to the ability to direct its use and to obtain substantially all of its remaining benefits (i.e., the right to cash inflows or reduction of cash outflows generated by the good or service). Control also means the ability to prevent other entities from directing the use of and receiving the benefit from a good or service. (IFRS 15 33)
These criteria include ensuring there is no continuing managerial involvement to a degree usually associated with ownership or effective control over the goods sold. (IAS 18 14) The existence of continuing managerial involvement might indicate that control of goods has not passed to a buyer, but its existence alone does not preclude revenue recognition under IFRS 15.
IFRS 15 requires that an entity determines whether it will transfer control of a promised good or service over time at contract inception. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time. These concepts including the indicators that would be used to assess when control has passed to the buyer are explored further in the following sections.
The criteria in IFRS 15 for a performance obligation to be satisfied over time differ from the current requirements in IFRIC 15, which may result in different accounting outcomes.
Performance obligations satisfied over time Satisfaction of construction performance obligations
An entity transfers control of a good or service over time (rather than at a point in time) when any of the following criteria are met:
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
- The entity’s performance creates or enhances an asset (e.g., work in process) that the customer controls as the asset is created or enhanced.
- The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
Customer simultaneously receives and consumes benefits as the entity performs Satisfaction of construction performance obligations
In some instances, the assessment of whether a customer simultaneously receives and consumes the benefits of an entity’s performance will be straight-forward (e.g., daily cleaning services, for which the simultaneous receipt and consumption by the customer is readily evident). However, in circumstances in which simultaneous receipt and consumption is less evident, the standard clarifies that revenue recognition over time is appropriate if “an entity determines that another entity would not need to substantially re-perform the work that the entity completed to date if that other entity were this determination, entities will not consider practical or contractual limitations that limit the transfer of the remaining performance obligation.
Real estate entities that provide property management and other services will need to carefully evaluate their contracts to determine whether the services performed are simultaneously received and consumed by the customer (i.e., real estate owner). It may be apparent that services such as routine and recurring maintenance, cleaning and administrative and support services functions meet the criteria for recognition of revenue over time. However, determining whether other services, such as leasing or development activities, are simultaneously received and consumed by the real estate owner, or that another entity would not need to substantially re-perform activities completed to date, will require significant judgement. These judgements will also be affected by an entity’s conclusion about the number of performance obligations (i.e., single or multiple) in the contract (see Performance obligations in a property management contract).
Customer controls asset as it is created or enhanced Satisfaction of construction performance obligations
The second situation in which control of a good or service is transferred over time is where the customer controls the asset as it is being created or enhanced. For example, many construction contracts contain clauses indicating that the customer owns any work-in-progress as the contracted item is being built.
In many jurisdictions, the individual units of an apartment block are only accessible by the purchaser on completion or near completion. However, the standard does not restrict the definition of control to the purchaser’s ability to access and use (i.e., live in) the apartment. See IFRS 15 33 how benefits can be obtained directly or indirectly.
In some jurisdictions it may be possible to pledge unfinished apartments or sell or exchange the unfinished apartment. Accordingly, it may be possible that this criterion is met for some residential developers. Careful consideration will be required of the specific facts and circumstances. Satisfaction of construction performance obligations
Control transferred at a point in time Satisfaction of construction performance obligations
Control is transferred at a point in time if none of the criteria for a good or service to be transferred over time are met. In many situations, the determination of when that point in time occurs is relatively straight-forward. Satisfaction of construction performance obligations
However, in some circumstances, this determination is more complex. IASB has provided indicators for entities to consider when determining whether control of a promised asset has been transferred:
- The entity has a present right to payment for the asset.
- The customer has legal title to the asset.
- The entity has transferred physical possession of the asset.
- The customer has the significant risks and rewards of ownership of the asset.
- The customer has accepted the asset.
None of these indicators are meant to be individually determinative. IASB also clarified that the indicators are not meant to be a checklist and not all of them must be present to determine that the customer has gained control. Satisfaction of construction performance obligations
An entity needs to consider all relevant facts and circumstances to determine whether control has transferred. For example, the presence of a repurchase option in a contract may indicate that the customer has not obtained control of the asset, even though it has physical possession.