IFRS 15 insights for the real estate industry
New revenue Standard could have a major impact on profile of revenue and profit recognition
As part of our Clearly IFRS series, we highlight changes for the real estate industry in guidance on when to recognize revenue arising from contracts with customers.
IFRS 15: Revenue from Contracts with Customers
In May 2014 the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) jointly issued Revenue from Contracts with Customers (IFRS 15 under IFRS and ASU 2014-09 (Topic 606) under US GAAP), a generally converged standard on the recognition of revenue from contracts with customers. IFRS 15 establishes a comprehensive framework for revenue from contracts with customers, with a core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services (using a five-step model). The standard applies to all types of contracts with customers in all industries (subject to certain scoping exemptions), and generally provides more prescriptive guidance in many areas relevant to the real estate sector.
What are the implications for real estate?
The profile of revenue and profit recognition will change for some real estate entities, particularly those engaged in development, construction and engineering, as well as activities that are subject to performance based fees as the new Standard is more detailed and more prescriptive than the existing guidance and introduces new complexities. In particular, real estate companies will need to consider:
- whether revenue should be recognised over time or at a point in time;
- the extent to which distinct goods or services are supplied, which should be accounted for separately;
- whether particular costs relating to obtaining a contract must be capitalised;
- whether revenue must be adjusted for the effects of the time value of money;
- how to account for contract modifications;
- the impact of new guidance where pricing mechanisms include variable amounts; and
- how the significant disclosure requirements will be addressed.
Click here to download IFRS 15 for the real estate industry to explore these processes in more detail.
Since issuance of the new standard, the IASB and the FASB jointly formed the Transition Resource Group (TRG) for Revenue Recognition, to support implementation of the new standard. As a result of the on-going discussions of the TRG, the IASB and the FASB have tentatively decided to propose targeted amendments (note: the IASB and FASB are not necessarily proposing the same amendments).
In light of these ongoing discussions and proposed targeted amendments, in July 2015, the IASB approved a one-year deferral of the mandatory effective date of IFRS 15. The new standard is now mandatorily effective for annual periods beginning on or after January 1, 2018, with early application permitted. The FASB has also approved a one-year deferral of its equivalent US GAAP standard, ASU 2014-09.
Click here to learn more about the latest developments and decisions being made related to the new standard.