IFRS 15 will require construction companies to consider whether these contracts should be accounted for separately or as one combined contract. Contents Executive summary 05 Dealing with transition 07 Detailed guide 11 Appendices 235 Appendix 1 IFRS 15 illustrative disclosures 236 Appendix 2 Comparison with US GAAP 244 Key Contacts 250. You are attempting to documents.. IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transaction involving Advertising Services. For example, in the case of construction contracts, or other long-term service contracts, modifications are frequent. Some of the practical implications on systems and processes for Construction Co and Building Co include: Subscribe to receive the latest BDO News and Insights. Construction Co would be entitled to sue for damages which would include costs incurred to date plus lost profit). This may be described as a change order, a variation, or an amendment. Does the customer have legal title to the asset? It includes the reasons for accepting particular views and rejecting others. This is because the vendor’s performance obligations are in connection with the construction of the building and the installation of items such as elevators; the supply of components does not result in any part of that service being provided. The method recognizes revenues and expenses in proportion to the completeness of the contracted project. That is: Construction Co should use the input method of calculating progress (costs incurred to date) because this is the most accurate method it has of estimating completion. IFRS 15, paragraph B19 notes that with the input method, depending on the timing or pattern of costs incurred, there may not be a direct relationship between an entity’s inputs and the transfer of control of goods or services to a customer. So this feels like the right time to . the conclusions in their standards, IFRS 15 Revenue from Contracts with Customers and Topic 606, which is introduced into the FASB Accounting Standards Codification® by the Accounting Standards Update 2014-09 Revenue from Contracts with Customers. c. the customer pays a portion of the purchase price for the real estate unit as the unit is being constructed, and pays the remainder (a majority) after construction is complete. New sub-sectors, emerging industries, new funding sources and a truly global landscape are shaping industry dynamics. understand how certain areas of IFRS 15 ‘Revenuefrom Contracts with Customers’ has been applied, and whether the accounting appeared appropriate in the circumstances. © 2020 BDO Australia Ltd. All rights reserved. Under IFRS 15, an entity recognises as an asset the incremental costs of obtaining a contract with a IFRS 15.IE.Ex36–37 customer only if it expects to recover those costs. • IFRS 15 is principles-based, consistent with legacy revenue requirements, A contract is an agreement between 2 parties that creates enforceable rights and obligations (IFRS 15, Appendix A). The refurbishment work is completed by 31 December 2019. If this is the case, these other standards should be applied to account for these costs (IFRS 15.96). In the construction industry it is very common for an entity to provide multiple goods or services to one customer or related parties of a customer. 53 . The standard provides a single, principles based five-step model to be applied to all contracts with customers. IFRS 15 also provides requirements for the accounting for contract modifications. It established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. At BDO, we can help you embrace these opportunities and address the challenges. Transition . If the contracts were accounted for separately, revenue would be recognised as follows: However, the entity needs to determine if the contracts for the building of the house and garage should be accounted for separately or as one combined contract. For example, a construction contract might involve the vendor procuring high value items for installation, such as elevators. The standard provides a single, principles based five-step model to be applied to all contracts with customers. Answer BDO understands the unique audit, tax and advisory requirements of the not-for-profit sector, which comes from our experience in acting for the sector over many years. Therefore, costs would be the most objective method of measuring completion. How should these be accounted for in the context of IFRS 15? Question The new standard, IFRS 15, Revenue from Contracts with Customers, replaces the accounting guidance in IAS 11 Construction Contracts, and affects annual reporting periods that begin on or after 1 January 2018. Should the revenue from each of these contracts be kept separate and accounted for separately, or should the contracts be combined? They were negotiated together and a discount was given on the garage build as Construction Co would already have the necessary equipment on site from the house construction, and could also build the foundations simultaneously with the house. Accounting for contract costs, such as pre-contract costs and costs to fulfill a contract The revenue standards (ASC 606 and IFRS 15, Revenue from Contracts with Customers) will replace substantially all revenue guidance under US GAAP and IFRS, including the industry-specific guidance for construction-type and production-type contracts. Free IFRS Quizzes IFRS 15 – Revenue from Contracts with Customers Quiz ) , () ) Previous Lesson. IFRS 15 contains specific, and more precise guidance to be applied in determining whether revenue is recognised over time (often referred to as ‘percentage of completion’ under existing standards) or at a point in time. IFRS 15 takes the view that although it is appropriate to recognise revenue from the sale of the elevators at the point at which control is transferred to the customer, it is not appropriate to recognise profit. Paragraphs 28 and 30 have not been amended but have been included for ease of … Costs on the contract comprise: The elevator is delivered by Building Co to the customer’s premises on 31 December 2018. See also Example 37 accompanying IFRS 15. The ship has been designed specifically to suit the needs of Customer A and includes a number of features that may not be useful for other customers. IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. BDO’s Real Estate and Construction professionals are ready to... It’s our job to stay on top of changes in the fast-paced retail sector. the cost of the elevator. For example, a construction company can be engaged to provide design and engineering services as well as the actual construction. Subscribe to receive the latest BDO news and insights. Big Bed enters in a contract with a customer to sell beds for $400 per bed on 1 January 2017. Author: KPMG IFRG Limited Subject: IFRS Keywords: ifrs 15, revenue recognition, implementation, checklist, construction … IAS 18 Revenue and IAS 11 Construction Contracts, and the related Interpretations on revenue recognition: IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue— Barter Transactions Involving Advertising Services. The expected cost to construct the land and garage are $400,000 and $64,000 respectively. Accounting for contract costs, such as pre-contract costs and costs to fulfill a contract The revenue standards (ASC 606 and IFRS 15, Revenue from Contracts with Customers) will replace substantially all revenue guidance under US GAAP and IFRS, including the industry-specific guidance for construction-type and production-type contracts. At 30 June 2019, the entity has incurred costs of $200,000 in relation to the house and $5,000 in relation to the garage. Your essential guide to preparing financial statements under the new revenue standard IFRS 15 – Illustrative disclosures. Consequently, and particularly if an input method is being used for the purposes of revenue recognition, in many cases the vendor would recognise an equal amount of revenue and cost of sales for the elevators, with profit margin only being recognised on the construction and installation services. BDO’s technology specialists have deep experience in helping clients around the globe to navigate the various issues affecting the industry. EXAMPLE: MODIFICATION OF A CONTRACT FOR GOODS 55 EXAMPLE: MODIFICATION OF A CONTRACT TO CONSTRUCT A BUILDING 56 . The amount is payable on completion. This includes the percentage-of-completion method and the related construction cost accounting guidance as a stand-alone model. Construction Co’s financial year end is 30 June 2017. ILLUSTRATIVE EXAMPLES (see separate booklet) APPENDIX Amendments to the guidance on other Standards IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IFRS Foundation 4. International Financial Reporting Standard 15 Revenue from Contracts with Customers (IFRS 15) is set out in paragraphs 1–129 and Appendices A–D. What are the transition options under IFRS 15… IFRS 15 permits either output or input methods to be used to calculate the amount of revenue to be recognised. Contract liability is recognised when a payment for customer is due (or already received, whichever is earlier) before a related performance obligation is satisfied (IFRS 15.106). BDO’s Healthcare team has the knowledge, expertise and resources to help navigate this complex and integrated new world. Even the construction itself could be seen as comprising many component services such as site clearance, foundations, procurement, construction of the structure, piping and wiring, etc. Examples of such costs include: cost of inventories, cost of property, plant and equipment, IFRS 15 example – sale of a product A company enters into a contract to sell 200 units of a product for £16,000 (£80 each) and will supply 50 units per month over a four month period (control over each unit passes to the customer on delivery). Over the past five years, we – like you – have wrestled with the many challenges of implementing IFRS 15. If the customer purchases more than 1000 beds in a calendar year, the contract states that the price per unit is … BDO is the brand name for the BDO network and for each of the BDO member firms. IFRS 15 requires a series of distinct goods or services that are substantially the same with the same pattern of transfer, to be regarded as a single performance obligation. BDO’s Natural Resources team has deep industry experience and global resources in all of the world’s mining, oil and gas centres to help you navigate complex landscapes, both at home and abroad. Example (based on example 10 in IFRS 15 illustrative examples): An entity, a contractor, enters into a contract to build a hospital for a customer. There are separate contracts for each of these two activities. So this feels like the right time to . take stock – to pull together, in one place, what we have learned about this new world of revenue recognition. The manufacturing and wholesale sector covers many industries and product lines. Construction Co also has an enforceable right to payment under the legal system it operates within. The new revenue standard will replace the construction contract guidance and substantially all existing revenue recognition guidance under IFRS and US GAAP. We go through the new IFRS standard with examples as to what guidance will be provided in future. In May 2014, IFRS 15 (International Financial Reporting Standards) Revenue from Contracts with Customers was issued. include specific guidance on the accounting for onerous contracts or on other contract losses. Existing standards IAS 18 Revenue and IAS 11 Construction Contracts contain only limited guidance, mainly on applying the percentage of completion method (under which contract revenue and costs are recognised with reference to the stage of completion). An output method results in revenue being recognised on the basis of direct measurement of the value of goods or services transferred to date, while input methods result in revenue being recognised based on measures such as resources consumed, costs incurred or machine hours. Our Tourism, Leisure & Hospitality (TLH) team provides specialist accountancy and business advisory expertise to a wide variety of businesses across the Sports and Leisure, Hotels and Tourism and Pubs and Clubs sectors. Revenue recognition in a real estate contract (IFRS 15 Revenue from Contracts with Customers) ... price after construction is complete. Our approach is agile, practical and reflects the nature of rapid change in the industry. BDO is the brand name for the BDO network and for each of the BDO member firms. EXAMPLE: MODIFICATION OF A CONTRACT FOR GOODS 55 EXAMPLE: MODIFICATION OF A CONTRACT TO CONSTRUCT A BUILDING 56 . The standalone selling prices of the house and garage are $500,000 and $80,000 respectively. For companies with real estate development, property management or construction activities, IFRS 15 replaces several familiar standards and provides significant new guidance in a number of key areas. Construction Co operates in a jurisdiction where if Customer A terminated the contract, Construction Co would be entitled to payment for the percentage they had completed (i.e. Building Co therefore excludes from an input method the effects of any inputs that do not depict the entity’s performance in transferring control of goods or services to the customer, i.e. Inline XBRL; ZIP; Example 19: Credit Risk Exposure . The price of the contract was agreed to be $4 million. Example 2: (Contracts for which outcome is not reliably measurable) AB LTD is an entity engages in construction business. BDO’s Natural Resources team has deep industry experience and global resources in all of the world’s mining, oil and gas centres to help you navigate complex landscapes, both at home and abroad. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and omissions. The following decision tree is a useful tool to determine whether revenue should be recognised at a point in time or over time: If revenue is recognised at a point in time, the overall principle is that revenue should be recognised at the point in time at which it transfers control of the good or service to the customer. At BDO, we can help you embrace these opportunities and address the challenges. These activities can be dealt with under one contract or be separated into various sub-contracts. Simple explanation of IFRS 15 Construction Contracts that should cover most exam questions. However, timing of revenue recognition for both parts is not necessarily the same. In some cases, IFRS 15 requires an entity to combine contracts and account for them as one contract. For example, if the ship could be easily sold to another customer and/or the construction company’s legal framework did not allow for it to legally enforce payment; then revenue could not be recognised over time under IFRS 15. This is an adaptation from IFRS 15, Illustrative examples, Example 24. IFRS 15 for the construction industry – Multiple contracts that should be combined, Technology, Media & Entertainment and Telecommunications, Information Security and Privacy Statement. This is an adaptation from IFRS 15, Illustrative examples, Example 24. Construction Co should recognise its revenue over time because the third criterion in IFRS 15, paragraph 35(c) is met. The manufacturing and wholesale sector covers many industries and product lines. Free IFRS Quizzes IFRS 15 – Revenue from Contracts with Customers Quiz ) , () ) Previous Lesson. Some of the practical implications on systems and processes for Construction Co include: Subscribe to receive the latest BDO News and Insights. Backed by our significant practical experience, our team provides no-nonsense strategic advice, helping you make... BDO specialises in understanding the distinct needs of government and public sector organisations operating in an environment where policy, legislative and budgetary requirements can make delivering cost-effective services challenging. However, sometimes, entity needs to ascertain that whether a contract for the construction of group of assets will be treated as a single contract or each asset in group of assets will be treated as a separate contract; in such circumstances the entity should apply the following: 1. Paragraphs in bold … So your request will be limited to the first 1000 documents. Our Tourism, Leisure & Hospitality (TLH) team provides specialist accountancy and business advisory expertise to a wide variety of businesses across the Sports and Leisure, Hotels and Tourism and Pubs and Clubs sectors. BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. Transition. Answer IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transaction involving Advertising Services. IFRS 15 Revenue from Contracts with Customers, issued in April 2014: o Introduces a single revenue model for entities to apply in accounting for revenue arising from contracts with customers. Author: KPMG IFRG Limited Subject: IFRS Keywords: ifrs 15, revenue recognition, implementation, checklist, construction … This site uses cookies. 57 . IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. How would the timing of the revenue recognised differ if the contracts were accounted for separated and combined? The session discusses the implications of contract modifications and accounting thereof The contracts were negotiated with the same customer, at the same time and pricing on one contract is dependent on the other. 57 . IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transaction involving Advertising Services. BDO is a specialised automotive service provider assisting franchised dealers, manufacturers and industry associations with a wide range of financial and consulting services. Costs to fulfil a contract. Customer A engages Construction Co to build a ship for $2,000,000 (expected cost $1,500,000) on 1 January 2017. This includes the percentage-of-completion method and the related construction cost accounting guidance as a stand-alone model. The following decision should be used to determine whether multiple contracts should be combined or not: Question To find out more, see our Cookies Policy Terms & Conditions Articles. Revenue would be recognised as follows: The common practice under IAS 11 would be to account for these two contracts separately and recognise the revenue for both the house and garage on a percentage of completion basis. Systems to recognise revenue and account for timing differences between payment/invoicing and revenue. At 30 June 2017, Construction Co had incurred 50% of costs and their senior project manager estimated they had completed 50% of the build. Construction | IFRS 15 Revenue – Are you good to go? On 1 January 20X1 Entity A enters into a contract with Customer X to manage his information technology data … For example, in the case of construction contracts, or other long-term service contracts, modifications are frequent. How should these be accounted for in the context of IFRS 15? 25. When a contract modification is approved, it creates or changes the enforceable rights and obligations of the parties to the contract. The following indicators should be considered to determine whether control of an asset or service has been transferred: If revenue is recognised over time, the overall principle is that revenue is recognised to the extent that each of the vendor’s performance obligations has been satisfied. Backed by our significant practical experience, our team provides no-nonsense strategic advice, helping you make... BDO specialises in understanding the distinct needs of government and public sector organisations operating in an environment where policy, legislative and budgetary requirements can make delivering cost-effective services challenging. IFRS 15 for the construction industry – Multiple contracts that should be combined 05 June 2018. BDO’s Healthcare team has the knowledge, expertise and resources to help navigate this complex and integrated new world. New sub-sectors, emerging industries, new funding sources and a truly global landscape are shaping industry dynamics. Under IFRS 15.18, contract modification is a change in the scope or price of a contract, or both. IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue – Barter Transaction involving Advertising Services. After I wrote a couple of articles about IFRS 15 here and here, and after I discussed with some of my friends CFOs or auditors, there are two types of reactions:. Background IFRS 15 Contracts with Customers introduced a huge change and a very difficult challenge for almost every single company. Find out how we can help you succeed at every stage of Private Equity investment. In the construction industry it is very common for an entity to provide multiple goods or services to one customer or related parties of a customer. BDO has an extensive and diverse range of food and agribusiness clients, from producers to retailers and everything in between. c. the customer pays a portion of the purchase price for the real estate unit as the unit is being constructed, and pays the remainder (a majority) after construction is complete. Between payment/invoicing and revenue does not them as one contract or be separated into various sub-contracts construction is place. 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Or be separated into various sub-contracts construction is complete recognition in a contract to CONSTRUCT a Building.! 29 are amended differ if the contracts were accounted for as one contract for the of! Of measuring completion to sell beds for $ 5,000,000 the various issues affecting the....