Transition 57 What are the transition options under IFRS 15… Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and omissions. Construction | IFRS 15 Revenue – Are you good to go? IFRS 15 Revenue from Contracts with Customers does not . Answer It established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. 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. These activities can be dealt with under one contract or be separated into various sub-contracts. Our approach is agile, practical and reflects the nature of rapid change in the industry. 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. Systems to recognise revenue and account for timing differences between payment/invoicing and revenue. 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. This includes the percentage-of-completion method and the related construction cost accounting guidance as a stand-alone model. Liability limited by a scheme approved under Professional Standards Legislation. 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). At BDO, we can help you embrace these opportunities and address the challenges. (i think we should use ifrs 15 as it replaces ias 11)… so please answer to question 2&3 if we must use ifrs 15 in exam: 2-if a contract is a normal one without any extra cost(eg:contract price=$20m and cost=$15m) How should we use ifrs 15? 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. recognition – IFRS 15 ‘Revenue from Contracts with Customers’ (ASU 2014-09 in the US). Construction | IFRS 15 Revenue – Are you good to go? It started a contract for the construction of a school building for one of its client, spanning 2 years. Simple explanation of IFRS 15 Construction Contracts that should cover most exam questions. The standard provides a single, principles based five-step model to be applied to all 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. How should Construction Co account for this arrangement as at 30 June 2017? 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. This includes the percentage-of-completion method and the related construction cost accounting guidance as a stand-alone model. 57 . Deleted text is struck through and new text is underlined. You are attempting to documents.. 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. The power of industry experience is perspective - perspective we bring to help you best leverage your own capabilities and resources. Inline XBRL; ZIP; Example 19: Credit Risk Exposure . BDO’s technology specialists have deep experience in helping clients around the globe to navigate the various issues affecting the industry. Construction Co should recognise its revenue over time because the third criterion in IFRS 15, paragraph 35(c) is met. A customer engages Construction Co to provide construction services to build a house (contract price of $500,000) and a garage (contract price of $50,000). 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. 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. The following decision should be used to determine whether multiple contracts should be combined or not: Question Subscribe to receive the latest BDO news and insights. understand how certain areas of IFRS 15 ‘Revenuefrom Contracts with Customers’ has been applied, and whether the accounting appeared appropriate in the circumstances. Author: KPMG IFRG Limited Subject: IFRS Keywords: ifrs 15, revenue recognition, implementation, checklist, construction … If the customer purchases more than 1000 beds in a calendar year, the contract states that the price per unit is … Paragraphs 28 and 30 have not been amended but have been included for ease of … For example, a construction contract might involve the vendor procuring high value items for installation, such as elevators. Our approach is agile, practical and reflects the nature of rapid change in the industry. Big Bed enters in a contract with a customer to sell beds for $400 per bed on 1 January 2017. 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. 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. 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. Construction Co also has an enforceable right to payment under the legal system it operates within. 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. Costs on the contract comprise: The elevator is delivered by Building Co to the customer’s premises on 31 December 2018. Therefore, costs would be the most objective method of measuring completion. 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. It includes the reasons for accepting particular views and rejecting others. Processes needed to identify the appropriate revenue recognition pattern using specific fact patterns for each transaction, Systems to calculate ‘over time’ or ‘point in time’ revenue recognition, Systems to isolate significant amounts of ‘uninstalled materials’ such as elevators and other significant costs which are not proportionate to the entity’s progress in satisfying its performance obligation. My question is about IFRS 15 and construction contract: 1-should we use ias 11 or ifrs 15 for construction contract in the exam? Consequently, any inputs that do not relate directly to the vendor’s performance in transferring those goods and services are excluded when measuring progress to date. Construction Co’s financial year end is 30 June 2017. For example, in the case of construction contracts, or other long-term service contracts, modifications are frequent. 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. 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. The session discusses the implications of contract modifications and accounting thereof Author: KPMG IFRG Limited Subject: IFRS Keywords: ifrs 15, revenue recognition, implementation, checklist, construction … 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. IFRS 15 for the construction industry – Multiple contracts that should be combined 05 June 2018. take stock – to pull together, in one place, what we have learned about this new world of revenue recognition. This may be described as a change order, a variation, or an amendment. 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. 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. Day 1 — IFRS 15 update on recent changes IFRS 15 revenue from contracts with customers The existing rules on revenue recognition in IAS 11 and IAS 18 and some IFRICs are sometimes accused of being lacking in detail. These examples represent how some of the disclosures required by IFRS 15 (in paragraphs 114-115 and B87-B89) in relation to dissagregation of revenue from contracts with customers might be tagged using detailed XBRL tagging. 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:. This site uses cookies. Liability limited by a scheme approved under Professional Standards Legislation. Does the customer have significant risks and rewards of ownership of the asset? IFRS 15 for the construction industry – Multiple contracts that should be combined, Technology, Media & Entertainment and Telecommunications, Information Security and Privacy Statement. Customer A engages Construction Co to build a ship for $2,000,000 (expected cost $1,500,000) on 1 January 2017. Combination of contracts. New sub-sectors, emerging industries, new funding sources and a truly global landscape are shaping industry dynamics. In May 2014, IFRS 15 (International Financial Reporting Standards) Revenue from Contracts with Customers was issued. 57 . 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. Question BDO has an extensive and diverse range of food and agribusiness clients, from producers to retailers and everything in between. 53 EXAMPLE: MODIFICATION OF A CONTRACT FOR GOODS 55 EXAMPLE: MODIFICATION OF A CONTRACT TO CONSTRUCT A BUILDING56 Transition 57 25. Therefore, the contracts should be combined and accounted for as one contract for the purposes of IFRS 15. BDO’s financial services team members come from a variety of exceptional backgrounds, blending their experience to develop new insights and add real value to your business. 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. The power of industry experience is perspective - perspective we bring to help you best leverage your own capabilities and resources. When a contract modification is approved, it creates or changes the enforceable rights and obligations of the parties to the contract. 25. To make your more manageable, we have automatically split your selection into separate batches of up to 25 documents.. batch • IFRS 15 is principles-based, consistent with legacy revenue requirements, the IASB’s Basis of Conclusions on IFRS 15, and examples other than those cited in IFRSs are highlighted by green shading. EXAMPLE: MODIFICATION OF A CONTRACT FOR GOODS 55 EXAMPLE: MODIFICATION OF A CONTRACT TO CONSTRUCT A BUILDING 56 . 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. There would be similar treatment under IAS 11, however, there are more specific requirements under IFRS 15. 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. However, Construction Co has agreed with the customer to first build and complete the house and then finish the garage within the next three months. 53 . 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. 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. include specific guidance on the accounting for onerous contracts or on other contract losses. In essence, the majority of construction contracts will include a significant service of integrating the separate parts and therefore only contain one performance obligation. Back to Course Next Lesson. How would the timing of the revenue recognised differ if the contracts were accounted for separated and combined? For example, Building Co incurs a significant amount of costs on the elevator up front, but these costs do not reflect transfer of control of the refurbishment works to the customer. 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. However, a practical expedient allows an entity to expense such costs as incurred if the amortisation period of the asset is one year or less. 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. This may be described as a change order, a variation, or an amendment. At 30 June 2017, Construction Co had incurred 50% of costs and their senior project manager estimated they had completed 50% of the build. 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. 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. • IFRS 15 is principles-based, consistent with legacy revenue requirements, IFRS 15 sets out a single and comprehensive framework for revenue recognition, The guidance in IFRS 15 is considerably more detailed than existing IFRSs for revenue recognition (IAS 11 Construction Contracts and IAS 18 Revenue and associated Interpretations), including extensive application guidance and illustrative examples. 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. 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. 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. BDO is the brand name for the BDO network and for each of the BDO member firms. 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. IFRS 15 permits either output or input methods to be used to calculate the amount of revenue to be recognised. On 1 January 20X1 Entity A enters into a contract with Customer X to manage his information technology data … IFRS 15 replaces the following standards and interpretations: IAS 18 Revenue, IAS 11 Construction Contracts SIC 31 Revenue – Barter Transaction Involving Advertising Services IFRIC 13 Customer Loyalty Programs IFRS 15 Agreements for the Construction BDO’s financial services team members come from a variety of exceptional backgrounds, blending their experience to develop new insights and add real value to your business. Transition . 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. IFRS 15 for the construction industry – Timing of revenue recognition, Technology, Media & Entertainment and Telecommunications, Information Security and Privacy Statement, Legal, Privacy & Terms and Conditions of use. Transition. There are separate contracts for each of these two activities. BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. BDO’s Healthcare team has the knowledge, expertise and resources to help navigate this complex and integrated new world. In some cases, IFRS 15 requires an entity to combine contracts and account for them as one contract. BDO is the brand name for the BDO network and for each of the BDO member firms. Big Bed enters in a contract with a customer to sell beds for $400 per bed on 1 January 2017. The standard provides a single, principles based five-step model to be applied to all contracts with customers. 57 . Global factors continue to impact efficiency and negatively influence margins. If this is the case, these other standards should be applied to account for these costs (IFRS 15.96). 57 . Transition . The manufacturing and wholesale sector covers many industries and product lines. To find out more, see our Cookies Policy Terms & Conditions Articles. understand how certain areas of IFRS 15 ‘Revenuefrom Contracts with Customers’ has been applied, and whether the accounting appeared appropriate in the circumstances. Be entitled to sue for damages which would include costs incurred to date plus lost profit ) (! Use in accounting for revenue arising from contracts with Customers specific requirements under IFRS 15 based. End is 30 June 2017 essential guide to IFRS 15 – Illustrative disclosures under. Real estate and construction industry very difficult challenge for almost every single company is agile, and. 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