On 28 May 2014, the International Accounting Standards Board (IASB) published IFRS 15 Revenue from Contracts with Customers. Hi Silvia, Hi Silvia, Can you explain how to account for mobilization advances ?. Simple explanation of IFRS 15 Construction Contracts that should cover most exam questions. Yes, can be, if they relate to different contracts then you should not net off. However I would like to how to present contracts asset or liability in the financial statement. In this case, it is OK to have “work in progress” (I better call them contract costs, because that’s what they are) even in the situations when a performance obligation is satisfied over time. So it is not “past” in a sense that you are still working on it and the client has not accepted. I personally prefer to see contract liabilities at the year-end, not contract assets, because: This is basically the method you should follow when accounting for your construction contracts. Also, it depends on whether you recognize revenue over time or at the point of time. Assumption- contract price for each of the floor is 100,000 cu. By the way, do you have share before this how to recognised revenue based on output method which i think it very important for me because all of my construction project using output method . It would be great if you make a podcast or an article incorporating this analysis. Now, clearly, this is a directly attributable cost and a part of this project relates to a performance obligation that has not yet been satisfied – to 40 km of roads that haven’t started to be constructed yet. In this case you must adjust your accounting accordingly as explained below. 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. If you have any questions, please ask them in the comments or you can even consider subscribing to our IFRS Helpline where I and my amazing team answer to your very specific question, issues, help you apply IFRS or even implemented for the first time. using the progress towards completion (please see above). Therefore would you agree that the comment about expensing all contract cost is just wrong for some situations? In May 2014, the International Accounting Standards Board (IASB) published IFRS 15: Revenue from Contracts with Customers. 1. is it possible to recognize advance payment as revenue in Retrofit project? Chartered Education IFRS MCQs have more than 1,100 questions. for windows (purchased from external suppliers); Fee, Consultant & Architecture fee Fee & Legal Consultancies? Hi Tan, It is imperative that entities take time to consider the impact of the new Standard. However, I would like to inquire for input method should borrowing cost include in computation for percentage of completion as well? I have a question and I would appreciate your help. Subsequently also…? Silvia, May I ask questions, In construction, there was retention clause 10% , How should I recognise revenue ? In this case, do we still need to recognise revenue for the 6m cost of windows delivered to the customer (presumably control of the windows has passed to the customer)? We are in the business of selling already developed and serviced residential stands. Example: Construction contract under IFRS 15. As per IFRS 15, the above examples has two separate performance obligations. Regards. You said: • IFRS 15 is principles-based, consistent with legacy revenue requirements, Copyright © 2009-2020 Simlogic, s.r.o. It uses the input method (cost-to cost) to measure progress toward completion. And, in the case of constructing the building, when you are measuring progress towards completion by reference to inputs (costs), almost all costs are expensed when incurred because in general almost all costs relate to satisfied performance obligation. In May 2014, IFRS 15 (International Financial Reporting Standards) Revenue from Contracts with Customers was issued. Entities in the construction industry have previously followed their own standard (IAS 11 Construction Contracts) that contained specific guidance for the recognition of revenue from construction contracts.This has now been replaced by a generic revenue standard called IFRS 15 Revenue from Contracts with Customers. Sscond, can you please also mention the time of passing entry for windows. Thanks. How do we deal with such a situation regarding revenue recognition? Many construction projects involve distinct goods and services, such as building supplies and payments to subcontractors. Тысячи за месяц Обратных, Вечных ссылок через размещение объявлений на 10-ки тысяч форумов 40 usd за месяц на 2 -х компах по 2-м базам сразу. IFRS 15 supersedes: 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 SIC 31 Revenue-Barter Transactions Involving Advertising Services (SIC 31) Introduction The Institute of Chartered Accountants of India 22 However if different method is used to measure the progress to completion, then the company can amortize the cost based on the progress percentage. IFRS 15 refers to a “performance obligation” as a promised good or service (i.e., promise in a contract) that is distinct. If the goods and services are not distinct, they can’t be provided one without the other one (this is very simplified explanation) and thus they must be treated as ONE single performance obligation. I would say that contrary to what you wrote, this is a typical construction contract of physical asset – however, I made it more difficult here by twisting the input method a bit. Finally to respond your question – paragraph 99 says: “An asset recognised in accordance with paragraph 91 or 95 shall be amortised on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.” – reading in between the lines, isn’t this systematic basis equivalent to progress towards completion in some cases? If it is based on cost, then recognize 60%. Kindly advice for the below point. IAS 11 covers construction contracts. Transition 57 What are the transition options under IFRS 15? First of all – you did not copy the full BDO’s comment, which precisely says in the first sentence: “For performance obligations that meet the conditions for over time recognition of revenue, an entity would not recognise any work-in-progress under IAS 2 Inventories.” Thus they refer only to situations when revenue is recognized over time, not at the point of time (here you will have WIP under IAS 2), and also – they are referring to work in progress under IAS 2 Inventories and NOT contract cost as such (as I am referring to in my article). The International Financial Reporting Standards Foundation is a not-for-profit corporation incorporated in the State of Delaware, United States of America, with the Delaware Division of Companies (file no: 3353113), and is registered as an overseas company in England and Wales (reg no: FC023235 Hey Silvia, Great insight to IFRS 15. Company A contracts company B to build a plant at a cost of usd 20. IFRS 15 provides guidance on contract costs, including pre-contract costs and expenditures made to fulfill a contract. Hi Sylvia, u explained very well with simple example. Total contract revenue excluding windows: CU 6 mil. could you please tell me when the networking equipment’s are on “leased to owned” business model (ie; after certain years ownership of equipment’s deployed to run the network will be transferred to buyer ) . Here, from what I see, the control is transferred to the customer at the point of time, so you would recognize revenue when you transfer control of the apartment to the customer (in one amount). When the performance obligation is met, recognize that revenue. Now, as per the previous Standard, ABC can recognise revenue for the cost of windows, since the cost incurred in relation to the windows can be said to be specifically incurred for the refurbishing project (even though control has not been transferred). We are a national road agency deriving revenue from e-tolls. for windows (purchased from external suppliers); CU 4 mil. PwC help on accounting under IFRS and implications for business Only advance paid (8 mil) or would he recognize also part as PPE – maybe elevators and some part of finished work? What I am not so convinced is the example given in your article. The reason is that the windows are purchased from the third party and the transfer of windows to the customer has no direct relationship with the other ABC’s work. In such cases should we apply IFRS 15 or IAS 17 leas standard. IAS 18 Revenue is replaced by IFRS 15 from 2017. Many Thanks. Hi Silvia, how IFRS 15 deals with the contract with uncertain outcome i.e. You should remember that the performance obligation can be satisfied either: The standard IFRS 15 lists a few criteria when a performance obligation is satisfied over time: If you meet just one of these criteria, then the performance obligation is satisfied over time. Finally, we need to account for the progress payment of CU 8 mil. Also, let me warn you about one significant factor specific especially for construction contracts: There may be no direct relationship between your inputs and the transfer of control of goods or services to a customer. At the point of time? Contract – An agreement between two or more parties that creates enforceable rights and obligations. IFRS 15 that was issued on 28th of May 2014 provides a single, principles based five-step model to be applied to all contracts with customers. Total revenue to 31 December 20X1 excluding windows: CU 6 mil. Hi Silva, thanks for the excellent article. It will improve comparability of reported revenue over a range of industries, companies and geographical areas globally. WEB/IT-специалисты Вёрстка сайтов, разработка разных web приложений, разработка скриптов и еще многие тысячиактуальных предложений по срочной работе для тех, кто тесно связан с WEB-IT-деятельностью.У нас опубликованы только самые свежие и реальные запросы.Всегда можно найти клиента тут , которые уже готовы заплатить за вашу работу – дело нескольких минут.! Thank you. Therefore, you should exclude the effects of any inputs from input method that do not depict your performance in transferring control of goods or services to the customer (par. If the contract has no enforceable right for payment, we need to apply the so-called completed contract method i.e. Is nt this entry should be This is because the vendor’s performance obligations are in connection with the … IFRS® is the IFRS Foundation’s registered Trade Mark and is used by Simlogic, s.r.o This is clear, but in reality, you can have some variability involved, like progress or performance bonuses. Like : Let’s follow the 5 steps for the revenue recognition. It perfectly fits to the project by the consultant I outlined above. to complete the contracts are accounted for as contract costs (at the time when they are actually incurred): At 31 December 20X1, ABC needs to amortize the contract costs based on progress towards completion. Debit Contract costs (asset in balance sheet); Credit Employees (or suppliers or whatever is relevant), Debit Contract costs (asset in balance sheet). To summarize – revenue recognition for construction revenue is mostly the same under IFRS 15. If so then why inventory is credited as that time of purchase it will still be in inventory. In this case, should we recognize $2,000 ($10,000 x 20/100) in first month and from second month it should be $1,429 ($10,000 x 20/140)? The full known loss being conservative or proportionate to progress of project ? What would be the journal entries for the above example (100Km of road construction)? Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. IFRS 15 provides a guidance about contract combinations and contract modifications, too. Telecommunications, software, real estate and construction entities will be significantly affected by one or more of the new requirements. My question, how should those duties be treated in the accounts since it is not exactly revenue. Thank you silvia , you explained very well NEW: Online Workshops – US GAAP, IFRS and other, IFRS 15 Revenue from Contracts with Customers, read more in this article (find real estate part). Thanks. IAS 18 Revenue and IAS 11 Construction Contracts, and the related Interpretations on revenue recognition: ... Contract costs IFRS 15 also includes requirements for accounting for some costs that are related to a contract with a customer. what if the company has done some work. Sometimes it’s not true and you will have TWO or more performance obligations there. And when will we recognize the revenue for windows, is it at the completion date?? Credit Employees (or suppliers or whatever is relevant) The new revenue standard will replace the construction contract guidance and substantially all existing revenue recognition guidance under IFRS and US GAAP. RSM Canada Consulting LP is a limited partnership that provides consulting services and is an affiliate of RSM US LLP, a member firm of RSM International. report “Top 7 IFRS Mistakes” performance risk). In this case, you need to recognize revenue based on the progress towards completion. The execution is spread over two accounting periods. Debit Trade receivables (bank account, cash…): CU 8 mil. 2) I am not sure what you mean – I think it is mentioned up there. However, the client obtained control of windows. In other words, does the $500k need to show on the Balance Sheet as a liability even before the work begins? Hi Rishidar, if ABC is going to make some work on the windows, then it may be the case that there will be direct relationship between ABC’s inputs and the transfer of control of goods or services to a customer. How will we recognize revenue for each sold floor? ? Percentage of completion is 0%. Identify the performance obligations in the contract; Allocate the transaction price to the performance obligations in the contract; Recognize revenue when (or as) an entity satisfy a performance obligation. Contents IFRS 15 Revenue from Contracts with Customers Illustrative Examples IE1 Identifying the contract IE2 - IE17Contract modifications IE18 - IE43Identifying performance obligations IE44 - IE65A Silvia, thank you very much for your reply. 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. If the company did not do anything, just received a payment, then it’s a contract liability. And my next question – would you agree that recognizing revenue for 40 km, but expensing ALL costs for 60 km would create inconsistency? Plus, I will illustrate everything on an example with journal entries and calculations. I can’t say from this information how because I haven’t seen what you wrote in your contracts with customers. This is very important for me. or remain CU 6mil x 25% = CU 1.5mil. Thanks for your nice explanation on IFRS 15. IFRS 15 impacts for the construction industry. Therefore, it is all about assessing whether the costs incurred relate to past performance or to future performance and unlike BDO, I would definitely not generalize that all contract costs shall be expensed as incurred – this is where I don’t agree with your first statement (not BDO’s). Try a free IFRS 15 Revenue from Contracts with Cutomers quiz and test your knowledge. However, IAS 11 requires an entity to consider combining a group of contracts as a single contract when the contracts are performed concurrently or in a continuous sequence. And would cost of sales= estimated costs*change in %completion OR (Estimated costs*current year %completion) less prior year cost of sales? Back to Course Next Lesson. what is the treatment? The final section of this chapter takes a look at other business dimensions that could be impacted by the arrival of IFRS 15. Thanks for your explanation. I have some questions please guide about the following Hi Silvia, The largely converged revenue standards, IFRS 15 Revenue from Contracts with Customers and Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers 1 (together with IFRS 15, the standards), that were issued in 2014 by the International Accounting Standards Board (IASB Hi Sylvia. By using our website, you agree to the use of our cookies. In other words, no need to treat windows separately as in the above example and you would not exclude windows from the input method. Transition. The idea behind IFRS 15 is that a company should recognize revenue in a way that reflects the payments it expects to receive. The IASB’s Standard IFRS 15 Revenue from Contracts with Customers is now effective (for periods beginning on or after 1 January 2018 with earlier adoption permitted). It would be interesting for other readers, too. You can also check out my IFRS Kit with detailed video tutorials about IFRS 15. Carefully, because you should apply the resulting percentage of completion to the revenues excluding windows, too – just for the consistency! IAS 11 covers construction contracts. Thus windows would be treated just as the remaining project, based on the progress towards completion and as such, you would recognize revenue based on the progress towards completion at the year-end on all project (we all agree that the performance obligation is satisfied over time). Hi, I agree with all the examples you mentioned. In most construction contracts, the performance obligations are satisfied over time and NOT at the point of time (although exceptions might exist). The first sentence of your quote was exactly what I did not agree with. IFRS master. IFRS 15 requires construction companies to consider whether these contracts should be accounted for separately or as one combined contract. Viber/whаtsapp +380976131437 ckайп evg7773 Telegrаm @evg7773. Costs to fulfil a contract are similar in nature to work-in-progress, but they … Hi Hemant, yes, I guess so. If we were to change the purchase of the windows to a pay-when-paid transaction, and the vendor invoiced the windows but it was unpaid at year end, would the window payable be reported as accounts payable or a contract liability? Your demostrated example is crystal clear and easy to understand. If it does, how, can you please give an example. On 31 December 20X1, ABC needs to amortize the contract costs based on progress towards completion. Contract combination happens when you need to account for two or more contract as for 1 contract and not separately. It is very clear now, we have the explicit contractual agreement between ABC and a customer. outcome of a construction contract cannot be measured realiably. Now I see what you are referring to, but OK let me make this more precise. They were constructing the road, in total 100 km, they incurred cost for 60 km, but certified only 40 km. Contract assets. Labor costs, materials, etc. construction contracts, or other long-term service contracts, modifications are frequent. IFRS may require some changes in how your company does business. Credit Revenue from construction project: CU 1.5 mil. Signing amount for sold floor space is 70,000 cu (for 10 sold floors) Cost incurred so far; basement-80,000 cu, cost for each floor 50,000 cu (up to 4th Floor). Let’s recognize the revenue from “remaining” services (all except for windows). While IFRS 15 was under development, a key concern of the construction industry was whether contractors would continue to recognise revenue as the contract progresses, similar to the stage of completion method under IAS 11. Hi Silvia, Did you assume that there was no margin on the windows purchased from the suppliers or what. Contract asset that arose at revenue recognition (6+1.5): CU 7.5 mil. I will grateful for your reply. How we present contract costs in the financial position current or non current??? To find out more, see our Cookies Policy Terms & Conditions Articles. Reporting revenue under IFRS 15 is now one of the ordinary activities of companies in the 100+ countries that use IFRS Standards. Debit Contract costs (asset in balance sheet); 1) Accounting – no, my entries are correct, please revise once again (when the paints are used, contract costs are in P/L, not in the balance sheet). Hi Silvia, The publication of IFRS 15 was followed by IFRS 9, which outlined the new accounting requirements for financial instruments and IFRS 16: Leases. However, if control transfers at the point of time and acceptance signature is that point of time, then the costs incurred to provide that good/service transferred at that point of time do not relate to past performance, but the performance not yet accepted. Surya, but yes, we recognized the revenue for windows in the first year in the amount equal to its cost (zero profit margin). IFRS 15 sets out a single model for the recognition of revenue that apply to all contracts with customers. How should a promised good or service be identified? Like a model questionnaire to begin working on the implementation. Please give an example less progress payment of CU 8 mil on after... Steps: While this may sound straightforward, applying these steps to construction contracts under IAS 11 construction under. Enforceable rights and obligations of the parties to the revenues excluding windows: 6! Conservative or proportionate to progress of project are being provided to construction contracts under IAS can. Or performance bonuses not obtained control of the ordinary activities of companies in the public domain the... A question and I would try searching Big4 materials as the progress percentage ” expenditures made to a... 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