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IFRS 15: Revenue: The UAE's Real Estate Sector

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362 views2 pages

IFRS 15: Revenue: The UAE's Real Estate Sector

Uploaded by

Shawn Walker
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IFRS 15: Revenue

The UAE’s real estate sector

March 2016

The new revenue standard requires entities to review the terms and conditions of their existing contracts to
identify all goods and services sold to customers. Do you fully understand the financial and accounting
implications of your contracts? IFRS 15 contains new guidance in determining whether a cost should be
capitalized or expensed when incurred. Have you assessed their practical impacts on your planning?
Under the new standard, revenue recognition overtime (percentage of completion) is not an automatic right
but subject to conditions. One or more of the new requirements will affect revenue recognition for UAE
companies. Are you ready for the new standard?

IFRS 15 core principle


In May 2014, the International
The core principle of the new revenue standard is that revenue reflects
Accounting Standards Board the transfer of promised goods or services to customers in an amount
(IASB) published a new that reflects the consideration to which the entity expects to be entitled
standard, IFRS 15 Revenue in exchange for those goods or services.
from contracts with
A five-step model is provided by IFRS 15:
customers (IFRS15), which • Identify the contract(s) with a customer
significantly impacts real • Identify the performance obligations in the contract
estate companies. Under IFRS • Determine the transaction price
• Allocate the transaction price to performance obligations in the
15, real estate entities can contract
now recognize revenue over • Recognize revenue as performance obligations are satisfied
the construction period if
certain conditions are met.
Does a contract include more than one
performance obligation?
Under IFRS 15, an entity is required to determine whether it promises to
transfer distinct goods or services. A good or service is distinct from
other goods and services if:
• the goods or services provide stand-alone benefits to the customer;
and
• the goods or services are distinct within the context of the contract.

An entity must judge whether the different elements of a contract can be


separated from each other based on the new criteria. A more complex
judgment is expected for real estate developers that provide services or
deliver common properties or amenities in addition to the property being
sold.

© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Entities should review contract terms and property law to evaluate
whether their current approach is still appropriate under IFRS 15.
For example, a real estate developer that recognizes revenue from
the sale of a property when its title is transferred to a customer
might need to recognize revenue over the construction period, or
vice versa, based on the new criteria.

Should revenue be recognized at a How does the time value of money


point in time or over a period of time? affect revenue?
IFRS 15 specifies when revenue should be recognized, point As transaction prices across the real estate industry are often
in time or over a period of time, providing three specific significant, cash payments may be received in advance or
criteria. If one or more of these criteria are met, then the deferred. As a result, cash receipts may not match when that
entity recognizes revenue over time, using a method that revenue is recognized.
depicts its performance, otherwise it is recognized at a point
in time. IFRS 15 criterions are as follows: IFRS 15 requires an entity to adjust the amount paid or deferred
according to the time value of money to reflect what the cash
selling price would have been. This requirement may recognize
interest income (in the case of a deferred payment) or interest
Criterion Example expense (for advance payments).

1. The customer simultaneously Routine or recurring However, IFRS 15 also provides a practical expedient for where
receives and consumes the services. the difference between transfer of a good or service and receipt
benefits provided by the of payment is less than one year.
entity's performance as the
entity performs.

2. The entity's performance Building an asset on a


creates or enhances an asset customer's site.
that the customer controls as
the asset is created or
enhanced.

3. The entity's performance Building a specialized


does not create an asset with asset that only the
an alternative use to the customer can use, or
entity and the entity has an building an asset to a
enforceable right to payment customer order.
for performance completed
to date.

Contact us
Yusuf Hassan FirozAli Ghadyaly
Partner Associate Director
Head of Accounting Advisory Services Accounting Advisory Services
E: yusufhassan@kpmg.com E: firozali@kpmg.com
T: +971 4 424 8912 T: +971 4 356 9734

The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although we
endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation and circumstances.

© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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