Canada: Revenue Recognition For Construction Contracts Under IFRS 15

The timing of revenue recognition may need to change in the near term for a construction entity preparing IFRS financial statements. Specific accounting guidance on construction contracts contained in IAS 11 Construction Contracts is replaced effective for annual reporting periods beginning on or after January 1, 2018. The International Accounting Standards Board (IASB) has published a new standard, IFRS 15 Revenue from Contracts with Customers (IFRS 15). IFRS 15 sets out requirements for recognizing revenue that apply to all contracts with customers.

Overview

The core principle in IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To recognize revenue, a company would apply the following five steps:

  1. Identify the contract(s) with the customer.
  2. Identify the performance obligations in the contract(s).
  3. Determine the transaction price.
  4. Allocate the transaction price.
  5. Recognize revenue when a performance obligation is satisfied.

Application of these five steps may result in different accounting for construction contracts than is currently applied. Key steps where issues may arise in the application of IFRS 15 for construction companies are set out below.

Identifying performance obligations in contracts

An entity must evaluate the contractual terms and its customary business practices to identify whether there are distinct goods or services within each contract. Distinct goods or services are considered separate performance obligations and are accounted for separately. There are normally multiple components to a construction contract. The asset to be constructed and the services to be provided are likely to be highly dependent or integrated. This means that, in many instances, for accounting purposes, only one performance obligation exists in the contract. A detailed evaluation of each construction contract is required.

The transaction price

An entity considers the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a construction contract frequently includes fixed amounts along with variable amounts. An entity includes variable consideration in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The total transaction price is then allocated to each performance obligation on the basis of the relative stand-alone selling price of each distinct good or service.

Recognizing revenue when a performance obligation is satisfied

Revenue is recognized upon the satisfaction of performance obligations, which occurs when control of the good or service transfers to the customer. This can occur either at a point in time or over time. A performance obligation is satisfied over time, only if any of the following criteria are met:

  • The customer receives and consumes the benefits of the entity's performance as the entity performs.
  • The entity's performance creates or enhances an asset (work in process) that the customer controls as the asset is created or enhanced.
  • The entity's performance does not create an asset with an alternative use to the entity, and the customer does not have control over the asset created, but the entity has an enforceable right to payment for performance completed to date.

An entity has an enforceable right to payment only when it is entitled, at all times, to an amount that at least compensates the entity for performance to date if the contract is terminated for any reason other than non-performance.

Where an arrangement was within the scope of IAS 11, revenue and profits were recognized on a percentage of completion basis. Similar recognition under IFRS 15 is permitted, but only where enforceable contractual rights and obligations satisfy certain criteria. Since there is no automatic right to recognize revenue on a stage of completion basis, the timing of the recognition of construction revenue and profit may vary under the new standard.

Contract costs

Although guidance is not specific to construction contracts, IFRS 15 provides prescriptive guidance on pre-contract costs incurred and general guidance on contract costs or those incurred to fulfil a contract.

IFRS 15 requires incremental costs incurred in obtaining a contract with a customer to be recognized as an asset if an entity expects to recover the costs. A simplification of expensing exists where the amortization period is less than one year. The requirement for pre-contract costs to be incremental would generally prohibit most internal costs for a project – such as due diligence costs or wages for employees to prepare a proposal – from being capitalized, as those costs may have been incurred regardless of whether the contract was won or lost.

IAS 11 sets out how to account for expected contract losses, but no guidance is contained in IFRS 15. Therefore, an entity will need to now look to the more general guidance on onerous contracts contained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. This may impact timing for when these losses on construction contracts are recognized and/or measured.

In summary, accounting for revenue arising from a construction contract may result in accounting for revenue in a similar manner to current practice, through the stage of completion approach. However, a detailed read of the standard may raise questions on how the new recognition and measurement steps are to be applied to a contract. A thorough analysis of the nature of the contract entered into by the entity is critical on initial adoption, in order to establish IFRS 15 compliant accounting policies. Entities that are required to follow IFRS will need to document how they have complied with the requirements set out in IFRS 15 starting Q1 2018.

Any change in current practice could impact the availability of income for distributions, compliance with loan covenants and compensation and bonus plans calculations. Careful planning is critical. Contact your Collins Barrow advisor for assistance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions