Revenue Recognition in Real Estate – IFRIC 15 and IFRS 15

Revenue Recognition in Real Estate refers to the accounting process of determining when and how income from real estate transactions—such as property development, sales, or construction—is recognized in the financial statements. This ensures revenue is reported accurately, reflecting the true economic substance of real estate transactions.

Table of Contents

1. IFRIC 15 – Accounting for Real Estate
2. Recommendations of IFRIC 15
3. Salient Features of IFRIC 15
4. Introduction of IFRS-15
5. IFRS 15 – “Revenue from Contracts with Customers”
6. Scope of IFRS-15

Check out Taxmann's Taxation of Real Estate Developers & Joint Development Arrangements with Accounting Aspects, a specialised treatise thoroughly addresses real estate taxation, especially in Joint Development Arrangements (JDAs). It covers newly introduced or revised provisions such as sections 45(5A), 50C, 43CA, 56(2)(x)(b), 23(5), and 80-IBA. It offers in-depth guidance on revenue recognition, capital gains, ICDS, accounting standards, judicial precedents, and practical case studies. With its structured approach and practical insights, the book serves as a one-stop reference for professionals, developers, landowners, tax officials, and academicians seeking clarity on complex real estate taxation. It clarifies intricate scenarios, from fundamental principles to advanced issues, making it indispensable for practitioners and researchers in this domain.

Internationally, revenue recognition in the case of joint development agreements by the real estate developers is presently governed by International Accounting Standard-11 on Construction Contracts and IFRIC-15 issued by International Accounting Standard Board (IASB) relating to agreements for the construction of real estate. In fact IAS-11 is corresponding to Indian Accounting Standard AS-7 which deals with the accounting and revenue recognition for contractors in the case of construction contracts. It does not apply to the real estate developers unless the structuring of the transaction is in the nature of construction contract. Therefore, IAS Board in 2009 approved IFRIC-15 which provides certain guidelines relating to accounting and revenue recognition for real estate developers. Further IAS-11 and IFRIC-15 have been replaced and merged with newly released IFRS-15 on “Revenue from Contracts with Customers” which is applicable from 1st January, 2017.

1. IFRIC 15 – Accounting for Real Estate

Real Estate Developers constantly face the fundamental issue in respect of recognition of revenue, i.e., whether a contract for construction is a contract for sale of a property or is it a contract for providing service. Issue also prevails with respect to when the significant risks and rewards of ownership of property pass to the buyer in case of sale of real estate during the construction period.

Internationally, revenue is recognised in accordance with IAS-11 on the basis of stage of completion of work if a contract relates to providing service with regards to construction contracts. If the contract, on the other hand, is a contract for sale of goods or property, revenue there from should be recognised in accordance with IAS-18.

However, question relating to applicability of IAS-11 or IAS-18 arises in a situation, when sale is made during construction period.

IFRIC-15 prescribes the accounting for revenue from the construction of real estate in situations where the agreement is –

• a construction contract in accordance with IAS-11;
• an agreement for the rendering of services in accordance with IAS-18; or
• an agreement for the sale of goods in accordance with IAS-18.

2. Recommendations of IFRIC 15

5.1 Agreement is a Construction Contract (Within the Scope of IAS-11)

An agreement for the construction of real estate is a construction contract within the scope of IAS-11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not).

If the agreement is within the scope of IAS-11 and its outcome can be measured reliably, the developer recognizes income by reference to stage of completion of the contract activity.

If on the other hand, the buyer has limited ability to influence the design and other elements of the real estate then agreement is within the scope of IAS-18.

5.2 Agreement for the Rendering of Services (IAS-18)

Where the agreement falls within the scope of IAS-18 and the developer is not required to acquire and supply construction materials, the agreement is for the rendering of services. The developer is responsible only for assembling materials supplied by others (i.e. it has no inventory risk for the construction materials) and therefore the constructor is rendering a service.

Revenue is recognised by reference to the stage of completion of the transaction using the percentage of completion method. As stated in IAS-18 para 21, the requirements of IAS-11 are generally applicable to the recognition of revenue and the associated expenses for such a transaction.

5.3 Agreements for the Sale of Goods (IAS-18)

When an agreement involves the provision of construction materials and labour and it does not fall to be accounted for as a construction contract under IAS-11, it will be an agreement for the sale of goods under IAS-18. The applicable recognition criteria are those set out in IAS-18 para 14.

The developer may transfer to the buyer control and significant risks and rewards of ownership of the work-in-progress in its current state as construction progresses. In this case, if all the criteria in paragraph 14 of the IAS-18 are met continuously as the construction progresses, the developer shall recognise revenue by reference to the stage of completion using the percentage of completion method. The requirements of IAS-11 are generally applicable to the recognition of revenue and associated expenses for such a transaction.

The developer may transfer to the buyer control and significant risks and rewards of ownership of the real estate in its entirety at a single time (i.e., at completion, upon or after delivery). In this case, the developer shall recognise revenue only when all the criteria in paragraph 14 of IAS-18 are satisfied.

Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied – [IAS 18.14]

• the seller has transferred to the buyer the significant risks and rewards of ownership,
• the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold,
• the amount of revenue can be measured reliably,
• it is probable that the economic benefits associated with the transaction will flow to the seller, and
• the costs incurred or to be incurred in respect of the transaction can be measured reliably.

3. Salient Features of IFRIC 15

IFRIC 15 Agreements for the Construction of Real Estate became effective from 1st January, 2009 in the following background –

1. In the real estate industry, entities that undertake the construction of real estate, directly or through subcontractors, may enter into agreements with one or more buyers before construction is complete. Such agreements take diverse forms.
2. For example, entities that undertake the construction of residential real estate may start to market individual units (apartments or houses) ‘off plan’, i.e., while construction is still in progress, or even before it has begun. Each buyer enters into an agreement with the entity to acquire a specified unit when it is ready for occupation. Typically, the buyer pays a deposit to the entity that is refundable only if the entity fails to deliver the completed unit in accordance with the contracted terms. The balance of the purchase price is generally paid to the entity only on contractual completion, when the buyer obtains possession of the unit.
3. Entities that undertake the construction of commercial or industrial real estate may enter into an agreement with a single buyer. The buyer may be required to make progress payments between the time of the initial agreement and contractual completion. Construction may take place on land the buyer owns or leases before construction begins.

The Interpretation addresses two issues –

1. Is the agreement within the scope of IAS-11 or IAS-18?
2. When should revenue from the construction of real estate be recognised?

Determining whether an agreement for the construction of real estate is within the scope of IAS-11 or IAS-18 depends on the terms of the agreement and all the surrounding facts and circumstances. Such a determination requires judgment with respect to each agreement.

IAS-11 applies when the agreement meets the definition of a construction contract set out in paragraph 3 of IAS-11 – ‘a contract specifically negotiated for the construction of an asset or a combination of assets …’ An agreement for the construction of real estate meets the definition of a construction contract when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether or not it exercises that ability). When IAS-11 applies, the construction contract also includes any contracts or components for the rendering of services that are directly related to the construction of the real estate in accordance with paragraph 5(a) of IAS-11 and paragraph 4 of IAS-18.

In contrast, an agreement for the construction of real estate in which buyers have only limited ability to influence the design of the real estate, e.g. to select a design from a range of options specified by the entity, or to specify only minor variations to the basic design, is an agreement for the sale of goods within the scope of IAS-18.

Accounting for revenue from the construction of real estate

The agreement is a construction contract

1. When the agreement is within the scope of IAS-11 and its outcome can be estimated reliably, the entity shall recognise revenue by reference to the stage of completion of the contract activity in accordance with IAS-11.
2. The agreement may not meet the definition of a construction contract and therefore be within the scope of IAS-18. In this case, the entity shall determine whether the agreement is for the rendering of services or for the sale of goods.
3. If the entity is not required to acquire and supply construction materials, the agreement may be only an agreement for the rendering of services in accordance with IAS-18. In this case, if the criteria in paragraph 20 of IAS-18 are met, IAS-18 requires revenue to be recognised by reference to the stage of completion of the transaction using the percentage of completion method. The requirements of IAS-11 are generally applicable to the recognition of revenue and the associated expenses for such a transaction.
4. If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver the real estate to the buyer, the agreement is an agreement for the sale of goods and the criteria for recognition of revenue set out in paragraph 14 of IAS-18 apply.
5. The entity may transfer to the buyer control and the significant risks and rewards of ownership of the work-in-progress in its current state as construction progresses. In this case, if all the criteria in paragraph 14 of IAS-18 are met continuously as construction progresses, the entity shall recognise revenue by reference to the stage of completion using the percentage of completion method. The requirements of IAS-11 are generally applicable to the recognition of revenue and the associated expenses for such a transaction.
6. The entity may transfer to the buyer control and the significant risks and rewards of ownership of the real estate in its entirety at a single time (e.g. at completion, upon or after delivery). In this case, the entity shall recognise revenue only when all the criteria in paragraph 14 of IAS-18 are satisfied.
7. When the entity is required to perform further work on real estate already delivered to the buyer, it shall recognise a liability and an expense in accordance with paragraph 19 of IAS-18. The liability shall be measured in accordance with IAS-37. When the entity is required to deliver further goods or services that are separately identifiable from the real estate already delivered to the buyer, it would have identified the remaining goods or services as a separate component of the sale, in accordance with paragraph 8 of this Interpretation.

4. Introduction of IFRS-15

IFRIC-15 standardises accounting practice across jurisdictions for the recognition of revenue by real estate developers for sales of units, such as apartments or houses, ‘off plan’ – that is, before construction is complete.

IFRIC-15 will be superseded by IFRS-15 Revenue from Contracts with Customers as of 1 January, 2017.

IFRS-15 contains specific, and more precise conditions for determining whether revenue is recognised over time (referred to as ‘percentage of completion’ under IAS-11) or at a point in time.

5. IFRS 15 – “Revenue from Contracts with Customers”

The International Accounting Standards Board (IASB) issued IFRS-15 Revenue from Contracts with Customers in May 2014.

The new guidance standardises how companies should recognise revenue in financial statements under both US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

IFRS-15 establishes a comprehensive framework for determining when to recognise revenue and how much revenue to recognise. The core principle in that framework is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

IFRS-15 is effective from 1 January, 2017. Earlier application is permitted.

IFRS-15 replaces the following standards and interpretations –

• 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.

6. Scope of IFRS-15

IFRS-15 Revenue from Contracts with Customers applies to all contracts with customers except for – leases within the scope of IAS-17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS-9 Financial Instruments, IFRS-10 Consolidated Financial Statements, IFRS-11 Joint Arrangements, IAS-27 Separate Financial Statements and IAS-28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS-4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

A contract with a customer may be partially within the scope of IFRS-15 and partially within the scope of another standard. In that scenario –

• if other standards specify how to separate and/or initially measure one or more parts of the contract, then those separation and measurement requirements are applied first. The transaction price is then reduced by the amounts that are initially measured under other standards;
• if no other standard provides guidance on how to separate and/or initially measure one or more parts of the contract, then IFRS-15 will be applied.

The IFRS provides that a Company should apply following five steps to recognise the revenue from contact with customers –

6.1 Identify the Contract(s) with the Customer

A contract is an agreement between two or more parties that creates enforceable rights and obligations.

A contract with a customer will be within the scope of IFRS-15 if all the following conditions are met –

• the contract has been approved by the parties to the contract;
• each party’s rights in relation to the goods or services to be transferred can be identified;
• the payment terms for the goods or services to be transferred can be identified;
• the contract has commercial substance; and
• it is probable that the consideration to which the entity is entitled to in exchange for the goods or services will be collected.

6.2 Identify the Performance Obligations in the Contract

Performance obligations are promises in a contract to transfer to a customer goods or services that are distinct. In determining whether a good or service is distinct, a company considers if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer. A company also considers whether the company’s promise to transfer the good or service is separately identifiable from other promises in the contract. For example, a customer could benefit separately from the supply of bricks and the supply of construction labour. However, those items would not be distinct if the company is providing the bricks and construction labour to the customer as part of its promise in the contract to construct a brick wall for the customer. In that case, the company has a single performance obligation to construct a brick wall. The bricks and construction labour would not be distinct goods or services because those items are used as inputs to produce the output for which the customer has contracted.

6.3 Determine the Transaction Price

The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services.

Where a contract contains elements of variable consideration, the entity will estimate the amount of variable consideration to which it will be entitled under the contract. Variable consideration can arise, for example, as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. Variable consideration is also present if an entity’s right to consideration is contingent on the occurrence of a future event.

The standard deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be recognised. Specifically, variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved.

6.4 Allocate the Transaction Price

A company would typically allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service. If a stand-alone selling price is not observable, the company would estimate it. Sometimes, the transaction price may include a discount or a variable amount of consideration that relates entirely to a specific part of the contract. The requirements specify when a company should allocate the discount or variable consideration to a specific part of the contract rather than to all performance obligations in the contract.

6.5 Recognise Revenue When a Performance Obligation is Satisfied

A company would recognise revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For a performance obligation satisfied over time, a company would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied.

6.6 Revenue is Recognised as Control is Passed, Either Over Time or at a Point in Time

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. This includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly. These include, but are not limited to –

• using the asset to produce goods or provide services;
• using the asset to enhance the value of other assets;
• using the asset to settle liabilities or to reduce expenses;
• selling or exchanging the asset;
• pledging the asset to secure a loan; and
• holding the asset.

6.7 An Entity Recognises Revenue Over Time if One of the Following Criteria is Met

• the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs;
• the entity’s performance creates or enhances an asset that the customer controls as the asset is created; or
• the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.