Revenue Recognition in Real Estate Under Ind AS 115

1. Question

Jupiter Realty Limited (“the entity”) is engaged in constructing a multi-unit residential complex. The entity enters into a binding sales contract with a customer for a specified residential unit. As per the contract terms:

• The customer makes milestone payments, which cumulatively are less than the work completed to date plus a normal profit margin.
• A significant portion of the contract price is paid by the customer to the entity upon delivery of the unit. The contract is considered enforceable under Ind AS 115 (i.e., it meets the criteria in paragraph 9 of Ind AS 115 for being a contract).
• In the event the customer wishes to terminate the contract, either the customer or the entity can identify a new customer who will pay the remaining amount as per the milestone schedule.
• The new customer compensates the original buyer for payments made to date. This compensation may be higher or lower than the cumulative payments made by the original customer.
• The contract is silent on the scenario where a new buyer cannot be identified. However, as per local laws, the entity cannot enforce a claim for remaining payments from the original customer if a new buyer is not found and the original customer defaults on further payments.

State whether the entity’s performance obligation to deliver the specified residential unit to the customer meets the criteria for revenue recognition over time as per Ind AS 115, or should revenue be recognised at a point in time.

2. Relevant Provisions

Ind AS 115, Revenue from Contracts with Customers

Paragraph 31 – “An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.”

Paragraph 32 – “For each performance obligation identified in accordance with paragraphs 22-30, an entity shall determine at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.”

Paragraph 35 – “An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

(a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs B3-B4);

(b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5); or

(c) the entity’s performance does not create an asset with an alternative use to the entity (see paragraph 36 and paragraphs B6-B8) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).”

Paragraph B9 – “In accordance with paragraph 37, an entity has a right to payment for performance completed to date if the entity would be entitled to an amount that at least compensates the entity for its performance completed to date in the event that the customer or another party terminates the contract for reasons other than the entity’s failure to perform as promised. An amount that would compensate an entity for performance completed to date would be an amount that approximates the selling price of the goods or services transferred to date (for example, recovery of the costs incurred by an entity in satisfying the performance obligation plus a reasonable profit margin) rather than compensation for only the entity’s potential loss of profit if the contract were to be terminated…..”

Paragraph B3 (Guidance on para 35(a)) – “For some types of performance obligations, the assessment of whether a customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs is straightforward. Examples include routine or recurring services (such as a cleaning service) in which the receipt and consumption of the benefits of the entity’s performance by the customer can be readily identified as the entity performs.

Paragraph B4(Guidance on para 35(a)) – “For other types of performance obligations, an entity may not be able to readily identify whether a customer simultaneously receives and consumes the benefits from the entity’s performance as the entity performs. In those circumstances, a performance obligation is satisfied over time if an entity determines that another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer…..”

Paragraph B5 (Guidance on para 35(b)) – “In determining whether a customer controls an asset as it is created or enhanced in accordance with paragraph 35(b), an entity shall apply the requirements for control in paragraphs 31-34 and 38. The asset that is being created or enhanced (for example, a work-in-progress asset) can be either tangible or intangible.”

Paragraph B6 (Guidance on para 35(c)) – “In assessing whether an asset has an alternative use to an entity in accordance with paragraph 36, an entity shall consider the effects of contractual restrictions and practical limitations on the entity’s ability to readily direct that asset for another use, such as selling it to a different customer. The possibility of the contract with the customer being terminated is not a relevant consideration in assessing whether the entity would be able to readily direct the asset for another use.”

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