We look at possible impacts of IFRS 15, actions that may be needed, and how KPMG can help.
With the arrival of the new revenue standard – IFRS 15 Revenue from Contracts with Customers – the construction industry has effectively lost its contract accounting ‘rule book’.
The industry will now be guided by the principles of the generic standard.
To help you get to grips with what’s changed, read Impacts on the construction industry of the new revenue standard. In this publication, we seek to draw out key areas of potential change by considering the life cycle of a typical construction contract.
Earlier draft versions of IFRS 15 raised concerns in the construction sector that the ability to recognise revenue from construction activities progressively would be curtailed or removed completely.
KPMG supported its clients in the construction industry in their pursuit for retaining progressive revenue recognition, and this is largely reflected in the new standard.
As a result, contractors will often find that applying the new standard to a traditional construction contract results in a revenue accounting outcome broadly similar to current stage of completion.
Concerns expressed earlier in the development of the standard that revenue may be deferred until practical completion, or that a single contract may be broken down into many small accounting units, have largely been addressed.
Nevertheless, the devil is in the detail. IFRS 15 introduces many new concepts for revenue and cost recognition.
The most notable change for construction contracts is that under IAS 11 Construction Contracts, recognition of revenue and profits on a percentage of completion basis was required where an arrangement met the definition of a construction contract.
Under IFRS 15, progressive revenue recognition will only be permitted where the enforceable contractual rights and obligations satisfy certain criteria. There is no automatic right to recognise revenue on a progressive basis for construction contracts.
The method for accounting for foreseeable contract losses was prescribed in IAS 11. This guidance is not contained in IFRS 15 and accordingly loss-making projects are now accounted for as ‘onerous’ contracts under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
This change could have an impact on when losses from loss-making projects are recognised and how they are measured.
While the effective date may seem a long way off, decisions need to be made soon – especially regarding when and how to transition to the new standard.
An early decision will allow you to develop an efficient implementation plan and inform your key stakeholders.
We hope that this publication will help you assess the impact of the new standard on your construction contracts.
Please speak to your usual KPMG contact if you would like to find out more about how KPMG can help your business.