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10
CONSTRUCTION WORLD
MARCH
2016
In May 2014, the accounting standards setting
authorities released a new standard on revenue
recognition – IFRS 15, Revenue from Contracts with
Customers, (‘IFRS 15’) which is effective for periods
beginning on or after 1 January 2018. IFRS 15 brings
together in one standard the core principles for revenue
recognition across all sectors.
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MARKETPLACE
Publishing a new standard on
revenue recognition is a major
achievement for the standard
setters, but for companies, espe-
cially those in the construction industry, the
real work is just beginning.
The new requirements will affect
companies in different ways and those
engaged in major projects in South Africa
such as telecom, public utilities, engineering,
construction and real estate industries, could
see significant changes to the timing
of revenue.
Although earlier concerns that revenue
may be delayed until practical completion
of a contract or that a single contract may
be broken down into many small accounting
units have been largely addressed, the devil is
nevertheless in the detail. The new standard
A new
FRAMEWORK
FOR REVENUE
introduces many new concepts for revenue
and cost recognition and companies need to
carefully consider the key areas of potential
change by considering the life cycle of a
typical construction contract.
The most notable change for construc-
tion contracts is that progressive profit
recognition will only be permitted where the
enforceable contractual rights and obliga-
tions satisfy certain criteria. There is no longer
an automatic right to recognise revenue on a
progressive basis for construction contracts.
In addition, the standard does not prescribe
how to account for foreseeable contract
losses and this could have an impact on how
losses from loss making projects are recog-
nised and measured.
Most importantly, while the effective date
of IFRS 15, 1 January 2018, may seem a long
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way off, one key decision needs to be made
early, how to transition to the new standard?
It is critical to make your decisions early
in order to develop an effective and efficient
implementation plan. However, making
those decisions may not be so straight
forward and there is no ‘one-size-fits-all’
solution. The standard offers a range of tran-
sition options and senior management needs
to carefully consider the possible significant
effects on revenue and cost trends in the
financial statements.
In addition, to identify the optimal
approach, management must consider
broader business issues – from IT implemen-
tation plans and taxation to communication
with stakeholders.
It is against this backdrop that KPMG in
South Africa hosted its inaugural Construc-
tion Breakfast in November and discussed
the impact of the new revenue recognition
accounting standard, IFRS 15, as well as some
related and topical tax issues.
KPMG strongly believes that the best
approach to these complex issues is for senior
management to consider a set of core issues
that will be relevant to their business, to
take early decisions and implement efficient
transition plans.
This will ensure that one of the most
important financial reporting metrics –
revenue – remains a robust and reliable
reflection of the company’s performance.