Construction World March 2016

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.

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

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