Off-plan sales: revenue under IFRS 15

What are off-plan sales?

An off-plan sale is a contract to buy a specific unit, a flat, villa or office floor, in a development that has not been built or finished. The buyer usually pays a deposit on signing, instalments during construction and the balance on handover, sometimes with a payment plan that runs on after handover. The developer keeps legal title until handover or registration.

When is revenue on off-plan sales recognised?

Each sold unit is usually a single performance obligation. The buyer does not control the building as it goes up, so revenue is recognised over time only if the unit has no alternative use to the developer, which is normally the case once a specific unit is sold, and the developer has an enforceable right to payment for work done to date, at every point in the contract. If not, revenue is recognised when control passes, usually at handover. See property development revenue for the over time test and a worked example.

What did the IFRS Interpretations Committee decide?

In March 2018 the Committee published an agenda decision on a sale of a unit in a residential complex. The buyer paid in instalments and could cancel. If it did, the developer had to resell the unit to a new buyer, and the original buyer had to pay any shortfall between the resale price and the original price, plus resale costs. The Committee concluded that the developer had no enforceable right to payment for performance completed to date: its right was to compensation for a loss on resale, not to payment for the work done. Revenue was therefore recognised at a point in time.

The decision also confirmed that the assessment considers the contract terms and any laws that supplement or override them, including legal precedent that makes a contractual right unenforceable. Developers in the same country can still reach different answers if their contracts differ. Many developers in the UAE recognise revenue over time, having concluded that their contracts and local law give them a right to payment for work done; developers elsewhere, where buyers can cancel and the developer's remedy is resale, recognise it at handover.

Off-plan sales: a financing example

A developer sells a flat off plan for CU 1,000,000. The buyer pays 10% on signing and 50% during construction, together 600,000, on average two years before handover, and the remaining 40% on handover. Revenue is recognised at handover. The developer's incremental borrowing rate is 6%. Because the buyer is financing construction for more than a year, the contract has a significant financing component.

The developer recognises interest expense of 74,160 over two years and revenue of 1,074,160 on handover, 74,160 more than the cash price. The interest is a borrowing cost, so if the development is a qualifying asset under IAS 23 it can be capitalised into the cost of the units and reach profit through cost of sales instead. Where revenue is recognised over time and payments track construction, the financing effect is often small. If the gap between payment and handover is a year or less, IFRS 15's practical expedient allows it to be ignored.

What about payment plans after handover?

Post-handover payment plans reverse the position: the developer finances the buyer. If the buyer pays over several years after taking the keys, revenue is the present value of the payments, and the difference is interest income recognised over the plan. The receivable is a financial asset, so the developer also recognises expected credit losses on it under IFRS 9, usually with a provision matrix. See the IFRS 9 provision matrix.

How are buyers' payments presented?

Under a point in time model, payments before handover are a contract liability. Under an over time model, the developer compares revenue recognised with amounts billed for each contract: revenue ahead of billing is a contract asset, billing ahead of revenue a contract liability. An instalment that is due, whatever the revenue position, is a receivable.

How are escrow accounts treated?

In some markets, buyers' payments must go into a project escrow account that the developer can draw on only as certified construction milestones are reached. Dubai, for example, has required this for off-plan projects since 2007. Developers present these balances either outside cash and cash equivalents as restricted cash, or within cash with disclosure, depending on how tightly the restrictions bite. IAS 7 requires disclosure of significant cash balances that are not available for use by the group.

How are cancellations accounted for?

When a buyer cancels, the developer ends its obligation and returns the unit to its stock of unsold units. Under a point in time model, any part of the payments the developer is entitled to keep is recognised in profit when the contract ends and nothing is refundable, and the rest is refunded. Under an over time model, the revenue and cost of sales recognised on the contract are generally reversed, the unit's costs go back to inventory, and any contract asset that the developer cannot recover is written off. High cancellation rates can also call into question whether contracts are enforceable at all, which in turn affects whether a contract exists under IFRS 15.

This guide is general information. It is not tax or legal advice for your situation.