Property development revenue under IFRS 15

When is property development revenue recognised over time?

IFRS 15 has three routes to over time recognition. The first, the customer consuming the benefits as the developer performs, does not fit property. The second, the buyer controlling the asset as it is built, fits development on the buyer's own land, such as a build-to-suit office for a tenant who owns the plot. For most residential sales the developer owns the land and building until handover, so the question is the third route: does the unit have no alternative use, and does the developer have an enforceable right to payment for the work done so far?

When does a unit have no alternative use?

A unit has no alternative use if the developer cannot readily direct it to another buyer, either because the contract prevents it or because doing so would cause a significant economic loss. A contract to sell a specific, identified flat usually restricts the developer from substituting another unit, so the unit has no alternative use once it is sold, even if the flats are identical. The assessment is made at contract inception and not revisited unless the contract changes.

What counts as an enforceable right to payment?

At all times during the contract, if the buyer walks away for reasons other than the developer's failure, the developer must be entitled to an amount that at least compensates it for the work done to date, including a reasonable margin. A deposit that only covers the developer's loss on resale, or a right to recover a shortfall from the buyer, is not enough. The answer depends on the contract terms and on local law and court practice, which is why developers in some countries recognise revenue over time and others at completion. See off-plan sales, which covers the IFRS Interpretations Committee's agenda decision on this point.

Property development revenue: a block of 100 flats

A developer is building 100 flats. It has sold 80 of them off plan for a total of CU 40 million. Total expected costs for the whole block are 35 million, including land, and costs incurred to the year end are 21 million, so construction is 60% complete. Each sold unit's costs are assumed to be 1% of the total.

Over time, the developer recognises 60% of the revenue and margin on the 80 sold flats. The costs of the 20 unsold flats, 4.2 million, stay in inventory, because nobody has bought them yet. Under the point in time model, every cost incurred is inventory and the full profit of 12 million on the sold flats arrives on handover.

How are unsold units accounted for?

Unsold units, and the share of land and common areas attributable to them, are inventory under IAS 2, at the lower of cost and net realisable value. When a unit is sold part way through construction, the costs already incurred on it go to cost of sales at once, with the matching catch-up of revenue. If prices fall below cost, unsold units are written down. See IAS 2 inventories.

How is land treated in the measure of progress?

Land is often a large share of a project's costs, but buying it is not progress in building. Some developers include land in a cost-to-cost measure; others exclude it and recognise the revenue attributable to the land when control of it passes to the buyer, at an amount equal to its cost, in a similar way to uninstalled materials. The choice can move profit materially between periods, so the policy should be consistent and explained. Where a landowner contributes the land to a development partnership instead of selling it, see real estate joint ventures. See over time or point in time.

Is there a significant financing component?

Off-plan buyers often pay large amounts years before handover. If the gap between payment and transfer is more than a year and the payment terms give the developer financing, IFRS 15 requires the developer to recognise interest on the advance, increasing revenue by the same amount. Where payments broadly track construction under an over time model, the financing effect may be small. The practical expedient lets developers ignore it if the gap is a year or less.

What about sales commissions and marketing?

Commissions paid to agents only when a sale is signed are incremental costs of obtaining a contract, capitalised and charged to profit in line with the revenue: as construction progresses under an over time model, or at handover otherwise. Show flats, sales galleries and advertising are not incremental: they are expensed, or capitalised under IAS 16 if they meet its criteria, such as a sales gallery built to be used for several years.

Can borrowing costs be capitalised?

A development that will be sold only on completion takes a substantial period to get ready for sale, so it is a qualifying asset and borrowing costs on it are capitalised under IAS 23. The IFRS Interpretations Committee concluded in March 2019 that where units are sold before completion and revenue is recognised over time, neither the receivable or contract asset nor unsold units that the developer intends to sell in their current, partly built state are qualifying assets, so those borrowing costs are expensed. See borrowing costs on contracts.

How does US GAAP compare?

ASC 606 applies the same control model and the same over time criteria, so the analysis is similar. Project costs are capitalised under ASC 970, which has more detailed rules on allocating land and common costs between units. See real estate accounting.

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