How to implement ifrs15 in this case

[omartarek2723]

hello,,

We are trying to apply the new IFRS 15 (revenue from contracts with customers) and i have some questions

we are a real-estate development company we usually enter into a contract with the customers where customers have to pay an advanced payment and then an periodic payment over 8 years and the customer will have the control over the unit after 4 years from the contract inception

so apparently we will not recognize revenue until 4 years from the inception of the contract (when performance obligation is satisfied )
so my question is how to deal with the advanced payment and the periodic payment?
shall we consider a significant financing component ? and what interest rate should we use ?

thanks in advance

 

[LUXMAN SHANKAR]

Hi

1. It does appear that there is a significant financing component as the customer is making an advance payment as well as gets the benefit of periodic payment over 8 years.
2. Measurement of the financing component may be on the basis of "cash price" of the property or if the contract specifies an interest rate. If both are unavailable you may choose an appropriate interest rate, based on "prevailing interest rates" as mentioned by the standard..
3. All payments received (advance and periodic payments) till the date of completion of performance obligations shall be "contract liabilities".
4. You can close out contract liabilities and record revenue and receivables at year 4 (control passes to customer)
5. You will need to discount all payments using an appropriate interest rate as per 2 and recognized interest expense or interest income as applicable.
Hope this helps.