Article:

IFRS 15 for the construction industry – Contracts that contain multiple goods or services

05 June 2018

Bundling or unbundling goods and/or services

In the construction industry it is very common for an entity to provide multiple goods or services to one customer. For example, a construction company can be engaged to provide design and engineering services as well as the actual construction. Even the construction itself could be seen as comprising many different services such as site clearance, foundations, procurement, construction of the structure, piping and wiring, etc. These activities can be dealt with as one performance obligation or separated into various separate performance obligations. IFRS 15 will require construction companies to consider whether these goods and/or services should be accounted for separately or as one performance obligation (bundling). Similarly, if there is one contract that covers many different services then the entity will need to consider if the contract contains multiple performance obligations that require the contract revenue to be split into separate performance obligations (unbundling). 

The following decision tree could be used to determine whether a good or service is distinct and therefore a separate performance obligation or not:

Example – Unbundling

Background

Construction Co is engaged by Customer A to design a building and also to construct the building once the design has been approved. These activities are both within the same contract and the contract price is for $100,000. Customer A could benefit from the design services by itself as they could engage another construction company to perform the build with the design specifications made by Construction Co.

The standalone selling price for the design services is $30,000 and $80,000 for the building services.

Question
How should the revenue from this contract be accounted for?

Answer
Under IFRS 15, Construction Co has entered into a contract which consist of two performance obligations:

  • Design services
  • Construction services.

Therefore, revenue is recognised for these two performance obligations as follows:

Contract components Standalone selling price Revenue
Design $30,000 $27,273

$30,000x($100,000/$110,000)
Construction $80,000 $72,727

$80,000x($100,000/$110,000)
  $110,000 $100,000

The revenue from the design services would potentially only be recognised when the design specifications were approved by the customer, and the construction revenue would be recognised as the construction services were provided (over time) because the second criterion in IFRS 15, paragraph 35(b), would be met, i.e. building on the customer’s land. Consideration should be given whether the design services meet the third criterion in IFRS 15 paragraph 35(c).

Current practice under IAS 11

Entities that currently do not ‘unbundle’ such contracts would recognise revenue for the design services over time, together with the construction services.

Practical implications on systems and processes

Some of the practical implications on systems and processes for Construction Co include:

  • Identifying that there are two performance obligations
  • Working out the standalone selling price of the design and construction services
  • Systems to split out the transaction into its 2 performance obligations
  • Systems to recognise revenue for the design services
  • Systems to recognise revenue and defer the remaining revenue as construction services are performed.