FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE

Transcription

1 FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE FRSIC Consensus 23 Application of MFRS 15 Revenue from Contracts with Customers on Sale of Residential Properties Preamble FRSIC Consensus 23 Application of MFRS 15 Revenue from Contracts with Customers on Sale of Residential Properties was developed by the Financial Reporting Standards Implementation Committee ( FRSIC ) and issued by the ( MIA or Institute ) on 16 January The Consensus contained herein is issued as part of the Institute s initiatives to promote best practices in compliance with the highest standards in financial accounting.

2 FRSIC CONSENSUS 23 APPLICATION OF MFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS ON SALE OF RESIDENTIAL PROPERTIES FRSIC Consensus is guidance issued by MIA and shall be regarded as best practice. It should be read in conjunction with the respective applicable accounting standards. Members of MIA are expected to observe compliance to the consensus issued. In exceptional circumstances where departure is necessary, members shall be prepared to justify the departure. FRSIC Consensus need not be applied to immaterial items. Nothing in the FRSIC Consensus is to be construed as amending or overriding the accounting standards or other statements adopted or issued by the Malaysian Accounting Standard Board ( MASB ) and other relevant laws. Background 1 The sale of residential properties in Peninsular Malaysia (i.e. excluding Sabah and Sarawak), by licensed housing developers (hereinafter referred to as entity or entities ) is regulated under the Housing Development (Control and Licensing) Act 1966 ( HDA ). 2 In accordance with Regulation 11 of the Housing Development (Control and Licensing) Regulations 1989 ( HDR ), every sale and purchase agreement ( SPA ) for residential property (except for build then sell contract) that is executed prior to the issuance of the residential property s certificate of completion and compliance shall be in the form prescribed in the following schedules in HDR: a) Schedule G: SPA for land and building b) Schedule H: SPA for building or land intended for subdivision into parcels The SPAs, which are legislated agreements, cannot be amended except by the Controller of Housing. 2 of 6

3 Scope 3 This Consensus applies to: the accounting for revenue recognition under MFRS 15 Revenue from Contracts with Customers by an entity that enters into Schedule G or Schedule H SPA with a purchaser; and an entity that has determined that the contract is within the scope of MFRS 15 by satisfying all the criteria in paragraph 9 of MFRS 15. The Issue 4 An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Paragraph 35 of MFRS 15 states that an entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time if one of the following criteria is met: a) the customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs; b) the entity s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or c) the entity s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. 5 Criterion in paragraph 35 (a) of MFRS 15 is not relevant in determining whether revenue from real estate sales (before completion) is recognised over time. This is because the purchasers generally do not consume all of the benefits of the property as the entity constructs the property. Rather, those benefits are consumed in the future. This criterion generally is relevant for service contract where the customer consumes the services as they are provided. 6 Due to the contractual terms of the SPAs and the unique nature of the industry, it is unclear that the purchaser is able to control the work in progress i.e. uncompleted house in accordance with the criterion in paragraph 35 (b) of MFRS of 6

4 7 In assessing whether revenue from sale of residential property governed under Schedule G or Schedule H SPAs is recognised over time or at a point in time, an entity applies the criterion in paragraph 35 (c) of MFRS 15. An entity considers whether: i. the entity s performance does not create an asset with an alternative use to the entity; and ii. the entity has an enforceable right to payment for performance completed to date. Consensus and Basis of Consensus Entity s performance does not create an asset with an alternative use 8 Paragraph 36 of MFRS 15 states: An asset created by an entity s performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. 9 Paragraph B6 of MFRS 15 further clarifies that In assessing whether an asset has an alternative use to an entity in accordance with paragraph 36, an entity shall consider the effects of contractual restrictions and practical limitations on the entity s ability to readily direct that asset for another use, such as selling it to a different customer. The possibility of the contract with the customer being terminated is not a relevant consideration in assessing whether the entity would be able to readily direct the asset for another use. 10 The promised residential property is specifically identified by its plot, lot and parcel number and its attributes (such as its size and location) in the SPA and the attached layout plan. The purchaser could enforce its rights to the promised residential property if the entity seeks to sell the unit to another purchaser. As the contractual restriction on the entity s ability to direct the promised residential property for another use is substantive, the Committee is of the view that the promised residential property pursuant to the SPA does not have an alternative use to the entity. Right to payment for performance completed to date 11 Paragraph 37 of MFRS 15 states: An entity shall consider the terms of the contract, as well as any laws 4 of 6 that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 35 (c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance

5 completed to date if the contract is terminated by the customer or another party for reasons other than the entity s failure to perform as promised. 12 Paragraph B11 of MFRS 15 further states: In some contracts, a customer may have a right to terminate the contract only at specified time during the life of the contract or the customer might not have any right to terminate the contract. If a customer acts to terminate a contract without having the right to terminate the contract at that time (including when a customer fails to perform its obligations as promised), the contract (or other laws) might entitle the entity to continue to transfer to the customer the goods or services promised in the contract and require the customer to pay the consideration promised in exchange for those goods or services. In those circumstances, an entity has a right to payment for performance completed to date because the entity has a right to continue to perform its obligation in accordance with the contract and to require the customer to perform its obligations (which include paying the promised consideration). 13 Pursuant to Schedule G or Schedule H SPAs as prescribed by the HDR ( Prescribed SPAs ) the purchaser is contractually obliged to make payments to the entity according to the progress billings schedule and the purchaser does not have the unilateral right under the Prescribed SPAs to terminate the SPA. Having said that, the entity does not have the unilateral right under the Prescribed SPAs to terminate the SPA except in the event of default by the purchaser. The Prescribed SPAs specify that the entity may annul the SPA if the purchaser default in payments. Notwithstanding that the entity could terminate the SPA, the entity has a right to payment for performance completed to date because the entity could also choose to complete the construction of the property and enforce its rights to full payment under the Prescribed SPAs. The fact that the entity may choose to terminate the SPA in the event of purchaser defaults on its obligations would not affect the assessment as the entity s rights to require the purchaser to continue to perform as required under the SPA are enforceable and the entity is entitled to all of the promised consideration. 14 The Committee had obtained legal opinion which confirms that the enforceable right of the entity as described in Paragraph 11 is provided in the Prescribed SPAs (as the entity may choose not to terminate) which itself is an extension of an enacted legislation in Malaysia. Accordingly, the common law in Malaysia does not override the terms stipulated in Prescribed SPAs. Similarly, the Committee noted that the entity s customary past business practices of terminating the SPAs in the event of default by the purchaser do not affect the entity s contractual right to continue to perform the contract and be entitled to all of the promised consideration. 5 of 6

6 15 Based on the above, the Committee opined that entities which enter into SPAs with purchasers in the form prescribed in Schedule G or Schedule H of Prescribed SPAs satisfy the criteria of paragraph 35 (c) of MFRS 15 and accordingly revenue from the sale of residential properties shall be recognised over time. Issuance date of this Consensus 16 This Consensus is issued on 16 January References MFRS 15 Revenue from Contracts with Customers Housing Development (Control and Licensing) Act 1966 ( HDA ) Housing Development (Control and Licensing) Regulations 1989 ( HDR ) 6 of 6