IFRS 15 and IAS 28, Revenue to the associate

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Lisboa
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Joined: 22 Sep 2021, 12:59

IFRS 15 and IAS 28, Revenue to the associate

Post by Lisboa »

Dear members,
The construction company A has the investment in associated company B. Company A provides construction services to company B to build a residential building. B sells the apartments to the customers.
Company A decides to acquire some apartments in the constructed building itself and then sell them to the final customers.
Under IFRS 15 A recognizes its revenue for construction services “over time”.
When B sells the apartments in the uncompleted building to the customers it recognizes its revenue using the same accounting treatment as the agreement with the customer is “irrevocable”.
The question is whether A could recognize two types of revenue:
1) Revenue from construction services to its associate
2) Revenue from the selling of apartments in the same building acquired from its associate but sold to local customers.
“A” is the construction Group of companies and has construction and distribution subsidiaries.
The trick is that the product nature is the building under construction and there are two questions, the first one is the possibility to recognize the revenue of constriction services and selling the apartments, and the second one is the amount of revenue to be recognized.

Thank you in advance.
pub_acco
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Joined: 19 Mar 2020, 16:40

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by pub_acco »

Do you mean A is acquiring some of the completed apartments from B? In other words, is A trying to recognize revenue when it sells the building to B and recognize revenue again when A sells the repurchased apartments to final consumers?
Lisboa
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Joined: 22 Sep 2021, 12:59

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by Lisboa »

Actually, A buys rights for the apartments from B, and then sells them to final customers, yes. According to local legislation, "rights" are uncompleted apartments. If rights are still to be sold before the completion, then A becomes an owner of completed apartments and sells them as they are to the final customers.

And yes, my question is if A could recognize two types of revenue: construction services to B and revenue from completed and uncompleted apartments to local customers bought back from B.
pub_acco
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Re: IFRS 15 and IAS 28, Revenue to the associate

Post by pub_acco »

I'm not fully understanding the arrangement, but to me it sounds like a sort of repurchase agreements where A promises to buy back some products when selling them to B. Usually, revenue is not recognized under IFRS 15 in such a situation because the risks and control over the products are effectively not transferred to B.
Lisboa
Posts: 6
Joined: 22 Sep 2021, 12:59

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by Lisboa »

pub_acco wrote: 23 Sep 2021, 11:41 I'm not fully understanding the arrangement, but to me it sounds like a sort of repurchase agreements where A promises to buy back some products when selling them to B. Usually, revenue is not recognized under IFRS 15 in such a situation because the risks and control over the products are effectively not transferred to B.
Actually, there is no "promise" to buy back. A might buy back or not. The accounting policy for construction services and selling apartments is both "over time". I agree, it seems bit unusual arrangement but I am looking if there is direct prohibition in IFRS from such arrangement.
DJP
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Re: IFRS 15 and IAS 28, Revenue to the associate

Post by DJP »

You don't have to have a promise to buy back, but if that's what happens in practice, that's how you should account for it.
Lisboa
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Joined: 22 Sep 2021, 12:59

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by Lisboa »

DJP wrote: 24 Sep 2021, 09:23 You don't have to have a promise to buy back, but if that's what happens in practice, that's how you should account for it.
Hi!

Do you mean I could recognize both types of revenues? From A to B and from A to local customers, right?
DJP
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Joined: 26 Jun 2020, 15:57

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by DJP »

no, I am saying the same as pub_acco
Lisboa
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Joined: 22 Sep 2021, 12:59

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by Lisboa »

DJP wrote: 24 Sep 2021, 09:31 no, I am saying the same as pub_acco
"Usually, revenue is not recognized under IFRS 15 in such a situation because the risks and control over the products are effectively not transferred to B."

Okay, but how you will recognise the gain (ie difference between the purchase price of the apartment and the selling price to local customers)? Isn't it at least an "agent fee" to be recognised as revenue?
A acts as a general contractor to B and has the specific contract liabilities, and as the distributor to local customers bearing the market and credit risks.
There are different types of liabilities and risks attributable to different contracts.
DJP
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Joined: 26 Jun 2020, 15:57

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by DJP »

The question is the amount of revenue that you are recognising on the sale from A to B. If you are buying back some of those properties, then the revenue recognised on the sales from A to B should perhaps be adjusted to reflect that.
Lisboa
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Joined: 22 Sep 2021, 12:59

Re: IFRS 15 and IAS 28, Revenue to the associate

Post by Lisboa »

DJP wrote: 24 Sep 2021, 09:55 The question is the amount of revenue that you are recognising on the sale from A to B. If you are buying back some of those properties, then the revenue recognised on the sales from A to B should perhaps be adjusted to reflect that.
Thank you
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