IFRS 15 Revenue for Construction & Engineering Firms

Step 1: Identify the Contract

IFRS 15.9–21All five criteria must be met for a contract to exist

Have the parties approved the contract and are committed to perform their respective obligations?

IFRS 15.9(a)

Approval can be written, oral, or implied by customary business practice. Commitment means the parties intend to enforce their respective rights. Consider whether there is a signed agreement, purchase order, or established pattern of dealing that evidences approval.

Can the entity identify each party's rights regarding the goods or services to be transferred?

IFRS 15.9(b)

The contract must establish enforceable rights for each party. This includes identifying what goods or services the entity will transfer and what the customer is entitled to receive. Even if terms are implicit or established by customary business practice, rights must be identifiable.

Can the entity identify the payment terms for the goods or services to be transferred?

IFRS 15.9(c)

Payment terms include the amount, timing, and form of consideration. The terms need not be explicitly stated if they can be determined from customary business practices or the contract's terms and conditions. Consider fixed prices, variable elements, milestone payments, and credit terms.

Does the contract have commercial substance — that is, the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract?

IFRS 15.9(d)

A contract has commercial substance when it is expected to change the entity's future cash flows. This criterion prevents entities from recognising revenue on reciprocal exchanges of goods or services of similar nature and value (e.g., barter transactions between oil companies to fulfil demand in different locations). Most arm's-length commercial transactions have commercial substance.

Is it probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer?

IFRS 15.9(e)

Assess the customer's ability and intention to pay. Consider the customer's credit history, financial condition, collateral or guarantees, and the entity's past experience with similar classes of customers. 'Probable' means more likely than not under IFRS. If the entity offers a price concession, assess collectability on the reduced (expected) amount, not the stated contract price (IFRS 15.9.A1).

Contract Combination Assessment

(Optional)

Are there multiple contracts with the same customer (or related parties) entered at or near the same time that should be combined?

Contract Modification Assessment

(Optional)

IFRS 15 Revenue Recognition for Construction & Engineering

IFRS 15 for Construction replaced IAS 11. While over-time recognition often appears similar, the five-step model introduces new judgement areas.

Over-Time Recognition: IFRS 15.35(c) is the primary basis — no alternative use + enforceable right to payment including reasonable margin. The right to payment must cover performance to date if the customer terminates for convenience. Alternatively, IFRS 15.35(b) applies when the customer controls WIP.

Progress Measurement: Cost-to-cost (input) is most common. Adjust for uninstalled materials — recognise revenue at cost only until installation (IFRS 15.B19(b)). Output methods (milestones, surveys) directly measure value transferred.

Variable Consideration: Claims, change orders, incentives, penalties, provisional sums. Claims are frequently constrained until settlement is near-certain. Unapproved change orders are not modifications until approved — treat anticipated amounts as variable consideration.

Contract Modifications: Change orders modifying existing scope (e.g., adding a floor) are typically not distinct — cumulative catch-up under IFRS 15.21(b). Separately priced distinct additions = separate contract (IFRS 15.20).

Common Audit Pitfalls:

Premature claim recognition — the most common restatement cause.
Not adjusting for uninstalled materials.
No right-to-payment analysis for termination clauses.
Back-end loaded margins from artificially high initial cost estimates.

Typical Contract Structures

Fixed-price lump-sum, cost-plus, target-cost, and guaranteed maximum price structures. Include provisional sums, retention (5-10%), milestone payments, change order provisions, performance bonds, and liquidated damages. Subcontracting is pervasive.

Common Performance Obligations in Construction & Engineering

Design services Construction works Project management Commissioning Defect rectification

Regulatory Context

Local building regulations, procurement rules, and statutory retention requirements may affect contract terms and IFRS 15 application. PPP/PFI arrangements may fall under IFRIC 12.

Worked Example: Commercial Office Block — Design, Build, and Fit-Out

BuildCo contracts to design and build a 10-storey office for $48M fixed price, with $2M early completion bonus. Change order for rooftop terrace ($1.5M proposed, not approved). Estimated cost $38M. Built on customer's land with termination rights including 15% margin.

Step 1: Identify the Contract

Single design-build contract. All IFRS 15.9 criteria met. Unapproved change order not yet a modification — treat as variable consideration.

Step 2: Identify Performance Obligations

One PO: design + construction + fit-out combined (highly interrelated, significant integration service). 12-month defect period is assurance-type warranty under IAS 37.

Step 3: Determine the Transaction Price

$48M fixed + $2M bonus (included, 75% probability, constraint met) + $1.2M of rooftop terrace (constrained to cost recovery). Total = $51.2M.

Step 4: Allocate the Transaction Price

Single PO — entire $51.2M allocated to it.

Step 5: Recognise Revenue

Over-time under IFRS 15.35(c). Cost-to-cost method. Revenue = (costs incurred / $39.2M total) × $51.2M. Adjust for uninstalled materials. Reassess variable consideration each period.

IFRS 15 Revenue Recognition Audit Toolkit — free PDF

Complete audit toolkit: IFRS 15 five-step decision flowchart poster, contract assessment template, PO identification checklist, SSP allocation worksheet, and industry-specific application notes.

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Frequently Asked Questions

Why is construction revenue typically over-time?

IFRS 15.35(c): no alternative use (built to spec on customer's land) and enforceable right to payment including reasonable margin. Or 35(b) when customer controls WIP.

Input vs output methods — which is better?

Output methods are conceptually preferred but harder to apply. Cost-to-cost (input) is most common. Must adjust for uninstalled materials (IFRS 15.B19).

How to handle unapproved change orders?

Not yet a modification under IFRS 15.18. Anticipated consideration is variable consideration subject to the constraint. Often only cost recovery passes the constraint.

Are defect rectification obligations a separate PO?

Standard defect periods (6-24 months) are assurance-type warranties under IFRS 15.B28-B33 (IAS 37 provision). Extended maintenance beyond that may be a separate PO.

How does the constraint apply to claims?

Include only when highly probable a significant reversal won't occur. Claims are often constrained until settlement is near-certain. Scrutinise assumptions for large disputed amounts.

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