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New revenue
recognition standard
Impact to real estate
property developers
Contents
Page
Executive summary .................................................................. 2
Is there a sale to customer or does a contract exist?.................... 4
Should revenue be recognised over time or at a
point in time for pre-sale of multi-apartment units?................... 5
Will the timing for sale of completed property change
under the new model?............................................................... 7
How to account for the work to be completed after
delivery of the property unit to the customer?............................ 8
Is there any significant financing component under
the different payment methods offered to customer?................10
What will be the impact if the pricing includes a
variable amount?......................................................................11
Does the revenue standard cover accounting for
contract costs?..........................................................................12
Are there extensive disclosure requirements?...........................13
What are the transition requirements?......................................14
Next step?.................................................................................15
How can PwC help ...................................................................16
Executive summary
In July 2014, the Hong Kong Institute of Certified Public Accountants (“HKICPA”) issued HKFRS 15, Revenue from Contracts with
Customers, which is identical to IFRS 15 issued by International Accounting Standards Board (“IASB”) and Financial Accounting
Standard Board (“FASB”) more than a month ago. Entities which prepare financial statements in accordance with HKFRS/IFRS
need to apply HKFRS/IFRS 15 for financial periods beginning on or after 1 January 2017 (early application permitted).
Under HKFRS/IFRS 15, companies will use a new five-step model to recognise revenue from customer contracts.
How the five-step model works
Step 1:
Identify contract(s) with
customer
A contract creates enforceable rights and
obligations. It may be written, verbal, or
implied by customary business practice.
Combine contracts when they are
entered into at or near the same time
and are negotiated as a package,
payment of one depends on the other,
and goods/services promised are a
single performance obligation. Specific
guidance about contract modifications
prescribed to account for modifications
as a separate contract or continuation of
the original contract prospectively or
with cumulative catch-up.
Step 2:
Identify separate performance
obligations in the contract(s)
Performance obligations are promises in
a contract to transfer goods or services,
including those a customer can resell or
provide to its customer. Use the model’s
indicators to separate the performance
obligations if they are capable of being
distinct and if they are distinct based on
the context of the contract.
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New revenue recognition standard
Step 3:
Determine the transaction price
Transaction price can be based on the
expected value or the most likely amount
but is constrained up to the amount that
is highly probable (IFRS)/probable (US
GAAP) of no significant reversal in the
future. The minimum amount that meets
this criteria is included in the transaction
price. Assess your experience with
similar types of performance obligations
in making this determination.
Step 4:
Allocate the transaction price
Transaction price should be allocated to
distinct performance obligations based
on their relative stand-alone selling
prices. This may be the stand-alone
selling price of a good or service when
sold separately to a customer in similar
circumstances and to similar customers.
If a stand-alone selling price is not
directly observable, estimate it by
considering all information that is
reasonably available, such as market
conditions, specific factors, and class of
customers.
Step 5:
Recognise revenue when the
performance obligation is
satisfied
Recognise revenue when the promised
goods or services are transferred to the
customer and the customer obtains
control. This may be over time or at a
point in time. The new standard provides
indicators when control is transferred.
Additionally, the new standard
introduces a new concept and revenue is
required to be recognised over time
when a) the asset being created has no
alternative use to the company and b) the
company has an enforceable right to
payment for performance completed to
date.
The standard may result in a significant
change on how revenue and costs are
recognised for real estate property
developers. We have highlighted in this
publication a number of key areas and
practical examples below for your
consideration which are intended to
provide areas of focus to assist entities
with a preliminary understanding of the
implications of this new standard.
What will be the challenge faced by
the property developers?
• Revenue from pre-sales of
properties under development may
not be recognised at a point in time.
Instead, some may result in the
recognition of revenue over a period
of time depending on the terms of
the contract.
• T he timing of revenue recognition
for sale of a completed property,
which is currently based on whether
the significant risk and reward of
the ownership of properties has
been transferred, may also need to
be revisited under the transfer of
control model.
• Entity may need to defer a portion
of revenue related to unsatisfied
performance obligations.
• Property developers which offer
different payment plans to
customers may have to adjust the
transaction price for revenue
recognition when significant
financial components exist.
Where might your company feel the impact?
1.Contracts. Existing terms could take on new meaning under the new
standard, so you may need to re-negotiate debt covenants or with customers
to maintain the original intent.
2.Tax implications. The timing of cash payments could be affected if, for
example, you recognise revenue sooner than in the past.
3.Investor relations. Stakeholders would want to know how your revenue
recognition will change and how the new standard will affect your
company’s financial picture.
4.Controls and processes. The standard requires you to make more
estimates and disclosures, calling for new controls and processes.
5.Technology. You may need to update your current software to capture new
information that might not have been necessary before.
6.Compensation and bonus plans. Revenue recognition can trigger
payments like bonuses. Consider how timing changes for revenue recognition
affect these and other internal arrangements.
• Property developers may need to
revisit its existing policies on how to
account for contracts that include
variable consideration as the new
standard provides more specific and
detailed guidance.
• Incremental costs of obtaining a
contract (e.g. sales commissions)
will be required to be capitalised
unless the contract is completed
within one year.
• A number of additional disclosures
are required.
The IASB and FASB have established a
joint Transition Resource Group (TRG) to
aid entities transitioning to the new
standard. We encourage entities to use
this document as a guideline and
monitor developments discussed by the
TRG and the boards during the transition
period. For our PwC clients who would
like to understand this in more detail,
please contact your engagement partner.
Alternatively, contact any of the PwC
representatives listed out on the back
page of this publication.
PwC
3
Is there a sale to customer or does a
contract exist?
Does a contract exist when collectability is a concern?
An entity will assess at the inception of the contract whether the parties to the contract are committed to
performing their respective obligations and it is probable that the entity will collect the consideration to
which it will be entitled to in exchange for the goods or services that will be transferred to the customer.
This assessment determines whether a contract exists for the purpose of applying the revenue standard. The
collectability assessment is based on the customer’s ability and intent to pay as amounts become due. The
entity shall continue to assess the contract to determine whether the criteria are subsequently met.
In most cases an entity will not enter into a contract with a customer when there is a significant credit risk
without also having adequate economic protection. However, judgement is required whether the entity can
enforce the performance of the customer.
For example, when a customer signed a provisional S&P with a 5% deposit payment to purchase a
property, the customer can walk away and the developer can only forfeit the 5% deposit and cannot
enforce the completion of the contract. Under this situation, management may conclude that the
customer is not committed to the contract at this stage and the 5% deposit is treated as a liability
until the revenue criteria is met.
Collaboration arrangement
The revenue standard applies to all contracts with customers. A customer is a
party that contracts with an entity to obtain goods or services that are the output
of that entity’s ordinary activities. The scope includes transactions with
collaborators or partners if the collaborator or partner obtains goods or services
that are the output of the entity’s ordinary activities. It excludes these types of
arrangements, however, if the parties are participating in an activity together
where they share the risks and benefits of that activity.
For example, a landowner that has signed an
agreement with a builder for a joint property
development project (which involves building a
complex by the builder on the land and then sell
land and building together after completion).
Management would need to carefully analyse
the terms of the arrangement to consider
whether it is a joint arrangement (which is
under the scope of HKFRS/IFRS 11) or whether
the landowner is in substance selling its land to
the builder (which is a “customer” in the scope
of this standard) or the builder is merely
providing a construction service to the
landowner. Management will also need to
evaluate whether the arrangement contains
elements of both collaboration and a sale to a
customer.
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New revenue recognition standard
PwC observation
Management will need to evaluate
arrangements with collaborators
and partners to identify whether
such arrangements or portions
thereof are in the scope of the
revenue standard. Arrangements
where parties share risks and
benefits are different from those
where one entity obtains goods or
services from the other.
Should revenue be recognised over time
or at a point in time for pre-sale of multiapartment units?
PwC observation
Whether revenue of pre-sale
properties contracts should be
recognised over time or at a point
in time will depend on careful
analysis of specific contract terms
under the new revenue standard.
In particular, whether the entity
could have an alternative use for the
property under construction and
is entitled to be paid for the work
performed to date. Care should
be taken of whether there are any
contractual terms allowing the
customer to cancel the contract, and
if it can be cancelled, whether the
seller would always be contractually
entitled to adequate compensation
for work performed to date. All
these assessment will need to be
made in the context of both the
contract terms and the local legal
environment.
If revenue of pre-sale properties is
recognised over time, management
may need to enhance existing IT
systems and work processes in order
to capture different information
(e.g. “progress”) for each customer
contract for future reporting
purpose.
Under the current guidance of HK/IFRIC 15, customers
usually have only limited ability to influence the design of the
real estate, so a pre-sale of multi-apartment unit contract is
normally considered as an agreement for sale of goods under
HK/IAS 18 and revenue is recognised at a point in time.
Whether revenue from pre-sale contracts should be
recognised over time or at a point in time will depend on
careful analysis of specific contract terms under the new
revenue standard.
Under the new standard, an entity should determine at contract inception
whether control of a good or service is transferred over time or at a point
in time. This determination should depict the transfer of benefits to the
customer and should be evaluated from the customer’s perspective. An
entity should first assess whether the performance obligation is satisfied
over time. If not, the good or service transfers at a point in time.
An entity will recognise revenue over time if any of the following criteria
are met:
• The customer concurrently receives and consumes the benefits provided
by the entity’s performance as the entity performs.
• T he entity’s performance creates or enhances a customer-controlled
asset.
• The entity’s performance does not create an asset with an alternative
use and the entity has a right to payment for performance completed to
date.
The last criterion addresses situations where the customer does not control
an asset as it is created, or no asset is created by the entity’s performance.
Management will need to consider whether the asset being created has an
alternative use to the entity (if an asset is created) and whether the entity
has an enforceable right to payment for performance to date.
The assessment of whether an asset has an alternative use should be made
at contract inception, and not reassessed. Management should consider its
ability to redirect a product that is partially completed to another
customer, considering both contractual and practical limitations. A
substantive contractual restriction that limits the entity’s ability to
redirect the asset could indicate the asset has no alternative use. Practical
limitations, such as significant costs required to rework the asset so that it
could be directed to another customer, could also indicate that the asset
has no alternative use.
A right to payment exists if an entity is entitled to payment for
performance completed to date if the customer terminates the contract for
reasons other than the entity’s non-performance. A specified payment
schedule does not, by itself, indicate the entity has a right to payment for
performance to date. The assessment of the enforceability of the right to
payment should include consideration of the contract terms and any legal
precedent that could override the contract terms.
PwC
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An entity’s right to payment does not
have to be a present unconditional right.
Many arrangements include terms where
payments are only contractually required
at specified intervals, or upon completion
of the contract. Management needs to
determine whether the entity would have
an enforceable right to demand payment
if the customer cancelled the contract for
other than a breach or non-performance.
A right to payment would also exist if the
customer does not have a stated right to
cancel the contract, but the contract (or
other laws) entitles the entity to continue
fulfilling the contract and demand
payment from the customer in the event
the customer attempts to terminate the
contract.
Management should consider relevant
laws or regulations in addition to the
contract terms, such as:
• Legal precedent that confers upon an
entity a right to payment even in the
event that right is not specified in the
contract.
• Legal precedent that indicates a
contractual right to payment has no
binding effect.
• A customary business practice of not
enforcing a right to payment that
renders the right unenforceable in a
particular legal environment.
The right to payment should compensate
the entity at an amount that reflects the
selling price of the goods or services
provided to date, rather than provide
compensation for only costs incurred to
date or the entity’s potential loss of profit
if the contract is terminated. This would
be an amount that covers an entity’s cost
plus a reasonable profit margin for work
completed.
If revenue is to be recognised over time, a
method should be used to measure the
progress which best reflects the pattern
of transfer of goods or services to the
customer. The standard specifies that the
measure of progress shall exclude any
goods or services for which the entity
does not transfer control to the customer.
As such, the measure of progress may be
affected by whether or not control of the
land on which the property is being
constructed has been transferred to the
customer.
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New revenue recognition standard
Example 1:
A property developer enters into a
contract with Customer A to deliver an
apartment unit at specified floor and
block which is still under construction.
Customer A makes a non-refundable
deposit, 20% of total consideration, at
contract inception. Customer A can
terminate the contract at any time and
the property developer only has the right
to retain the deposit. The contract
precludes the property developer from
redirecting the apartment unit to
another customer. Customer A does not
control the apartment as it is being
constructed.
How should the property developer
recognise revenue for this contract?
Analysis
The property developer should recognise
revenue at a point in time, when the
control of the apartment unit transfers to
Customer A. The specified unit does not
have an alternative use to the property
developer because the contract has
substantive terms that preclude it from
redirecting the apartment unit to
another customer. Property developer,
however, is only entitled to payment of
the non-refundable deposit, not for costs
plus a margin for work performed up to
date of cancellation. The criterion for a
performance obligation satisfied over
time is not met because the property
developer does not have a right to
payment for performance completed to
date.
Example 2:
A property developer enters into a
contract with Customer B to deliver an
apartment unit at specified floor and
block which is still under construction.
Customer B has no right to cancel the
contract except in the case that there is a
breach or non-performance by the
property developer. The contract (or the
applicable laws) entitles the property
developer to continue fulfilling the
contract and demand payment from the
customer in the event the customer
attempts to terminate the contract. The
contract precludes the property
developer from redirecting the
apartment unit to another customer
unless the customer defaults. Customer B
does not control the apartment as it is
being constructed.
How should the property developer
recognise revenue for this contract?
Analysis
The property developer should recognise
revenue over time as it constructs the
apartment unit. The specified unit does
not have an alternative use to the
property developer as the property
developer cannot redirect the apartment
unit to another customer unless the
customer defaults. The property
developer also has a right to payment for
performance completed to date. This is
because if the customer were to default
on its obligations, the entity would have
an enforceable right to all of the
consideration promised under the
contract if it continues to perform as
promised. The criteria are met for a
performance obligation satisfied over
time.
Example 3:
The same facts as in Example 2 apply to
Example 3, except that in the event of a
default by the customer, either the
property developer can require the
customer to perform as required under
the contract or the property developer
can cancel the contract in exchange for
the apartment unit under construction
and an entitlement to a penalty of a
proportion of the contract price.
How should the property developer
recognise revenue for this contract?
Analysis
Notwithstanding that the property
developer could cancel the contract (in
which case the customer’s obligation to
the entity would be limited to
transferring control of the partially
completed property to the entity and
paying the penalty prescribed), the
property developer has a right to
payment for performance completed to
date because the property developer
could also choose to enforce its rights to
full payment under the contract. The fact
that the property developer may choose
to cancel the contract in the event the
customer defaults on its obligations
would not affect that assessment,
provided that the property developer’s
rights to require the customer to
continue to perform as required under
the contract (i.e. pay the promised
consideration) are enforceable.
Will the timing for sale of completed
property change under the new model?
PwC observation
All of the five indicators do not
need to be satisfied for revenue
to be recognised. The standard
does not place more weight on
one indicator over another. An
entity will need to consider all
indicators, not just whether
significant risks and rewards
have been transferred, to
determine when revenue should
be recognised.
For sale of completed property, generally the entity will transfer
to the customer at a particular point in time. Timing of revenue
for sale of a completed property will need to shift from focus on
significant risk and reward of ownership to transfer of control.
For example, significant risks and rewards of the property may
be transferred but the customer does not have title or
possession until a later date. The standard provides 5 indicators
to assess when control is transferred and significant judgement
will be needed.
The standard requires management to determine when the control of a good
or service is transferred to the customer. The timing of revenue recognition
could change for some transactions compared to current practice, which is
more focused on the transfer of risks and rewards. The transfer of risks and
rewards is an indicator of whether control has been transferred, but
additional indicators will also need to be considered.
Under the new standard, to determine when a customer obtains control and
an entity satisfies a performance obligation, the entity should consider the
following indicators:
• The entity has a present right to payment for the asset.
• The entity has transferred legal title to the asset.
• The entity has transferred physical possession of the asset.
• The entity has transferred the significant risks and rewards of ownership to
the customer.
• The customer has accepted the asset.
PwC
7
How to account for the work to be
completed after delivery of the property
unit to the customer?
Under current guidance, there is frequently only one sale recognition
point for real estate transactions even where some costs will be
incurred at a later date, which in this circumstance an entity would
accrue relevant cost. Under the new standard, an entity will need to
assess whether any costs after the delivery of property unit are
additional performance obligations and revenue maybe deferred until
such performance obligations are satisfied.
The new standard will significantly affect the accounting for sales of real estate
in situations where certain performance obligations are satisfied after the legal
sale of the assets. Such performance obligations could be explicitly defined in the
contract (e.g. an “amenity” such as a pool or club house) or implicitly required by
the builder in order to get zoning for the subdivision and sale (for example,
roads, infrastructure, schools, firehouse, street lights, etc.).
For example, a property developer may sell an individual unit before completing
roads, amenities or off-site costs (e.g. schools, firehouses, stop lights) for which it
is committed pursuant to the contract with the customer. Today, upon each sale,
the property developer would accrue a liability for the unit’s pro-rata portion of
future costs and include this amount in the cost of sale at the time the sale is
recorded, even though these costs had not yet been incurred. However, under the
new revenue recognition guidance, there may be multiple performance
obligations that could result in different recognition patterns for portions of the
revenue for the same unit (i.e. for goods or services sold before the
completion of the common items and those after).
PwC observation
A performance obligation is a promise (whether explicit or implicit) in a
contract with a customer to transfer a good or service to the customer.
Management will need to determine whether promises are distinct when
there are multiple promises in a contract. This is important because
distinct performance obligations are the units of account that determine
when and how revenue is recognised.
A good or service is distinct only if:
• the customer can benefit from the good or service either on its own or
together with other readily available resources (that is, the good or
service is capable of being distinct); and
• the good or service is separately identifiable from other promises in the
contract ((i.e. the good or service is distinct within the context of the
contract).
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New revenue recognition standard
The revenue standard provides
indicators rather than criteria
to determine when a good
or service is distinct within
the context of the contract.
This allows management to
apply judgement to determine
the separate performance
obligations that best reflect
the economic substance of a
transaction. All promises in
an arrangement should be
identified. Promises that are
inconsequential or perfunctory
need to be identified, even
if they are not the ‘main’
deliverable in the arrangement,
because all promises in a
contract are goods or services
that a customer expects to
receive. An entity should assess
whether inconsequential or
perfunctory performance
obligations are immaterial to
the financial statements.
A customer can benefit from a good or
service on its own if it can be used,
consumed, or sold to generate economic
benefits. A good or service that cannot be
used on its own, but can be used with
readily available resources, is still
distinct, as the entity has the ability to
benefit from it. A readily available
resource is one that is sold by the entity,
by others in the market, or that a
customer has already obtained from the
entity.
Determining whether a good or service is
distinct within the context of the
contract requires assessment of the
contract terms and the intent of the
parties. Indicators include, but are not
limited to:
• the entity does not provide a
significant service of integrating the
individual goods or services in the
contract into a bundle that is the
combined item the customer has
contracted to receive;
• the good or service does not customise
or significantly modify another
contractually promised good or
service; and
• the good or service is not highly
dependent on or highly interrelated
with other goods or services in the
contract; therefore, a customer’s
decision to not purchase a good or
service does not significantly affect the
other promised goods or services in the
contract.
The standard generally requires an
entity to allocate the transaction price to
the separate performance obligations in
proportion to their relative stand-alone
selling prices. Stand-alone selling price is
generally the observable price of a good
or service sold separately by the entity.
However, there could be a number of
instances where the stand-alone selling
price is not observable. This will often
require real estate entities to make
estimates for items they do not sell on a
stand-alone basis and will require
significant judgement.
PwC
9
Is there any significant financing
component under the different payment
methods offered to customer?
Property developers may offer different payment schemes for its
customers. Under the new standard, entities need to consider whether
there is significant financing component to be accounted for separately
from revenue and applies to both payments in advance as well as in
arrears.
PwC observation
Management will need to
evaluate arrangements with
customers to determine
whether they include
a significant financing
component. It could be
challenging for property
developers to determine
whether a significant financing
component exists, especially
when goods or services are
delivered and cash payments
received throughout the
arrangement. The standard
allows for some level of
judgement by requiring entities
to assess whether the substance
of the payment arrangement is
a financing.
An entity with contracts that
include a significant financing
component should consider
any operational challenges
relating to measuring and
tracking the interest element
of the arrangement. This could
require additional information
technology systems, processes,
or internal controls to capture
and measure such information.
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New revenue recognition standard
The amount of revenue recognised will be different from the amount of
cash received from the customer when an arrangement contains a
significant financing component. Revenue recognised will be less than
cash received when payments are made after performance, because
the entity is providing the customer with financing. A portion of the
consideration will be recognised as interest income. Revenue
recognised will exceed the cash received for payments made in
advance of performance, because the entity receives financing from
the customer. The entity will recognise interest expense on the
financing related to advance payments.
Under the new standard, the transaction price should be adjusted for any significant
financing component in the arrangement. A practical expedient allows entities to
disregard the time value of money if the period between transfer of the goods or
services and payment is less than one year, even if the contract itself is for more than
one year. In assessing whether a contract contains a significant financing component,
an entity should consider various factors, including:
• the length of time between when the entity transfers the goods or services to the
customer and when the customer pays for them;
• whether the amount of consideration would substantially differ if the customer
paid cash when the goods or services were transferred; and
• the interest rate in the contract and prevailing interest rates in the relevant market.
An entity needs to determine the discount rate to use when calculating the interest
element of a significant financing component. The entity should use a discount rate
that reflects what it would charge in a separate financing transaction with the
customer, including consideration of any collateral or guarantees it would require. An
entity receiving a significant financing benefit (e.g. because it has received an
advance payment) should consider its incremental borrowing rate to determine the
interest rate. The discount rate is not reassessed after inception of the contract.
What will be the impact if the pricing
includes a variable amount?
It is not uncommon for the price and scope to change during the course of development of the real
estate. The pricing in contracts will often include variable elements, such as liquidation damage,
rental guarantees and profit sharing arrangement subsequent to the sale of the real estate.
The standard includes new specific requirements in respect of variable consideration such that it is
only included in the transaction price if it is highly probable that the amount of revenue recognised
would not be subject to significant future reversals.
Under the new standard, variable consideration should be estimated using the more predicative of the following
approaches: the expected value or the most likely amount. The approach used is not a policy choice. Management should
use the approach that it expects will best predict the amount of consideration to which the entity will be entitled based on
the terms of the contract and taking into account all reasonably available information.
Variable consideration is included in the transaction price only to the extent
that it is highly probable that a significant reversal in the cumulative amount
of revenue recognised will not occur in future periods when the uncertainty
associated with the variable consideration is subsequently resolved. The
following indicators suggest that including an estimate of variable
consideration in the transaction price could result in a significant reversal of
cumulative revenue:
• The amount of consideration is highly susceptible to factors outside the
entity’s influence.
• Resolution of the uncertainty about the amount of consideration is not
expected for a long period of time.
• T he entity has limited experience with similar types of contracts.
• T he entity has a practice of offering a broad range of price concessions or
changing payment terms and conditions in similar circumstances for similar
contracts.
• T here is a large number and broad range of possible outcomes.
Management will need to determine if there is a portion of the variable
consideration (i.e. a minimum amount) that should be included in the
transaction price, even if the entire estimate of variable consideration is not
included due to the constraint. Management’s estimate of the transaction
price will be reassessed at each reporting period, including any estimated
minimum amount of variable consideration.
PwC observation
This approach to variable
consideration is different
from the previous standard.
In certain scenarios, it will
require a significant degree
of judgement to estimate the
amount of consideration that
should be taken into account
and require management
to conduct continuous
reassessment. Entities that
defer revenue recognition under
current guidance because the
price is not reliably measurable
could be significantly affected
by the new standard. Entities
could be required to recognise
a minimum amount of revenue
when control transfers as
oppose to waiting until the
uncertainty is resolved.
New processes may need
to be in place to make
and monitor estimates of
variable consideration on an
ongoing basis. Concurrent
documentation of the
judgements considered in
making estimates will also be
important.
PwC
11
Does the revenue standard cover
accounting for contract costs?
PwC observation
Currently, some property
developers may record sales
commissions and other direct
contract acquisition costs as
incurred while some recognised
them at the same time of
revenue. However, under the
new model, this may become
more complex. A portion of
the contract acquisition costs
would need to be allocated
to the various performance
obligations (if there were more
than one) and recognised when
the related revenue on those
performance obligations is
recognised.
12
New revenue recognition standard
Under the new standard, incremental costs of obtaining a contract are
costs the entity would not have incurred if the contract had not been
obtained (e.g. sales commissions). An entity is required to recognise an
asset for the incremental costs to obtain a contract that management
expects to recover. As a practical expedient, an entity is permitted to
recognise the incremental cost of obtaining a contract as an expense when
incurred if the amortisation period is one year or less.
An entity recognises an asset for costs to fulfil a contract when specific
criteria are met. Management will first need to evaluate whether the costs
incurred to fulfil a contract are in the scope of other standards (e.g.,
inventory, fixed assets, or intangibles). Costs that are in the scope of other
standards should be either expensed or capitalised as required by those
standards. If fulfilment costs are not in the scope of another standard, an
entity recognises an asset only if the following criteria are met: (a) the
costs relate directly to a contract; (b) the costs generate or enhance
resources of the entity that will be used in satisfying performance
obligations in the future; and (c) the costs are expected to be recovered.
An asset recognised for the costs to obtain or costs to fulfil a contract
should be amortised on a systematic basis as the goods or services to
which the assets relate are transferred to the customer. An entity
recognises an impairment loss to the extent that the carrying amounts of
an asset recognised exceed (a) the amount of consideration the entity
expects to receive for the goods or services less (b) the remaining costs
that relate directly to providing those goods or services.
Are there extensive disclosure requirements?
PwC observation
The revenue standard includes a number of disclosure requirements intended
to enable users of financial statements to understand the amount, timing and
judgements around revenue recognition and corresponding cash flows arising
from contracts with customers.
The more significant disclosure requirements are as follows:
• The disaggregation of revenue into categories that depict the nature,
amount, timing and uncertainty of revenue and cash flows affected by
economic factors (for both interim and annual reporting).
• An explanation of the significant changes in the contract asset and the
contract liability balances during the reporting period.
• An analysis of the entity’s remaining performance obligations including the
aggregate amount of the transaction price allocated to the performance
obligations that are unsatisfied (or partially unsatisfied), nature of the goods
and services to be provided, timing of satisfaction and significant payment
terms.
The disclosure requirements
are significantly greater
than existing disclosure
requirements. This could
require new processes and
enhancement to existing IT
system to capture information
that has historically not been
needed for financial reporting
purposes. The standard includes
several examples that illustrate
specific aspects of the disclosure
requirements. However, entities
will need to tailor the sample
disclosures for their specific
facts and circumstances.
• Significant judgements and changes in judgements that affect the
determination of the amount and timing of revenue from contracts with
customers.
• Disclosure of the closing balances of capitalised costs to obtain and fulfil a
contract and the amount of amortisation in the period.
PwC
13
What are the transition requirements?
PwC observation
The simplified transition
method is intended to reduce
the transition time and effort
for preparers. However, the
requirement for entities to
disclose the impact to each
financial statement line item
will effectively result in an
entity applying both the new
revenue standard and the
previous revenue guidance in
the year of initial application
(i.e. keeping two sets of
accounting records). While
full retrospective application
provides stronger trend
information that some entities
might prefer to provide to
investors. Transition could
be especially difficult for real
estate developers with multiyear contracts. Start record
keeping soon if retrospective
application is a consideration.
An entity can apply the new revenue standard retrospectively, including using one or
more of the following practical expedients:
• For completed contracts, an entity need not restate contracts that begin and end
within the same annual reporting period.
• For completed contracts that have variable consideration, an entity may use the
transaction price at the date the contract was completed rather than estimating
variable consideration amounts in the comparative reporting periods.
• For all reporting periods presented before the date of initial application, an entity
need not disclose the amount of the transaction price allocated to the remaining
performance obligations and an explanation of when the entity expects to
recognise that amount as revenue.
For any of the practical expedients listed above that an entity uses, the entity shall
apply that expedient consistently to all contracts within all reporting periods
presented. In addition, the entity shall disclose all of the following information: (a)
the expedients that have been used, and (b) to the extent reasonably possible, a
qualitative assessment of the estimated effect of applying each of those expedients.
An entity can alternatively choose to recognise the cumulative effect of initially
applying the new standard to existing contracts as an adjustment to the opening
balance of retained earnings on the annual reporting period that includes the date of
initial application with proper disclosures. Under this transition method, an entity
shall apply this guidance only to contracts that are not completed contracts at the date
of initial application.
Under this transition method, for reporting periods that include the date of initial
application, an entity shall provide both of the following additional disclosures:
• The amount by which each financial statement line item is affected in the current
reporting period by the application of the new standard as compared with the
guidance that was in effect before the change.
• An explanation of the reasons for significant changes identified between the
reported results under the new standard and legacy guidance.
An entity that uses this simplified transition method must disclose this fact in its
financial statements.
14
New revenue recognition standard
Next step?
The above discussions
have highlighted the key
issues that are most
impacted by the new
revenue standard.
However, they are just the
tip of the iceberg.
Our industry experts are
prepared to assist you to
get through the changes.
We can also help you to
pre-assess the impact of
the new standard to your
future revenue.
Watch out for our next
publication and feel free to
contact us.
PwC
15
How can PwC help
A scalable approach focused
on project management and
knowledge transfer.
Our ‘one firm’ solution
PwC is already working with a number of large companies around the world to
manage their transition to the new standard. We have developed an approach that
draws on our expertise in accounting, systems implementation and transaction
structuring to deliver an end-to-end integrated solution.
Embedded, flexible approach
1
2
3
•
•
•
•
Assess
Convert
Embed
Establish governance, project and change management approach
Inventory revenue arrangements and review contracts
Review current accounting policies and practices
Identify relevant differences under the new standard
•
•
•
•
Determine adoption method (retrospective or practical expedient)
Map accounting policy differences to process and systems impacts
Consider dual-GAAP approach, including interim solutions
Establish roadmap and communication plan
•
•
•
•
Educate and communicate within the organisation
Effect process and systems changes
Collect and convert data, perform calculations
Draft disclosures (both transition and ongoing)
Your advantages
Flexible approach
We apply a scalable flexible approach and
provide you a customised solution
depending on the impact of the new
revenue standard to your business. Our
approach allows flexibility to continuously
assess the need and to modify what PwC
can do to help.
Integrated solutions
We understand the impact of the new
revenue standard spans beyond
accounting. Our team will comprise of
experts in accounting as well as our
system and controls specialists. We will
provide insights on the financial impact
upon adoption of the new revenue
standard. But more importantly, we will
provide insights on other areas such as
operations, budgeting, system
requirements and human resources
enabling you to make informed decisions
and judgements about any proposed
business model changes.
16
New revenue recognition standard
Global network
We will provide you with our proven
accounting change methodology, tools,
templates and best practices and staff
training and, if needed, support you in
your choice and implementation of a
software solution. By leveraging our
multi-disciplinary specialists you will
reduce implementation risks and ensure
you meet the requirements of the new
revenue recognition standard in the most
cost efficient way.
Knowledge transfer
We will ensure a smooth implementation
process using continuous knowledge
transfer. Through continuous education
and communication we believe in
empowering you with relevant and
precise information and knowledge so
you can make informed decisions.
Project management
The fundamental of our approach is
robust project management. You will be
able to set up the implementation project,
get internal buy-in and sponsorship and
be able to integrate implementation
processes in your other regulatory and IT
change projects as well as your ongoing
financial reporting calendar.
Our service offering
How we can help depends on your needs and the
level of impact the new standard may have on your
business. Described below are some of the ways in
which we can help you as you plan for adoption. All
the services described below can be customised to
suit your needs.
Service
Offering
In-house training
and technical
help-desk
Provide you with training for your accounting, IT, legal and compliance teams on specific areas and
implementation issues you may face.
Diagnostics
Perform diagnostic review of your existing arrangements/accounting policies to assess business issues
and financial reporting implications and provide proposed practical solutions and recommendations.
Provide on-going implementation and technical support to finance team and other cross functional
teams on ad-hoc questions through transition phase.
Perform diagnostic that includes understanding the financial and cross-functional impact; analyse
your business models and contracts underlying your revenue recognition; analyse your IT landscape
and an overview of risks and gaps.
This will help you understand the breadth and depth of the impact (e.g. accounting, reporting, sales
contracts, controls and process, systems, remuneration, taxes and investor relations) so you can plan
for implementation.
Impact analysis
Work closely with your finance team to model the impact of adoption under different revenue
recognition scenarios to your earnings, business model, compensation plans, debt covenants and any
other impact areas identified by you.
Perform a detailed analysis of differences in accounting policies, data gaps and IT systems landscape
including required interfaces to be deployed/upgraded based on business requirement and functional
design specifications.
Based on the impact analysis, work closely with your team to execute a cross-functional
communication strategy both internally and externally to your investors, audit committee, board of
directors and other stakeholders on a timely basis.
Accounting advisory Undertake a detailed analysis of your specific revenue contract considering your industry and business
model while also being mindful of your objectives and propose possible solutions for you.
Active participation on the implementation of the proposed solutions, for example, participation in
discussions with your lawyers for possible changes to contracts, internal meetings with other crossfunctional teams to coordinate implementation, etc.
Systems, process
and controls
Work with your finance and IT teams on updating revenue recognition process, system change, books
and records through the transition period.
Support you to determine a sustainable software solution that is able to support compliance with the
complex accounting requirements for revenue recognition.
Full scale
implementation
A combination of all of the above to assist with your full scale implementation of the standard (from
in-house education, initial diagnostic phase, impact analysis, to embedding changes in your financial
reporting tool) utilising PwC developed and tested implementation tools and methodologies.
Support you in gathering the data, testing IT concept, adjusting IT systems and testing the results.
PwC
17
PwC contacts
Contact us to discuss the changes in the revenue accounting standards and the impact on your business.
Our real estate specialists
Hong Kong & China – South
China – North & Central
Alan Ho, Industry Leader
+852 2289 2168
alan.ho@hk.pwc.com
Jim Chen, Industry Leader
+86 (10) 6533 2067
jim.chen@cn.pwc.com
Hong Kong
Cathy Ng, Partner
+852 2289 2128
cathy.ng@hk.pwc.com
Kenny Yeung, Partner
+852 2289 2310
kenny.c.yeung@hk.pwc.com
Cherry Chan, Partner
Ming Tse, Partner
+852 2289 2102
+852 2289 2901
cherry.cm.chan@hk.pwc.com ming.tse@hk.pwc.com
China – South
China – Central
Albert Cheung, Partner
+86 (755) 8261 8833
albert.cheung@cn.pwc.com
Arthur Kwok, Partner
+86 (21) 2323 3030
arthur.kwok@cn.pwc.com
Ivan Ho, Partner
+86 (20) 3819 2202
ivan.ho@cn.pwc.com
Kathleen Chen, Partner
+86 (21) 2323 2566
kathleen.chen@cn.pwc.com
Clarry Chan, Partner
+852 2289 2169
clarry.chan@hk.pwc.com
Kevin Lin, Partner
Rachel Tsang, Partner
+86 (20) 3819 2308
+852 2289 2337
rachel.nk.tsang@hk.pwc.com kevin.yp.lin@cn.pwc.com
Sally Sun, Partner
+86 (21) 2323 3955
sally.sun@cn.pwc.com
Davis Cho, Partner
+852 2289 2848
davis.kl.cho@hk.pwc.com
Raphael Chu, Partner
+852 2289 2045
raphael.chu@hk.pwc.com
Michael Lam, Partner
+86 (755) 8261 8968
michael.sw.lam@cn.pwc.com
Dilys Cheng, Partner
+852 2289 2382
dilys.cheng@hk.pwc.com
Richard Sun, Partner
+852 2289 2186
richard.sun@hk.pwc.com
Shirley Yeung, Partner
+86 (20) 3819 2218
shirley.yeung@cn.pwc.com
Rock Liu, Partner
+86 (10) 6533 2115
rock.liu@cn.pwc.com
Wilson Liu, Partner
+86 (10) 6533 2278
w.liu@cn.pwc.com
Tommy Cheung, Partner
+86 (755) 8261 8001
tommy.cheung@cn.pwc.com
Jacky Wong, Partner
+852 2289 2055
jacky.wong@hk.pwc.com
China – North
Wintan Tang, Partner
+86 (20) 3819 2818
wintan.tang@cn.pwc.com
Y T Chen, Partner
+86 (20) 3819 2215
ytchen@cn.pwc.com
Our risk assurance specialists
Cimi Leung, Partner
+86 (20) 3819 2997
cimi.leung@cn.pwc.com
Kenny Hui, Partner
+86 (21) 2323 1936
kenny.sk.hui@cn.pwc.com
Our capital markets and accounting advisory services specialists
Samying Huie, Partner
+86 (10) 6533 2965
samying.s.huie@cn.pwc.com
Guipeng Chen, Senior Manager
+86 (10) 6533 5278
guipeng.chen@cn.pwc.com
Vivian Lai, Senior Manager
+852 2289 2870
vivian.lai@hk.pwc.com
www.pwchk.com
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consultation with professional advisors.
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