1. Introduction
Revenue recognition for construction contracts requires careful judgment due to their long-term nature and evolving scope. Ind AS 115 introduces a principles-based approach that focuses on the transfer of control rather than the completion of activities. Under this standard, entities must assess whether revenue is recognised over time or at a point in time, determine appropriate measures of progress, and estimate variable consideration arising from variations and claims. Given the complexity and uncertainty inherent in construction contracts, applying Ind AS 115 consistently is critical to ensure that revenue reflects the actual performance of the entity.
2. Challenges in Applying POCM by Real Estate Companies
Real estate companies often face significant challenges in applying the Percentage of Completion Method (POCM) under Ind AS 115. This is primarily because the criteria for recognising revenue over time—specifically, the transfer of control of a good or service to the customer—are rarely met in typical real estate arrangements.
The September 2017 “IFRIC Update” examined this issue in detail and concluded that, in most multi-unit real estate developments, the criterion relating to control over an asset created or enhanced by the entity is not fulfilled. As a result, revenue recognition over time using POCM is generally not permitted in such cases.
The IFRIC highlighted the following key considerations:
a) The asset created by the entity’s performance is the real estate unit itself, not the contractual right to receive the unit in the future. The ability to sell or pledge this contractual right does not indicate control over the real estate unit under construction.
b) Control must be assessed with reference to the part-constructed unit. During construction, customers typically do not have the ability to direct the use of, or obtain substantially all the remaining benefits from, the real estate unit.
c) Although customers may be exposed to changes in the market value of the unit, such exposure alone does not provide the ability to direct its use as construction progresses.
d) Rights that allow customers (collectively) to replace the developer in the event of non-performance are protective in nature and do not indicate control.
Accordingly, customers do not control the part-constructed real estate unit, and the over-time revenue recognition criterion based on control is generally not met.
There is another pathway under Ind AS 115 that may allow some real estate entities to apply POCM. An entity must demonstrate that the asset being constructed has no alternative use and that it has an enforceable right to payment for performance completed to date. In practice, this criterion is also rarely satisfied, as contracts often do not provide such rights, or applicable laws may prohibit recovery for work performed if the contract is terminated.
3. Para 35 of Ind AS 115
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
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