FRSIC Draft Consensus D 15 : Treatment of Land Cost When Revenue is Recognised Over Time by Measuring Progress Using Input Method, and Our Comment Letter dated 21 April 2016

April 21, 2016 – 

Recently, the Financial Reporting Standard Implementation Committee(FRSIC) of MIA issued the Draft Consensus 15 for comment by the public. The Draft Consensus is in respect to what should be the appropriate method to be used in measuring the progress of the property development for the purposes of recognising the revenue over time where it is allowed under the MFRS 15 Revenue From Contracts With Customers which will be effective from 1 January 2018.

More specifically, the FRSIC tried to determine if land cost should be included in the ‘costs incurred’ method. This literally means if the land cost element should be included or considered in calculating the percentage of completion for the purposes of determining the amount of the revenue to be recognised as income in each reporting period. Basically, the FRSIC is of the view that the land cost shall be excluded in the measure of the progress towards complete satisfaction of performance obligation. This approach is very much consistent with the current practice.
KGNP submitted its comment letter to FRSIC on 21 April 2016 to provide its views and suggestions on this issue. We commended MIA FRSIC for taking this initiative very early considering that MFRS 15 will be effective only from 1 January 2018. Below are extracts from our comment letter.

“It is clear that the property developer is required to deliver a completed property comprising land and building. In the case of landed properties, it is very clear that land is a major part of the goods/performance obligation. The Preamble and clause 23 of Schedule G(standard SPA) would support this. Land is definitely an input to the final product the property developer is selling. The fact that at the point of signing SPA, the building is not fully constructed yet does not mean that land is not an input. In another scenario, the project could be 90% completed when a SPA is signed and this does not mean the performance obligation of the property developer is confined to the balance of 10%. The performance obligation of a property developer when selling an ongoing project is to deliver a completed unit with certificate of completion within the time line which include land and building and all other facilities(especially condominium where there are common facilities).”

“……, MFRS 15 only stated ‘costs incurred’ and in the absence of a definition as to what ‘costs incurred’ comprised of then it should include all costs incurred i.e. all costs capitalized as property development cost which include land and development cost and borrowing cost capitalized (if any). However since MFRS 15 does not specifically state the entire or total costs incurred must be used except that B19 discussed examples of costs that should be excluded, it actually provides rooms for an entity to define and decide the type of costs it chooses to use so long as it best depicts the performance obligation over time. This means an entity can basically choose to follow the current practice(in line with our Property Development Activities standard) where land cost, borrowing costs and advances to contractors will be excluded in the calculation(i.e. based on costs of development activities). Alternatively, it can also choose to use the total costs incurred including land cost(especially) or the total costs excluding borrowing costs only. It should be an issue of accounting estimation similar to what depreciation method and rate to use.

Since land is a significant part of a property, it can never be wrong to include that unless the Standard specifically excludes it. The fact that it is not clearly stated in the Standard is in fact the reason why a FRSIC Consensus is felt necessary.”

“…the next point I would like to bring to the attention of the FRSIC to deliberate is to examine the possible impact of Para 35(C), the basis to argue why the revenue from residential property sold under Schedule G and H can be recognized over time. In the SPA with purchasers, the property developer is only entitled to payment based on the Schedule of Payment/Progress Billings. The Schedule of payment is based on a mixture of milestones; based on key event of signing SPA and delivery of vacant possession and in between, based on the stage of work on the building.
Whichever method is used to recognize the revenue over time and in respect of ‘costs incurred’ method, whether or not land cost is include or excluded, the question is whether the accumulated amount revenue recognized should not exceed the accumulated progress billing.

Even under the current accounting standards and practices, there are times where the percentage of completion far exceeded the progress billings resulting in a significant amount of ‘Accrued Billings’ included as Current Assets. This represents work done that cannot be billed yet according to the SPA. Does this contradict Para 35(C) which stated that ‘…..the entity has an enforcement right to payment for performance completed to date’. As at that point, the property developer has no right for payment for that part of work done but eventually if and when it completes it, the right to payment will arise. Since the right will only arise at a later stage, can revenue relates to that part be recognized just because a method chosen ( whether Output or Input Method ) provides a higher figure of the revenue that can be recognized as compared to progress billings. I suggest FRSIC to study further this issue/potential issue if it has not done so.”

Note : You can download the Draft Consensus D15 from MIA website