Abstract
M.Com. (International Accounting)
Revenue is regarded as one of the most important measures of financial performance and a critical aspect of the construction industry. Revenue recognition in the construction industry is considered complex due to the dynamic nature of the operations and contracts. To date, the main, effective IFRS for revenue in the construction industry has been IAS 11. This will be superseded by IFRS 15 in 2018. The replacement of IAS 11, the contract accounting ‘rule book’, raises the question of whether the new IFRS 15 will provide adequate guidance for the recognition of revenue on construction contracts. The objective of this limited scope dissertation is to evaluate the adequacy of the principles of IFRS 15 in dealing with the complexities of the construction industry in order to recognise revenue on construction contracts. A structured approach was followed based on the ‘five step approach’ of IFRS 15 by using a doctrinal research methodology. Doctrinal research focuses on the principles of accounting, and specifically, on IFRS 15 in this limited scope dissertation. IFRS derives from practice as it was created by the standard-setters, in this case the International Accounting Standards Board (IASB). Doctrinal research is a qualitative research method with normative characteristics. This study specifically applied reform-orientated doctrinal research, which focuses on the adequacy of the principles applied.
Although IAS 11 defined the nature of a construction contract, it lacked guidance in assessing whether rights and obligations were enforceable through law, which was simply implied in the Standard. In contrast, IFRS 15 gives adequate guidance to assess the validity of construction contracts, including specific guidance for contract modifications, which would assist in identifying enforceable rights and obligations in the construction industry.
IFRS 15 identifies ‘distinct’ goods and services that derive from promises that are contained in the contract. In the construction industry, the identification of performance obligations has less of an impact due to the interrelated nature of the goods and services under a construction contract, which results in only one performance obligation being identified in many cases. This would result in no allocation required of the transaction price to the performance obligations (under step 4) as there is normally only one performance obligation in construction contracts...