Abstract
Abstract:
Orientation: The International Financial Reporting Standard 15 (IRFS 15) Revenue from Contract with Customers replaced, amongst others, the industry-specific financial reporting standard (i.e. International Accounting Standard 11 [IAS 11] Construction Contracts), becoming effective on or after 01 January 2018. Construction is regarded as a complex industry with regular changes in contract scope and pricing. Research purpose: The objective of this article was to evaluate the adequacy of the guidance of the IFRS 15 to deal with the complexities of the construction industry in order to recognise revenue derived from construction contracts. In evaluating the application of the principles of the IFRS 15 to construction contracts, a structured approach was followed based on the fivestep approach followed in the IFRS 15. Motivation for the study: The lack of industry-specific guidance for construction revenue, together with the complexities of the construction industry, makes the application of the IFRS 15 challenging for construction entities. Research approach/design and method: The revenue recognition principles developed in the IFRS 15 were assessed through doctrinal research, a research method focusing on the core doctrines developed in practice. Reform-oriented doctrinal research was used to assess the doctrines developed in the IFRS 15 by applying authoritative interpretation. Main findings: This article found that the IFRS 15 provides an appropriate framework for the revenue recognition of construction contracts. However, the application of the guidance is based on the correct interpretation of the rights and obligations in construction contracts, which could create uncertainties in practice. Significant areas of estimation uncertainty and judgements should be disclosed. Practical/managerial implications: The implications of the IFRS 15 are that construction entities need to understand the rights and obligations in contracts and how these affect the revenue recognition of construction contracts. Contribution/value-add: This article provided insights into the application of the IFRS 15 to construction contracts.