Revenue – ifrs 15 handbook

Example 7B – Applying the over-time criteria: Real estate developer: 
Criterion 3 not met (2)
Modifying Example 7A, the contract between Real Estate Developer D and 
Customer C contains the following terms. 
– C pays 20% of the purchase price in instalments as the unit is constructed 
and the remainder of the purchase price after construction is complete. 
– D retains legal title to the unit during construction.
– C has the 
in rem
right to the unit during construction (i.e. the legal right to the 
unit), which it can resell or pledge to a new buyer.
The contract cannot be terminated under Country Y’s local law. However, the 
courts in Country Y have accepted requests to terminate similar contracts in 
some circumstances – e.g. when the customer becomes unemployed or ill. In 
these cases, the courts have allowed the developer to retain approximately 10% 
of the payments made as a termination penalty.
IU 03-18
D concludes that the 
in rem
right to the unit does not give C the ability to direct 
the use of the unit itself during construction; therefore, Criterion 2 is not met.
Although the contract does not give C a termination right, D concludes that 
the legal precedent permits the termination of contracts for reasons other 
than its failure to perform as promised. Further, the termination penalty of 
approximately 10% of the payments that the courts have allowed the developer 
to retain does not compensate the developer for performance to date. 
Therefore, D concludes that Criterion 3 is not met. 
Because none of the criteria for over-time revenue recognition is met, D 
recognises revenue at the point in time when control of the unit transfers to C 
(see 
Section 5.4
).

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5.3 Measuring progress towards complete satisfaction of a performance obligation
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