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New revenue recognition standard Impact to real estate property developers

Contents

Page

Executive summary ................................................................. 2

Is there a sale to customer or does a contract exist? ................... 4

Should revenue be recognised over time or at a point in time for pre-sale of multi-apartment units? .................. 5

Will the timing for sale of completed property change under the new model? .............................................................. 7

How to account for the work to be completed after delivery of the property unit to the customer? ........................... 8

Is there any significant financing component under the different payment methods offered to customer? ...............10

What will be the impact if the pricing includes a variable amount? .....................................................................11

Does the revenue standard cover accounting for contract costs? .........................................................................12

Are there extensive disclosure requirements?...........................13

What are the transition requirements? .....................................14

Next step? ................................................................................15

How can PwC help ..................................................................16

2 New revenue recognition standard

Executive summary

In July 2014, the Hong Kong Institute of Certified Public Accountants (“HKICPA”) issued HKFRS 15, Revenue from Contracts with Customers, which is identical to IFRS 15 issued by International Accounting Standards Board (“IASB”) and Financial Accounting Standard Board (“FASB”) more than a month ago. Entities which prepare financial statements in accordance with HKFRS/IFRS need to apply HKFRS/IFRS 15 for financial periods beginning on or after 1 January 2017 (early application permitted).

Under HKFRS/IFRS 15, companies will use a new five-step model to recognise revenue from customer contracts.

Step 1: Identify contract(s) with customer

A contract creates enforceable rights and obligations. It may be written, verbal, or implied by customary business practice. Combine contracts when they are entered into at or near the same time and are negotiated as a package, payment of one depends on the other, and goods/services promised are a single performance obligation. Specific guidance about contract modifications prescribed to account for modifications as a separate contract or continuation of the original contract prospectively or with cumulative catch-up.

Step 2: Identify separate performance obligations in the contract(s)

Performance obligations are promises in a contract to transfer goods or services, including those a customer can resell or provide to its customer. Use the model’s indicators to separate the performance obligations if they are capable of being distinct and if they are distinct based on the context of the contract.

How the five-step model works

Step 3: Determine the transaction price

Transaction price can be based on the expected value or the most likely amount but is constrained up to the amount that is highly probable (IFRS)/probable (US GAAP) of no significant reversal in the future. The minimum amount that meets this criteria is included in the transaction price. Assess your experience with similar types of performance obligations in making this determination.

Step 4: Allocate the transaction price

Transaction price should be allocated to distinct performance obligations based on their relative stand-alone selling prices. This may be the stand-alone selling price of a good or service when sold separately to a customer in similar circumstances and to similar customers. If a stand-alone selling price is not directly observable, estimate it by considering all information that is reasonably available, such as market conditions, specific factors, and class of customers.

Step 5: Recognise revenue when the performance obligation is satisfied

Recognise revenue when the promised goods or services are transferred to the customer and the customer obtains control. This may be over time or at a point in time. The new standard provides indicators when control is transferred. Additionally, the new standard introduces a new concept and revenue is required to be recognised over time when a) the asset being created has no alternative use to the company and b) the company has an enforceable right to payment for performance completed to date.

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Where might your company feel the impact?

1. Contracts. Existing terms could take on new meaning under the new standard, so you may need to re-negotiate debt covenants or with customers to maintain the original intent.

2. Tax implications. The timing of cash payments could be affected if, for example, you recognise revenue sooner than in the past.

3. Investor relations. Stakeholders would want to know how your revenue recognition will change and how the new standard will affect your company’s financial picture.

4. Controls and processes. The standard requires you to make more estimates and disclosures, calling for new controls and processes.

5. Technology. You may need to update your current software to capture new information that might not have been necessary before.

6. Compensation and bonus plans. Revenue recognition can trigger payments like bonuses. Consider how timing changes for revenue recognition affect these and other internal arrangements.

The IASB and FASB have established a joint Transition Resource Group (TRG) to aid entities transitioning to the new standard. We encourage entities to use this document as a guideline and monitor developments discussed by the TRG and the boards during the transition period. For our PwC clients who would like to understand this in more detail, please contact your engagement partner. Alternatively, contact any of the PwC representatives listed out on the back page of this publication.

• Property developers may need to revisit its existing policies on how to account for contracts that include variable consideration as the new standard provides more specific and detailed guidance.

• Incremental costs of obtaining a contract (e.g. sales commissions) will be required to be capitalised unless the contract is completed within one year.

• A number of additional disclosures are required.

The standard may result in a significant change on how revenue and costs are recognised for real estate property developers. We have highlighted in this publication a number of key areas and practical examples below for your consideration which are intended to provide areas of focus to assist entities with a preliminary understanding of the implications of this new standard.

What will be the challenge faced by the property developers?

• Revenue from pre-sales of properties under development may not be recognised at a point in time. Instead, some may result in the recognition of revenue over a period of time depending on the terms of the contract.

• The timing of revenue recognition for sale of a completed property, which is currently based on whether the significant risk and reward of the ownership of properties has been transferred, may also need to be revisited under the transfer of control model.

• Entity may need to defer a portion of revenue related to unsatisfied performance obligations.

• Property developers which offer different payment plans to customers may have to adjust the transaction price for revenue recognition when significant financial components exist.


Is there a sale to customer or does a contract exist?

Collaboration arrangement The revenue standard applies to all contracts with customers. A customer is a party that contracts with an entity to obtain goods or services that are the output of that entity’s ordinary activities. The scope includes transactions with collaborators or partners if the collaborator or partner obtains goods or services that are the output of the entity’s ordinary activities. It excludes these types of arrangements, however, if the parties are participating in an activity together where they share the risks and benefits of that activity.

For example, a landowner that has signed an agreement with a builder for a joint property development project (which involves building a complex by the builder on the land and then sell land and building together after completion). Management would need to carefully analyse the terms of the arrangement to consider whether it is a joint arrangement (which is under the scope of HKFRS/IFRS 11) or whether the landowner is in substance selling its land to the builder (which is a “customer” in the scope of this standard) or the builder is merely providing a construction service to the landowner. Management will also need to evaluate whether the arrangement contains elements of both collaboration and a sale to a customer.

PwC observation

Management will need to evaluate arrangements with collaborators and partners to identify whether such arrangements or portions thereof are in the scope of the revenue standard. Arrangements where parties share risks and benefits are different from those where one entity obtains goods or services from the other.

Does a contract exist when collectability is a concern?An entity will assess at the inception of the contract whether the parties to the contract are committed to performing their respective obligations and it is probable that the entity will collect the consideration to which it will be entitled to in exchange for the goods or services that will be transferred to the customer. This assessment determines whether a contract exists for the purpose of applying the revenue standard. The collectability assessment is based on the customer’s ability and intent to pay as amounts become due. The entity shall continue to assess the contract to determine whether the criteria are subsequently met.

In most cases an entity will not enter into a contract with a customer when there is a significant credit risk without also having adequate economic protection. However, judgement is required whether the entity can enforce the performance of the customer.

For example, when a customer signed a provisional S&P with a 5% deposit payment to purchase a property, the customer can walk away and the developer can only forfeit the 5% deposit and cannot enforce the completion of the contract. Under this situation, management may conclude that the customer is not committed to the contract at this stage and the 5% deposit is treated as a liability until the revenue criteria is met.

Under the current guidance of HK/IFRIC 15, customers usually have only limited ability to influence the design of the real estate, so a pre-sale of multi-apartment unit contract is normally considered as an agreement for sale of goods under HK/IAS 18 and revenue is recognised at a point in time. Whether revenue from pre-sale contracts should be recognised over time or at a point in time will depend on careful analysis of specific contract terms under the new revenue standard.

Under the new standard, an entity should determine at contract inception whether control of a good or service is transferred over time or at a point in time. This determination should depict the transfer of benefits to the customer and should be evaluated from the customer’s perspective. An entity should first assess whether the performance obligation is satisfied over time. If not, the good or service transfers at a point in time.

An entity will recognise revenue over time if any of the following criteria are met:

• The customer concurrently receives and consumes the benefits provided by the entity’s performance as the entity performs.

• The entity’s performance creates or enhances a customer-controlled asset.

• The entity’s performance does not create an asset with an alternative use and the entity has a right to payment for performance completed to date.

The last criterion addresses situations where the customer does not control an asset as it is created, or no asset is created by the entity’s performance. Management will need to consider whether the asset being created has an alternative use to the entity (if an asset is created) and whether the entity has an enforceable right to payment for performance to date.

The assessment of whether an asset has an alternative use should be made at contract inception, and not reassessed. Management should consider its ability to redirect a product that is partially completed to another customer, considering both contractual and practical limitations. A substantive contractual restriction that limits the entity’s ability to redirect the asset could indicate the asset has no alternative use. Practical limitations, such as significant costs required to rework the asset so that it could be directed to another customer, could also indicate that the asset has no alternative use.

A right to payment exists if an entity is entitled to payment for performance completed to date if the customer terminates the contract for reasons other than the entity’s non-performance. A specified payment schedule does not, by itself, indicate the entity has a right to payment for performance to date. The assessment of the enforceability of the right to payment should include consideration of the contract terms and any legal precedent that could override the contract terms.

PwC observation

Whether revenue of pre-sale properties contracts should be recognised over time or at a point in time will depend on careful analysis of specific contract terms under the new revenue standard. In particular, whether the entity could have an alternative use for the property under construction and is entitled to be paid for the work performed to date. Care should be taken of whether there are any contractual terms allowing the customer to cancel the contract, and if it can be cancelled, whether the seller would always be contractually entitled to adequate compensation for work performed to date. All these assessment will need to be made in the context of both the contract terms and the local legal environment.

If revenue of pre-sale properties is recognised over time, management may need to enhance existing IT systems and work processes in order to capture different information (e.g. “progress”) for each customer contract for future reporting purpose.

Should revenue be recognised over time or at a point in time for pre-sale of multi-apartment units?

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An entity’s right to payment does not have to be a present unconditional right. Many arrangements include terms where payments are only contractually required at specified intervals, or upon completion of the contract. Management needs to determine whether the entity would have an enforceable right to demand payment if the customer cancelled the contract for other than a breach or non-performance. A right to payment would also exist if the customer does not have a stated right to cancel the contract, but the contract (or other laws) entitles the entity to continue fulfilling the contract and demand payment from the customer in the event the customer attempts to terminate the contract.

Management should consider relevant laws or regulations in addition to the contract terms, such as:

• Legal precedent that confers upon an entity a right to payment even in the event that right is not specified in the contract.

• Legal precedent that indicates a contractual right to payment has no binding effect.

• A customary business practice of not enforcing a right to payment that renders the right unenforceable in a particular legal environment.

The right to payment should compensate the entity at an amount that reflects the selling price of the goods or services provided to date, rather than provide compensation for only costs incurred to date or the entity’s potential loss of profit if the contract is terminated. This would be an amount that covers an entity’s cost plus a reasonable profit margin for work completed.

If revenue is to be recognised over time, a method should be used to measure the progress which best reflects the pattern of transfer of goods or services to the customer. The standard specifies that the measure of progress shall exclude any goods or services for which the entity does not transfer control to the customer. As such, the measure of progress may be affected by whether or not control of the land on which the property is being constructed has been transferred to the customer.

Example 1: A property developer enters into a contract with Customer A to deliver an apartment unit at specified floor and block which is still under construction. Customer A makes a non-refundable deposit, 20% of total consideration, at contract inception. Customer A can terminate the contract at any time and the property developer only has the right to retain the deposit. The contract precludes the property developer from redirecting the apartment unit to another customer. Customer A does not control the apartment as it is being constructed.

How should the property developer recognise revenue for this contract?

Analysis

The property developer should recognise revenue at a point in time, when the control of the apartment unit transfers to Customer A. The specified unit does not have an alternative use to the property developer because the contract has substantive terms that preclude it from redirecting the apartment unit to another customer. Property developer, however, is only entitled to payment of the non-refundable deposit, not for costs plus a margin for work performed up to date of cancellation. The criterion for a performance obligation satisfied over time is not met because the property developer does not have a right to payment for performance completed to date.

Example 2: A property developer enters into a contract with Customer B to deliver an apartment unit at specified floor and block which is still under construction. Customer B has no right to cancel the contract except in the case that there is a breach or non-performance by the property developer. The contract (or the applicable laws) entitles the property developer to continue fulfilling the contract and demand payment from the customer in the event the customer attempts to terminate the contract. The contract precludes the property developer from redirecting the apartment unit to another customer unless the customer defaults. Customer B does not control the apartment as it is being constructed.


Analysis

The property developer should recognise revenue over time as it constructs the apartment unit. The specified unit does not have an alternative use to the property developer as the property developer cannot redirect the apartment unit to another customer unless the customer defaults. The property developer also has a right to payment for performance completed to date. This is because if the customer were to default on its obligations, the entity would have an enforceable right to all of the consideration promised under the contract if it continues to perform as promised. The criteria are met for a performance obligation satisfied over time.

Example 3:The same facts as in Example 2 apply to Example 3, except that in the event of a default by the customer, either the property developer can require the customer to perform as required under the contract or the property developer can cancel the contract in exchange for the apartment unit under construction and an entitlement to a penalty of a proportion of the contract price.


Analysis

Notwithstanding that the property developer could cancel the contract (in which case the customer’s obligation to the entity would be limited to transferring control of the partially completed property to the entity and paying the penalty prescribed), the property developer has a right to payment for performance completed to date because the property developer could also choose to enforce its rights to full payment under the contract. The fact that the property developer may choose to cancel the contract in the event the customer defaults on its obligations would not affect that assessment, provided that the property developer’s rights to require the customer to continue to perform as required under the contract (i.e. pay the promised consideration) are enforceable.

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For sale of completed property, generally the entity will transfer to the customer at a particular point in time. Timing of revenue for sale of a completed property will need to shift from focus on significant risk and reward of ownership to transfer of control. For example, significant risks and rewards of the property may be transferred but the customer does not have title or possession until a later date. The standard provides 5 indicators to assess when control is transferred and significant judgement will be needed.

The standard requires management to determine when the control of a good or service is transferred to the customer. The timing of revenue recognition could change for some transactions compared to current practice, which is more focused on the transfer of risks and rewards. The transfer of risks and rewards is an indicator of whether control has been transferred, but additional indicators will also need to be considered.

Under the new standard, to determine when a customer obtains control and an entity satisfies a performance obligation, the entity should consider the following indicators:

• The entity has a present right to payment for the asset.

• The entity has transferred legal title to the asset.

• The entity has transferred physical possession of the asset.

• The entity has transferred the significant risks and rewards of ownership to the customer.

• The customer has accepted the asset.

PwC observation

All of the five indicators do not need to be satisfied for revenue to be recognised. The standard does not place more weight on one indicator over another. An entity will need to consider all indicators, not just whether significant risks and rewards have been transferred, to determine when revenue should be recognised.

Will the timing for sale of completed property change under the new model?


Under current guidance, there is frequently only one sale recognition point for real estate transactions even where some costs will be incurred at a later date, which in this circumstance an entity would accrue relevant cost. Under the new standard, an entity will need to assess whether any costs after the delivery of property unit are additional performance obligations and revenue maybe deferred until such performance obligations are satisfied.

The new standard will significantly affect the accounting for sales of real estate in situations where certain performance obligations are satisfied after the legal sale of the assets. Such performance obligations could be explicitly defined in the contract (e.g. an “amenity” such as a pool or club house) or implicitly required by the builder in order to get zoning for the subdivision and sale (for example, roads, infrastructure, schools, firehouse, street lights, etc.).

For example, a property developer may sell an individual unit before completing roads, amenities or off-site costs (e.g. schools, firehouses, stop lights) for which it is committed pursuant to the contract with the customer. Today, upon each sale, the property developer would accrue a liability for the unit’s pro-rata portion of future costs and include this amount in the cost of sale at the time the sale is recorded, even though these costs had not yet been incurred. However, under the new revenue recognition guidance, there may be multiple performance obligations that could result in different recognition patterns for portions of the revenue for the same unit (i.e. for goods or services sold before the completion of the common items and those after).

A performance obligation is a promise (whether explicit or implicit) in a contract with a customer to transfer a good or service to the customer.

Management will need to determine whether promises are distinct when there are multiple promises in a contract. This is important because distinct performance obligations are the units of account that determine when and how revenue is recognised.

A good or service is distinct only if:

• the customer can benefit from the good or service either on its own or together with other readily available resources (that is, the good or service is capable of being distinct); and

• the good or service is separately identifiable from other promises in the contract ((i.e. the good or service is distinct within the context of the contract).

PwC observation

The revenue standard provides indicators rather than criteria to determine when a good or service is distinct within the context of the contract. This allows management to apply judgement to determine the separate performance obligations that best reflect the economic substance of a transaction. All promises in an arrangement should be identified. Promises that are inconsequential or perfunctory need to be identified, even if they are not the ‘main’ deliverable in the arrangement, because all promises in a contract are goods or services that a customer expects to receive. An entity should assess whether inconsequential or perfunctory performance obligations are immaterial to the financial statements.

How to account for the work to be completed after delivery of the property unit to the customer?

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A customer can benefit from a good or service on its own if it can be used, consumed, or sold to generate economic benefits. A good or service that cannot be used on its own, but can be used with readily available resources, is still distinct, as the entity has the ability to benefit from it. A readily available resource is one that is sold by the entity, by others in the market, or that a customer has already obtained from the entity.

Determining whether a good or service is distinct within the context of the contract requires assessment of the contract terms and the intent of the parties. Indicators include, but are not limited to:

• the entity does not provide a significant service of integrating the individual goods or services in the contract into a bundle that is the combined item the customer has contracted to receive;

• the good or service does not customise or significantly modify another contractually promised good or service; and

• the good or service is not highly dependent on or highly interrelated with other goods or services in the contract; therefore, a customer’s decision to not purchase a good or service does not significantly affect the other promised goods or services in the contract.

The standard generally requires an entity to allocate the transaction price to the separate performance obligations in proportion to their relative stand-alone selling prices. Stand-alone selling price is generally the observable price of a good or service sold separately by the entity. However, there could be a number of instances where the stand-alone selling price is not observable. This will often require real estate entities to make estimates for items they do not sell on a stand-alone basis and will require significant judgement.


Property developers may offer different payment schemes for its customers. Under the new standard, entities need to consider whether there is significant financing component to be accounted for separately from revenue and applies to both payments in advance as well as in arrears.

The amount of revenue recognised will be different from the amount of cash received from the customer when an arrangement contains a significant financing component. Revenue recognised will be less than cash received when payments are made after performance, because the entity is providing the customer with financing. A portion of the consideration will be recognised as interest income. Revenue recognised will exceed the cash received for payments made in advance of performance, because the entity receives financing from the customer. The entity will recognise interest expense on the financing related to advance payments.

Under the new standard, the transaction price should be adjusted for any significant financing component in the arrangement. A practical expedient allows entities to disregard the time value of money if the period between transfer of the goods or services and payment is less than one year, even if the contract itself is for more than one year. In assessing whether a contract contains a significant financing component, an entity should consider various factors, including:

• the length of time between when the entity transfers the goods or services to the customer and when the customer pays for them;

• whether the amount of consideration would substantially differ if the customer paid cash when the goods or services were transferred; and

• the interest rate in the contract and prevailing interest rates in the relevant market.

An entity needs to determine the discount rate to use when calculating the interest element of a significant financing component. The entity should use a discount rate that reflects what it would charge in a separate financing transaction with the customer, including consideration of any collateral or guarantees it would require. An entity receiving a significant financing benefit (e.g. because it has received an advance payment) should consider its incremental borrowing rate to determine the interest rate. The discount rate is not reassessed after inception of the contract.

PwC observation

Management will need to evaluate arrangements with customers to determine whether they include a significant financing component. It could be challenging for property developers to determine whether a significant financing component exists, especially when goods or services are delivered and cash payments received throughout the arrangement. The standard allows for some level of judgement by requiring entities to assess whether the substance of the payment arrangement is a financing.

An entity with contracts that include a significant financing component should consider any operational challenges relating to measuring and tracking the interest element of the arrangement. This could require additional information technology systems, processes, or internal controls to capture and measure such information.

Is there any significant financing component under the different payment methods offered to customer?

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It is not uncommon for the price and scope to change during the course of development of the real estate. The pricing in contracts will often include variable elements, such as liquidation damage, rental guarantees and profit sharing arrangement subsequent to the sale of the real estate.

The standard includes new specific requirements in respect of variable consideration such that it is only included in the transaction price if it is highly probable that the amount of revenue recognised would not be subject to significant future reversals.

Under the new standard, variable consideration should be estimated using the more predicative of the following approaches: the expected value or the most likely amount. The approach used is not a policy choice. Management should use the approach that it expects will best predict the amount of consideration to which the entity will be entitled based on the terms of the contract and taking into account all reasonably available information.

Variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the cumulative amount of revenue recognised will not occur in future periods when the uncertainty associated with the variable consideration is subsequently resolved. The following indicators suggest that including an estimate of variable consideration in the transaction price could result in a significant reversal of cumulative revenue:

• The amount of consideration is highly susceptible to factors outside the entity’s influence.

• Resolution of the uncertainty about the amount of consideration is not expected for a long period of time.

• The entity has limited experience with similar types of contracts.

• The entity has a practice of offering a broad range of price concessions or changing payment terms and conditions in similar circumstances for similar contracts.

• There is a large number and broad range of possible outcomes.

Management will need to determine if there is a portion of the variable consideration (i.e. a minimum amount) that should be included in the transaction price, even if the entire estimate of variable consideration is not included due to the constraint. Management’s estimate of the transaction price will be reassessed at each reporting period, including any estimated minimum amount of variable consideration.

What will be the impact if the pricing includes a variable amount?

PwC observation

This approach to variable consideration is different from the previous standard. In certain scenarios, it will require a significant degree of judgement to estimate the amount of consideration that should be taken into account and require management to conduct continuous reassessment. Entities that defer revenue recognition under current guidance because the price is not reliably measurable could be significantly affected by the new standard. Entities could be required to recognise a minimum amount of revenue when control transfers as oppose to waiting until the uncertainty is resolved.

New processes may need to be in place to make and monitor estimates of variable consideration on an ongoing basis. Concurrent documentation of the judgements considered in making estimates will also be important.


Does the revenue standard cover accounting for contract costs?

Under the new standard, incremental costs of obtaining a contract are costs the entity would not have incurred if the contract had not been obtained (e.g. sales commissions). An entity is required to recognise an asset for the incremental costs to obtain a contract that management expects to recover. As a practical expedient, an entity is permitted to recognise the incremental cost of obtaining a contract as an expense when incurred if the amortisation period is one year or less.

An entity recognises an asset for costs to fulfil a contract when specific criteria are met. Management will first need to evaluate whether the costs incurred to fulfil a contract are in the scope of other standards (e.g., inventory, fixed assets, or intangibles). Costs that are in the scope of other standards should be either expensed or capitalised as required by those standards. If fulfilment costs are not in the scope of another standard, an entity recognises an asset only if the following criteria are met: (a) the costs relate directly to a contract; (b) the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and (c) the costs are expected to be recovered.

An asset recognised for the costs to obtain or costs to fulfil a contract should be amortised on a systematic basis as the goods or services to which the assets relate are transferred to the customer. An entity recognises an impairment loss to the extent that the carrying amounts of an asset recognised exceed (a) the amount of consideration the entity expects to receive for the goods or services less (b) the remaining costs that relate directly to providing those goods or services.

PwC observation

Currently, some property developers may record sales commissions and other direct contract acquisition costs as incurred while some recognised them at the same time of revenue. However, under the new model, this may become more complex. A portion of the contract acquisition costs would need to be allocated to the various performance obligations (if there were more than one) and recognised when the related revenue on those performance obligations is recognised.

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The revenue standard includes a number of disclosure requirements intended to enable users of financial statements to understand the amount, timing and judgements around revenue recognition and corresponding cash flows arising from contracts with customers.

The more significant disclosure requirements are as follows:

• The disaggregation of revenue into categories that depict the nature, amount, timing and uncertainty of revenue and cash flows affected by economic factors (for both interim and annual reporting).

• An explanation of the significant changes in the contract asset and the contract liability balances during the reporting period.

• An analysis of the entity’s remaining performance obligations including the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied), nature of the goods and services to be provided, timing of satisfaction and significant payment terms.

• Significant judgements and changes in judgements that affect the determination of the amount and timing of revenue from contracts with customers.

• Disclosure of the closing balances of capitalised costs to obtain and fulfil a contract and the amount of amortisation in the period.

PwC observation

The disclosure requirements are significantly greater than existing disclosure requirements. This could require new processes and enhancement to existing IT system to capture information that has historically not been needed for financial reporting purposes. The standard includes several examples that illustrate specific aspects of the disclosure requirements. However, entities will need to tailor the sample disclosures for their specific facts and circumstances.

Are there extensive disclosure requirements?


PwC observation

The simplified transition method is intended to reduce the transition time and effort for preparers. However, the requirement for entities to disclose the impact to each financial statement line item will effectively result in an entity applying both the new revenue standard and the previous revenue guidance in the year of initial application (i.e. keeping two sets of accounting records). While full retrospective application provides stronger trend information that some entities might prefer to provide to investors. Transition could be especially difficult for real estate developers with multi-year contracts. Start record keeping soon if retrospective application is a consideration.

An entity can apply the new revenue standard retrospectively, including using one or more of the following practical expedients:

• For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.

• For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.

• For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognise that amount as revenue.

For any of the practical expedients listed above that an entity uses, the entity shall apply that expedient consistently to all contracts within all reporting periods presented. In addition, the entity shall disclose all of the following information: (a) the expedients that have been used, and (b) to the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients.

An entity can alternatively choose to recognise the cumulative effect of initially applying the new standard to existing contracts as an adjustment to the opening balance of retained earnings on the annual reporting period that includes the date of initial application with proper disclosures. Under this transition method, an entity shall apply this guidance only to contracts that are not completed contracts at the date of initial application.

Under this transition method, for reporting periods that include the date of initial application, an entity shall provide both of the following additional disclosures:

• The amount by which each financial statement line item is affected in the current reporting period by the application of the new standard as compared with the guidance that was in effect before the change.

• An explanation of the reasons for significant changes identified between the reported results under the new standard and legacy guidance.

An entity that uses this simplified transition method must disclose this fact in its financial statements.

What are the transition requirements?

The above discussions have highlighted the key issues that are most impacted by the new revenue standard. However, they are just the tip of the iceberg.

Our industry experts are prepared to assist you to get through the changes. We can also help you to pre-assess the impact of the new standard to your future revenue.

Watch out for our next publication and feel free to contact us.

Next step?

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How can PwC helpOur ‘one firm’ solutionPwC is already working with a number of large companies around the world to manage their transition to the new standard. We have developed an approach that draws on our expertise in accounting, systems implementation and transaction structuring to deliver an end-to-end integrated solution.

A scalable approach focused on project management and knowledge transfer.

Embedded, flexible approach

1 2 3• Establish governance, project and change management approach• Inventory revenue arrangements and review contracts• Review current accounting policies and practices• Identify relevant differences under the new standard

• Determine adoption method (retrospective or practical expedient)• Map accounting policy differences to process and systems impacts• Consider dual-GAAP approach, including interim solutions• Establish roadmap and communication plan

• Educate and communicate within the organisation• Effect process and systems changes• Collect and convert data, perform calculations• Draft disclosures (both transition and ongoing)

Assess

Convert

Embed

Your advantages

Flexible approach We apply a scalable flexible approach and provide you a customised solution depending on the impact of the new revenue standard to your business. Our approach allows flexibility to continuously assess the need and to modify what PwC can do to help.

Integrated solutions We understand the impact of the new revenue standard spans beyond accounting. Our team will comprise of experts in accounting as well as our system and controls specialists. We will provide insights on the financial impact upon adoption of the new revenue standard. But more importantly, we will provide insights on other areas such as operations, budgeting, system requirements and human resources enabling you to make informed decisions and judgements about any proposed business model changes.

Global network We will provide you with our proven accounting change methodology, tools, templates and best practices and staff training and, if needed, support you in your choice and implementation of a software solution. By leveraging our multi-disciplinary specialists you will reduce implementation risks and ensure you meet the requirements of the new revenue recognition standard in the most cost efficient way.

Knowledge transfer We will ensure a smooth implementation process using continuous knowledge transfer. Through continuous education and communication we believe in empowering you with relevant and precise information and knowledge so you can make informed decisions.

Project management The fundamental of our approach is robust project management. You will be able to set up the implementation project, get internal buy-in and sponsorship and be able to integrate implementation processes in your other regulatory and IT change projects as well as your ongoing financial reporting calendar.

PwC 17

Service Offering

In-house training and technical help-desk

Provide you with training for your accounting, IT, legal and compliance teams on specific areas and implementation issues you may face.

Provide on-going implementation and technical support to finance team and other cross functional teams on ad-hoc questions through transition phase.

Diagnostics Perform diagnostic review of your existing arrangements/accounting policies to assess business issues and financial reporting implications and provide proposed practical solutions and recommendations.

Perform diagnostic that includes understanding the financial and cross-functional impact; analyse your business models and contracts underlying your revenue recognition; analyse your IT landscape and an overview of risks and gaps.

This will help you understand the breadth and depth of the impact (e.g. accounting, reporting, sales contracts, controls and process, systems, remuneration, taxes and investor relations) so you can plan for implementation.

Impact analysis Work closely with your finance team to model the impact of adoption under different revenue recognition scenarios to your earnings, business model, compensation plans, debt covenants and any other impact areas identified by you.

Perform a detailed analysis of differences in accounting policies, data gaps and IT systems landscape including required interfaces to be deployed/upgraded based on business requirement and functional design specifications.

Based on the impact analysis, work closely with your team to execute a cross-functional communication strategy both internally and externally to your investors, audit committee, board of directors and other stakeholders on a timely basis.

Accounting advisory Undertake a detailed analysis of your specific revenue contract considering your industry and business model while also being mindful of your objectives and propose possible solutions for you.

Active participation on the implementation of the proposed solutions, for example, participation in discussions with your lawyers for possible changes to contracts, internal meetings with other cross-functional teams to coordinate implementation, etc.

Systems, process and controls

Work with your finance and IT teams on updating revenue recognition process, system change, books and records through the transition period.

Support you to determine a sustainable software solution that is able to support compliance with the complex accounting requirements for revenue recognition.

Full scale implementation

A combination of all of the above to assist with your full scale implementation of the standard (from in-house education, initial diagnostic phase, impact analysis, to embedding changes in your financial reporting tool) utilising PwC developed and tested implementation tools and methodologies.

Support you in gathering the data, testing IT concept, adjusting IT systems and testing the results.

Our service offeringHow we can help depends on your needs and the level of impact the new standard may have on your business. Described below are some of the ways in which we can help you as you plan for adoption. All the services described below can be customised to suit your needs.

Our capital markets and accounting advisory services specialists

Samying Huie, Partner+86 (10) 6533 [email protected]

Guipeng Chen, Senior Manager+86 (10) 6533 [email protected]

Vivian Lai, Senior Manager+852 2289 [email protected]

Our risk assurance specialists

Cimi Leung, Partner+86 (20) 3819 [email protected]

Kenny Hui, Partner+86 (21) 2323 [email protected]

PwC contacts Contact us to discuss the changes in the revenue accounting standards and the impact on your business.

Our real estate specialists

China – North & CentralJim Chen, Industry Leader+86 (10) 6533 2067 [email protected]

Kenny Yeung, Partner+852 2289 [email protected]

Ming Tse, Partner +852 2289 [email protected]

Rachel Tsang, Partner +852 2289 [email protected]

Raphael Chu, Partner+852 2289 [email protected]

Richard Sun, Partner+852 2289 [email protected]

Hong KongCathy Ng, Partner+852 2289 [email protected]

Cherry Chan, Partner+852 2289 [email protected]

Clarry Chan, Partner+852 2289 [email protected]

Davis Cho, Partner+852 2289 [email protected]

Dilys Cheng, Partner+852 2289 [email protected]

Jacky Wong, Partner+852 2289 [email protected]

Hong Kong & China – SouthAlan Ho, Industry Leader+852 2289 [email protected]

China – South Albert Cheung, Partner +86 (755) 8261 [email protected]

Ivan Ho, Partner +86 (20) 3819 [email protected]

Kevin Lin, Partner +86 (20) 3819 [email protected]

Michael Lam, Partner +86 (755) 8261 [email protected]

Shirley Yeung, Partner +86 (20) 3819 [email protected]

Tommy Cheung, Partner +86 (755) 8261 [email protected]

Wintan Tang, Partner +86 (20) 3819 [email protected]

Y T Chen, Partner +86 (20) 3819 [email protected]

China – CentralArthur Kwok, Partner +86 (21) 2323 [email protected]

Kathleen Chen, Partner +86 (21) 2323 [email protected]

Sally Sun, Partner +86 (21) 2323 [email protected]

China – NorthRock Liu, Partner +86 (10) 6533 [email protected]

Wilson Liu, Partner +86 (10) 6533 [email protected]

www.pwchk.comThis content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2014 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. HK-20140725-2-C1

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