This article first appeared in Forum, The Edge Malaysia Weekly on January 1, 2018 - January 7, 2018

Effective Jan 1, Financial Reporting Standard 201 Property Development Activities (FRS 201) will be replaced by Malaysian Financial Reporting Standard 15 Revenue from Contracts with Customers (MFRS 15). How will this affect property developers in Malaysia?

In my previous article on Dec 11, 2017 (Issue 1192), the following key areas were discussed: (i) the timing of revenue recognition; (ii) different payment schemes; and (iii) free goods and services provided to customers.

In this article, the impact of MFRS 15 on other key areas will be discussed.

Capitalisation of costs to obtain a contract

Under the current FRS 201, property developers may have developed their own accounting policies, due to the lack of guidance, to account for costs to obtain a contract (such as sales commissions paid to sales staff). Sales commissions are often expensed to the income statement as and when they are incurred. However, the new revenue standard cites sales commissions that are directly related to sales achieved during a time period as an example of an incremental cost that should be capitalised.

In contrast, some bonuses and other compensation that are based on other quantitative or qualitative metrics (for example profitability, earnings per share, performance evaluations) likely do not meet the criteria for capitalisation because they are not directly related to obtaining a contract. The determination of costs to be capitalised under the new revenue standard will, therefore, require judgement.

MFRS 15 represents a significant change for entities that currently expense the costs of obtaining a contract but will be required to capitalise these costs under the new standard. This may also be a change for entities that currently capitalise costs to obtain a contract, particularly if the amounts currently capitalised are not incremental and, therefore, would not be eligible for capitalisation under the new revenue standard.

Additional disclosure requirements

Many users of financial statements have criticised that the current revenue recognition disclosures are inadequate. As a result, the new revenue standard includes an overall objective for an entity to “disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers”. Some of the key disclosure requirements are as follows:

a) The disaggregation of revenue into categories that depict the nature, amount and timing of revenue; 

b) Information on separate components identified in a package and the transaction price for each of the identified component; and

c) Significant judgements applied in determining separate components and their respective transaction prices.

We believe entities may need to expend additional effort when initially preparing the required disclosures for their interim and annual financial statements. As a result, entities will need to ensure that they have the appropriate systems, internal controls, policies and procedures in place to collect and disclose the required information. In the light of the expanded disclosure requirements and the potential need for new systems to capture the data needed for these disclosures, entities may wish to prioritise this portion of their implementation plans.

Other business aspects to consider

In addition to the accounting implications discussed, the new revenue standard may impact other aspects of the business such as:

a) Whether changes need to be made to the entity’s bonus and other remuneration plans in order to ensure the remuneration policy remains aligned with the entity’s remuneration objectives;

b) Certain key performance indicators linked to revenue may need to be revisited;

c) Loan covenants may need to be renegotiated as certain ratios may be affected;

d) There may be potential divergence between accounting and taxation giving rise to changes to the timing of tax payments; and

e) Staff may need training to understand the new requirements and to work with the new or modified accounting systems and processes.

MFRS 15 requires retrospective application, but provides some practical expedients to alleviate the transition burden of accounting for completed contracts and contracts that were modified prior to adoption. Without the practical expedients, the assessment of contracts could be onerous. While practical expedients are provided, a number of application issues still exist that may make applying MFRS 15 difficult and time-consuming.

In addition, in respect of a new standard that is issued but not yet effective, an entity is required to disclose any known or reasonably estimable information relevant to assessing the possible impact arising from the initial application of the new standard. Some entities may not know or be able to make a reasonable estimate of the impact that MFRS 15 will have on their financial statements and may make a statement to that effect. 

However, it is worth noting that regulators may expect an entity’s disclosures to become more robust as time passes and more information about the effects of the new standard becomes available.

Hoh Yoon Hoong is a partner and the Malaysia real estate leader of Ernst & Young. The views in this article are his and do not necessarily reflect the views of the global EY organisation or its member firms. This is the second of a two-part series on the accounting disruptions to property developers.

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