Now, let’s us take a look at how the updated revenue recognition standard will impact the real estate industry. In the real estate sector, contracts with customers entails various services. Under the new standard, entities in this sector will need to determine whether these services should be treated as a separate contract. The identification of performance obligations can be complex as well for the real estate sector. Below is an example about the identification of performance obligations (EY, 2015, p.12).
Example 1-2/Illustration 1-6 Identifying performance obligations in a property management contract
Operator R enters into a five-year contract with Owner S to provide property management services for a regional shopping center. The contract …show more content…
Both services are capable of being distinct and are distinct in the context of the contract because the entity does not provide a significant service of integrating the services; neither service significantly modifies or customizes the other service; and the services are not highly dependent on, or highly interrelated with each other. The activities that are necessary to perform the day-to-day management of the property are independent of those that are required to negotiate and execute leases with tenants. Entities that provide property management services will need to determine which activities comprise a series of distinct …show more content…
Operator R identifies several activities that occur throughout the leasing process, including monitoring of upcoming vacancies, new tenant identification, proposal preparation, lease negotiation and document preparation. While certain of these activities may be capable of being distinct (e.g., document preparation could be outsourced), Operator R concludes they are not distinct within the context of the contract, because the ultimate objective of the leasing services is to execute individual leases with tenants to maintain the overall occupancy of the property (EY, 2015, p. 12-13).
3.3 Software Industry
For companies in this industry, the collectability criteria included in the identification of contracts may impact the number of contracts reported. Collectability refers to the probability that an entity receives the transaction price from the customer. To access collectability, companies should access the intention and ability of customers to pay.
Sometimes, companies offer discounts when they enter arrangements with customers to motivate. Keeping this in mind, the boards allow companies to “assess collectability of the amount to which it expects to be entitled, rather than the stated contractual amount. This difference could result in the earlier recognition of revenue for arrangements in which a portion, but not the entire amount, of the contract price is considered to be at risk” (EY, 2015,
Example 1-2/Illustration 1-6 Identifying performance obligations in a property management contract
Operator R enters into a five-year contract with Owner S to provide property management services for a regional shopping center. The contract …show more content…
Both services are capable of being distinct and are distinct in the context of the contract because the entity does not provide a significant service of integrating the services; neither service significantly modifies or customizes the other service; and the services are not highly dependent on, or highly interrelated with each other. The activities that are necessary to perform the day-to-day management of the property are independent of those that are required to negotiate and execute leases with tenants. Entities that provide property management services will need to determine which activities comprise a series of distinct …show more content…
Operator R identifies several activities that occur throughout the leasing process, including monitoring of upcoming vacancies, new tenant identification, proposal preparation, lease negotiation and document preparation. While certain of these activities may be capable of being distinct (e.g., document preparation could be outsourced), Operator R concludes they are not distinct within the context of the contract, because the ultimate objective of the leasing services is to execute individual leases with tenants to maintain the overall occupancy of the property (EY, 2015, p. 12-13).
3.3 Software Industry
For companies in this industry, the collectability criteria included in the identification of contracts may impact the number of contracts reported. Collectability refers to the probability that an entity receives the transaction price from the customer. To access collectability, companies should access the intention and ability of customers to pay.
Sometimes, companies offer discounts when they enter arrangements with customers to motivate. Keeping this in mind, the boards allow companies to “assess collectability of the amount to which it expects to be entitled, rather than the stated contractual amount. This difference could result in the earlier recognition of revenue for arrangements in which a portion, but not the entire amount, of the contract price is considered to be at risk” (EY, 2015,