Ifrs 15 Early Adoption and Accounting Information: Case of Real Estate Companies in Dubai

By Trabelsi, Nadia Sbei | Academy of Accounting and Financial Studies Journal, January 1, 2018 | Go to article overview

Ifrs 15 Early Adoption and Accounting Information: Case of Real Estate Companies in Dubai


Trabelsi, Nadia Sbei, Academy of Accounting and Financial Studies Journal


INTRODUCTION

In May 2014, the International Accounting Standards Board (IASB) issued the International Financial Reporting Standard 15 "Revenue from Contracts with Customers" hereafter, IFRS 15 providing firms with a five-step model that will apply to revenue earned from a contract with a customer. It was the result of a convergence project with Financial Accounting Standards Board (FASB) that started in 2002. IFRS 15 supersedes IAS 18 "Revenue" and IAS 11 "Construction Contracts" in order to introduce a new model for revenue recognition that is based on the transfer of control. It applies to revenue earned regardless of the type of revenue transaction or the industry (with limited exceptions). Although the effective date for the new standard is the beginning of a firm's first fiscal year beginning after January 1, 2018, the new standard allows early adoption for periods beginning prior to the effective date without any conditions.

Revenue recognition under IFRS 15 is performed in a manner that measures the amount representing the consideration to which the company got or is expecting to get in counterparty of goods and services transferred to customers. Thus, it is expected that the application of the new standard will affect significantly all entities in all industries. The objective of this paper is to analyze the effect of IFRS 15 early adopted by Real Estate Companies (REC) on the quality of accounting numbers: earnings and stockholders' equity. The paper is covering REC listed in Dubai Financial Market (DFM) that elected to use IFRS 15 in preparing their consolidated financial statements for the fiscal year 2015. The application of the five steps to determine when and how revenue should be recognized is expected to result in a material effect on earnings quality for REC. In fact the timing of revenue and profit recognition and the capitalization or expensing contract costs may be significantly affected and therefore lead to a material change in the measurement of revenue and profit.

This is explained by the following main differences between IFRS 15 and the current accounting practices: IAS18 and IAS11. Indeed revenue recognition under IFRS15does not depend on each category of revenue: sales, services, interest, royalties or dividends. It is based on a uniform method applicable to all type of revenue. Compared to current practices, IFRS15 revised the accounting criteria "over time". Its objective is to provide more relevant and reliable information to capital providers. Particularly, in construction contracts, unlike IAS11, revenue recognition over time by reference to the degree of completion is no more automatic. It depends on the transfer of control. The off-plan contracts for real estate developers in Dubai is common practice. It permits firms to recognize revenue progressively. An extensive use of judgement is expected. Moreover, it is expected that applying IFRS15 leads to a significant impact because of the new treatment of pre-contract costs. IAS 11 allows a broader range of costs to be capitalized. Under IFRS15, only incremental costs of obtaining a contract could be capitalized.

Positive accounting theory makes a number of predictions regarding the behavior of managers. The flexibility allowed in accounting to prepare financial statements can lead to an opportunistic behavior by managers (Holthausen, 1990; Morris, 1987). This would imply that managers might adjust the timing of adoption to maximize their interests. Given that the effective date for the adoption of IFRS 15 is January 2018, the analysis of accounting practices for REC listed in DFM regarding revenue recognition shows that there are firms that chose to adopt before the mandatory period; early adopters. Studies of IFRS adoption have demonstrated an increase in accounting quality (Ball et al., 2003; Gassen & Sellhorn. 2006). This increase is more visible when applying IFRS is mandatory (Houque et al., 2012 & Brochet et al. …

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