IFRS 15 For Real Estate Companies: Principal Or Agent?

In my last article, I provided an overview of the requirements for determining whether an entity is acting as a principal or an agent. I want now to look at this topic in more detail, and with a focus on the real estate sector—where it can be a considerable challenge.

Rental contracts have a leasing component accounted for under IFRS 16 Leases, as well as (usually) a service component in scope of IFRS 15 Revenue Recognition. Like in previous years—under the old requirements—an entity must identify the particular components of the contract and determine which standard to apply. The usual approach is to apply IFRS 16 first, and then to treat any residual components of the contract with IFRS 15.

In this article, I will only look at the components which are in scope of IFRS 15. For issues around the accounting treatment under IFRS 16, please have a look at our other blog articles.

The nitty gritty

The principal-or-agent concept introduced by IFRS 15 differs, notably, in how it applies to the revenue that the landlord must recognize from operational services falling under IFRS 15.

Operational costs charged by landlords to tenants consist of several types, usually including services tenants can directly benefit from—like maintenance of the elevator—and those which they cannot—like insurance of the building. Following on from that, a clear distinction must be made between service and non-service components when it comes to the accounting treatment, as non-service components are considered part of the total consideration of the contract and must be allocated to all separately identified components (service and leasing components).

Once this is done, and if a third party is involved, any service in scope of IFRS 15 should be analyzed with regards to whether the entity controls the good or service before transferring it to the tenant as principals present revenue on a gross basis and agents on a net basis. This assessment must be made for each service separately, as the entity could be the principal for some of the services and the...

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