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Revenue Recognition for Real Estate
Efficient recognition and measurement of revenue is essential for the well being, progress and prosperity of any company or individual engaging in business transactions. As the financial markets have become more and more globalized, the need for standardized procedures has increased. That is why the new standard guidelines have been developed with the aim of streamlining the process of keeping accurate financial records and preparing financial statements.
The Five Step Principle
The main principle of measuring and recognizing revenue and cash flows is that an entity receives and records the appropriate amount from customers as a result of the services or goods the entity provides. The following five steps can be applied in order to achieve this principle:
- Establish an agreement or contract with a customer
- Agree on the exact outcomes that are identified in the contract
- Determine the amount that will be paid by the customer
- Assign the amount to the outcomes in the contract
- Recognize the revenue when the entity achieves the outcomes
For entities in the real estate industry a greater level of judgement will be required when using the new revenue standard to measure and recognize profits and losses on sales of property.
The timing of the recognition of revenue and gains will generally coincide with the date when the control of the property is transferred to the new owner.
In the new standard it will no longer be necessary to evaluate the ongoing investments and involvement with the property of both the buyer and the seller. However, the collectability of the transaction price is still required from the real estate entities according to the principles of the new revenue standard.
When it comes to fees for services such as property management, there may be a change in the way these are recognized. In the new standard it is required to estimate variables and specify the number of performance obligations or outcomes included in the contract.