Off-Plan Villas, a Late Pool and Three Defaulting Buyers

IFRS 15 requires one of three criteria to be met for over-time recognition: the customer simultaneously receives and consumes the benefits; the entity's performance creates or enhances an asset the customer controls; or the asset has no alternative use and the entity has an enforceable right to payment for performance completed to date.

The first two fail: the buyer does not occupy or control a villa under construction. The third also fails on the 'no alternative use' limb. Bayan can resell a cancelled unit to another buyer at an average cost of KWD 4,000, which is about 1.7% of the price. That is strong evidence that the asset has an alternative use, so the criterion is not met even before considering the payment right. The payment right is also weak: the deposit is only 10%, and on buyer cancellation Bayan keeps 20%, which is not obviously an amount that approximates cost plus a reasonable margin for performance completed to date.

The contracts are therefore point-in-time. At 31 December 2025 no revenue is recognised; the KWD 96 million of costs is inventory or contract cost, not cost of sales, and the deposits received are contract liabilities. The 60% completion and the KWD 160 million expected cost are relevant to impairment of inventory, not to revenue recognition.

The starting point is whether the pool is a distinct good. It is separately identifiable in the specification and Bayan sells it for KWD 17,500 on a stand-alone basis; the KWD 18,000 price is close to that. Under IFRS 15.27(b), a contract modification that adds a distinct good at its stand-alone selling price is accounted for as a separate contract. The timing of 14 months is not decisive; what matters is distinctness and pricing.

If the pool is distinct, Bayan treats the KWD 18,000 as a new contract and recognises it when the pool is transferred, which in this case will be at handover of the villa. The original contract is unchanged. If the pool is not distinct because it is highly integrated into the villa, it is part of the single performance obligation; the transaction price increases to KWD 258,000 and revenue is recognised at handover. Because no revenue has yet been recognised under the point-in-time model, there is no cumulative catch-up to worry about.

The practical audit point is to check the contract terms: a standard catalogue item at a stand-alone price points to separate-contract treatment, while bespoke structural work integrated into the build points to a modification of the existing contract.

The liquidated-damages clause is variable consideration. The cap is 5% of KWD 240,000, or KWD 12,000 per villa, and delivery is now expected three months late, so payment is probable. Bayan should reduce the transaction price by the expected compensation and recognise a refund liability, but only to the extent that a significant reversal is not expected. With a contractual cap and an acknowledged delay, the constraint does not prevent recognition of the capped amount. The reduction should be applied to the 37 contracts still expected to complete.

The three defaulting buyers require a contract-termination analysis. Bayan has not resold the villas, so it still has performance obligations under the original contracts. It should not recognise revenue simply because the buyers stopped paying. If Bayan terminates the contracts and keeps the 20% cancellation amount, that amount is non-refundable consideration. Under IFRS 15, when a contract is terminated and the entity has no remaining obligation to transfer goods or services, non-refundable consideration is recognised as revenue. The KWD 48,000 per buyer (20% of KWD 240,000) would then be recognised, but only after legal termination and after assessing whether it is compensation outside the contract scope. Until then, the deposits remain contract liabilities and the villas remain inventory.