Long instalment plans and the financing component

In high-interest-rate markets like Egypt, ignoring the financing component can overstate revenue by a large margin at handover while understating multi-year interest income, distorting both the top line and the profile of future earnings, this is one of the largest quantitative IFRS 15 adjustments in the region's residential development sector.

Do any payment plans extend materially beyond the date control of the unit transfers (typically more than one year)? What discount rate reflects a genuine standalone financing transaction with this buyer, and is it supported by a cash-price discount or market evidence rather than an arbitrary rate? Is revenue being recognized at the discounted cash-price equivalent rather than the full nominal instalment total? Is interest income on the deferred instalments being unwound separately from property sales revenue using the effective interest method?

1) Identify the gap between when control of the unit transfers (or, for over-time contracts, when payments are made relative to performance) and when cash is actually collected; if that gap exceeds roughly one year and is not explained by reasons other than financing (e.g. not a performance/quality holdback), a significant financing component likely exists. 2) Confirm the practical expedient does not apply: the expedient allows ignoring the financing component only if the period between transfer of the promised good/service and payment is one year or less, long post-handover instalment plans typically fail this test. 3) Determine the cash-price equivalent of the property if the customer paid in cash at the point control transfers (often evidenced by the discount offered for cash purchases, or by constructing one using a market discount rate). 4) Select a discount rate that reflects the rate that would be used in a separate financing transaction between the developer and the customer at contract inception, considering the buyer's credit characteristics and any collateral (the unit itself). 5) Recognize revenue at the cash-price equivalent when control transfers; subsequently unwind the difference between the cash-price equivalent and the nominal instalment total as interest income over the remaining collection period using the effective interest method, presented separately from property sales revenue.

Measurement base: revenue is measured at the cash-price equivalent (present value of the instalment stream discounted at a rate reflecting a separate financing transaction with that buyer) at the date control transfers, not the nominal instalment total. Subsequent measurement: the resulting contract asset/receivable is subsequently measured using the effective interest method, with each instalment collected split between principal (reducing the receivable) and interest income (recognized in profit or loss, separately from revenue) over the collection period; the receivable should also be assessed for expected credit losses under IFRS 9.

Present interest income arising from the unwind of the financing component as a separate line from property sales revenue (finance income, not revenue from contracts with customers); disclose the discount rate(s) used and the basis for selecting them (buyer credit profile, market rates); disclose the accounting policy for identifying and measuring significant financing components; disclose the carrying amount of long-term instalment receivables split between current and non-current, with maturity analysis; disclose the practical expedient election if applied to short-term plans.

• Recognizing the full nominal instalment total as revenue at handover instead of the discounted cash-price equivalent, overstating revenue and understating future interest income
• using a token or arbitrary discount rate (e.g. a round number unrelated to the buyer'
• s credit profile or market rates) rather than one reflecting a genuine standalone financing transaction
• applying the one-year practical expedient to plans that clearly extend well beyond a year
• ignoring that large advance payments collected years before handover can embed the opposite effect, a financing component in the developer'
• s favor (effectively an implicit interest expense/discount), regardless of whether the project is on an over-time or point-in-time revenue pattern
• failing to true up the effective interest schedule when instalment terms are renegotiated or prepaid.