The IFRIC continued its project to develop a draft Interpretation that would (a) interpret the definition of the term ‘construction contract’ in IAS 11 Construction Contracts and (b) supersede existing guidance on real estate sales in Example 9 of the Appendix to IAS 18.
Definition of construction contract
The IFRIC decided that the Interpretation should address all real estate sales. It should therefore provide general guidance on the circumstances in which agreements for sale that were reached before construction was complete were construction contracts (ie IAS 11 contracts specifically negotiated for construction services as opposed to agreements for the sale of goods in IAS 18). The IFRIC decided that this guidance should take the form of a list of the features that individually or in combination would indicate that the agreements were construction contracts. It discussed a range of potential ‘indicators’ and directed the staff to prepare a revised list for discussion at a future meeting. The IFRIC focused on the customer’s substantive involvement in specifying significant design elements as an important characteristic of IAS 11 contracts; the IFRIC observed that a buyer taking ownership risks for the asset in
Amendments to Example 9 of Appendix to IAS 18
The IFRIC noted that the guidance it had developed to date would supersede the first paragraph of guidance in Example 9 of the Appendix to IAS 18. It decided that the draft Interpretation also should carry forward (with some limited amendments) the second paragraph of Example 9, which provides guidance on the consequences of continuing involvement by the seller. However, the IFRIC decided that the draft Interpretation should not carry forward the third paragraph of Example 9, which discusses the need for evidence of the buyer’s commitment to complete payment. The IFRIC decided that this paragraph does not follow from or usefully add to the requirement in paragraph 14(d) of IAS 18 for the entity to consider whether ‘it is probable that the economic benefits associated with the transaction will flow to the entity’.
Transitional arrangements and effective date
The IFRIC decided that the draft Interpretation should contain no specific transitional arrangements and should propose that the Interpretation should be effective for accounting periods beginning three or more months after its issue.