At its meeting in January 2008 the IFRIC considered comments received on D21 Real Estate Sales and directed the staff to develop a flowchart to illustrate the accounting for real estate sale agreements in accordance with IAS 11 Construction Contracts and IAS 18 Revenue, with the starting point being to consider the nature of the sale (‘what has been sold?’).
At this meeting, the staff presented a flowchart divided into two parts. The first part of the flowchart dealt with the identification of the real estate sale and the second part with the applicable standard and revenue recognition.
Identification of the real estate sale
The first part of the flowchart illustrated that IAS 18 is the relevant Standard to identify the nature of the real estate sale agreement because the guidance in paragraph 13 of IAS 18 is expressed at a general level. Therefore, in accordance with IAS 18, an entity should identify whether a single agreement for the sale of real estate has one component or multiple components. The staff noted that this approach is consistent with IFRIC 12 Service Concession Arrangements (paragraph BC31), which identifies a component for construction services within IAS 11 and a component for operating the asset constructed within IAS 18. Lastly, this part of the flowchart noticed that IAS 18 requires the fair value of the consideration received or receivable to be allocated to each identified component. The staff proposed that, in the Interpretation, no detailed guidance would be given on this allocation but rather a reference would made to existing guidance in IFRIC 12 and IFRIC 13 Customer Loyalty Programmes.
The IFRIC supported this first part of the flowchart but asked the staff to clarify what was meant by ‘real estate sale component’. In particular, the IFRIC wanted to clarify whether, in the flowchart, the sale of land would be identified as a separate component within the scope of IAS 18 at the early stage of analysing the transaction or included in the real estate sale component and treated as a separate component at a later stage.
Applicable standard and revenue recognition
The second part of the flowchart addressed the issues of:
- whether the real estate sale agreement (or component) should be regarded as a construction contract within the scope of IAS 11 or an agreement for the sale of goods within the scope of IAS 18; and
- how revenue from the sale of real estate should be recognised.
The IFRIC agreed with the flowchart that the first question should be whether the real estate agreement meets the definition of a construction contract. The IFRIC concluded that some guidance developed in D21 helps distinguish between construction and the custom assembly of goods from predefined vendor options and should be included in the Interpretation.
Then, the staff presented two alternative views for real estate sale agreements that do not meet the definition of a construction contract but in which the criteria in paragraph 14(a) and (b) of
IAS 18 for recognising revenue (that the seller transfers to the buyer control and the significant risks and rewards of ownership) are met as construction progresses:
- View 1: such agreements should be considered construction contracts and should be included within the scope of IAS 11 (view taken in D21). Revenue and costs are recognised by reference to the stage of completion.
- View 2: such agreements are within the scope of IAS 18 because they are not construction contracts. However, because all the criteria for revenue recognition for the sale of goods in IAS 18 are met on a continuous basis, the percentage of completion method appropriately recognises revenue. The entity should refer to IAS 11 for application guidance because the requirements of that Standard are generally applicable to the recognition of revenue and the associated expenses for such a transaction.
The IFRIC noted that both views produce similar revenue recognition answers. However, under View 2, the segmentation and disclosure requirements for the real estate sale agreement are those of IAS 18 and therefore are less restrictive than IAS 11 (View 1). The IFRIC agreed with some respondents to D21 who noted that the ‘control and risks and rewards’ test was not a requirement of IAS 11 and generally supported View 2.
However, in the flowchart, the IFRIC did not find the term ‘continuous sale of goods’ relevant and asked the staff to clarify the wording. Some IFRIC members asked the staff to consider whether the continuous sale of goods might be indicative that the essence of the arrangement involved the rendering of services. The IFRIC also asked the staff to address the issue of disclosures.
Lastly, the flowchart illustrated that, when the real estate sale agreement meets neither the definition of a construction contract nor transfers to the buyer control and the significant risks and rewards of ownership of the work in progress as construction progresses, the real estate sale is a sale of goods under IAS 18 (completed real estate). The IFRIC reaffirmed that, in such a situation, revenue is recognised when all the conditions in paragraph 14 of IAS 18 have been satisfied. The IFRIC directed the staff to circulate an amended version of the flowchart and to bring to the next IFRIC meeting a new draft of the Interpretation and the illustrative examples based on View 2.