The IFRIC completed its redeliberations of draft Interpretation D21 at this meeting.
The IFRIC considered the staff’s proposals for drafting changes to D21 made in response to its redeliberations at its meetings in January and March 2008. When redeliberating the issue, the IFRIC asked the staff to clarify the interaction between IAS 11 Construction Contracts and IAS 18 Revenue using a flow chart. The IFRIC generally supported the flow chart and the analysis proposed by the staff. However, the IFRIC asked the staff to address some remaining outstanding issues such as clarifying ‘real estate sale’ and ‘continuous transfer’.
Remaining outstanding issues
At this meeting, the staff presented a paper addressing issues in respect of:
- the scope of the Interpretation;
- the application of IAS 18;
- the identification of a component for the sale of land;
- transition and effective date.
Clarification of the scope
D21 stated that ‘this [draft] Interpretation shall be applied in accounting for revenue from the sale of real estate.’ At this meeting, the IFRIC decided:
- to clarify that the Interpretation would apply to agreements for the construction ofreal estate. The primary issue of whether an agreement is within the scope of IAS 11 or IAS 18 arises only from agreements that include construction activities. To be consistent, the Interpretation will be renamed Agreements for the Construction of Real Estate.
- to replace both terms ‘developers’ and ‘sellers’ used in D21 by ‘entities that undertake the construction of real estate’. In doing so, the intention is to focus on the entity that, directly or indirectly, undertakes construction activities and therefore would be affected by the Interpretation.
Application of IAS 18
The staff presented revised versions of the draft Interpretation, flow chart and illustrative examples that clarify that if the buyer has only limited ability to influence the design of the real estate an agreement may not meet the definition of a construction contract and would therefore be within the scope of IAS 18. In this case, the entity should determine whether the agreement is for the rendering of services or for the sale of goods:
- If the entity is not required to acquire and supply construction materials, the agreement may be only an agreement for the rendering of services in accordance with IAS 18, to which the criteria for recognition of revenue set out in paragraph 20 of IAS 18 apply;
- If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver the real estate to the buyer, the agreement is an agreement for the sale of goods and the criteria for recognition of revenue set out in paragraph 14 of IAS 18 apply.
The IFRIC reaffirmed its view of how paragraph 14 of IAS 18 should be applied and identified two types of agreements for the sale of real estate:
(a) Agreements in which the entity transfers to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses (‘continuous transfer’).
In this case, if all the criteria in paragraph 14 of IAS 18 are met continuously, an entity should recognise revenue on the same basis (by reference to the stage of completion).
(b) Agreements in which the entity transfers to the buyer control and the significant risks and rewards of ownership of the completed real estate in its entirety at a single point of time (eg at completion, upon or after delivery). In this case, the entity should recognise revenue only at that point, when all the criteria in paragraph 14 of IAS 18 are satisfied.
The IFRIC also identified agreements for the delivery of multiple goods in which the entity transfers to the buyer control and the significant risks and rewards of ownership of each separately identifiable good at different points of time (eg at each delivery). The IFRIC concluded that such agreements are of type (b) above, ie they simply involve multiple deliveries. The control and risks and rewards of the work in process does not transfer to the buyer as construction progresses, only when each completed item is delivered. Therefore the use of the percentage of completion method would not be appropriate.
The IFRIC noted that agreements of type (a) above may not be frequently encountered. However, the IFRIC decided that the Interpretation should address the accounting for such agreements because some respondents to D21 identified agreements with these characteristics. The IFRIC also decided that application by analogy would be permitted in accordance with IAS 8.
Identification of a component for the sale of land
As discussed in paragraph 13 of IAS 18, the IFRIC concluded that the agreement should be analysed to determine any separately identifiable components. Depending on facts and circumstances, the entity may or may not conclude that a component for the sale of land is separately identifiable from the component for the construction of real estate.
The IFRIC noted that one example proposed by the staff that would accompany, but not be part of, the Interpretation was illustrating a case of segmentation. The IFRIC also noted in the staff’s paper a case in which the land was not identified as a separate component and asked the staff to include such an example in the Basis for Conclusions.
The IFRIC noted that, for agreements accounted for under paragraph 14 of IAS 18 that have ‘continuous transfer’, the entity that undertakes the construction of real estate should disclose information about its accounting policies, significant judgements and major sources of estimation uncertainty in accordance with IAS 1 Presentation of Financial Statements.
The IFRIC decided that the Interpretation should require specific disclosures similar to those of paragraphs 39 and 40 of IAS 11 for such agreements to satisfy the requirements of IAS 1.
Vote to confirm consensus
The IFRIC concluded that the revised draft Interpretation together with the flow chart and the illustrative examples clarifies the definition of a construction contract, and the articulation between IAS 11 and IAS 18, and provides guidance on how to account for revenue when the agreement for the construction of real estate falls within the scope of IAS 18.
The IFRIC considered whether the changes from the draft Interpretation exposed for comment as D21 were such that re-exposure was needed in accordance with the IFRIC Due Process Handbook. The IFRIC believed that it had addressed the main concerns expressed by respondents to D21 about some aspects of the proposals or the possible application by analogy with industries other than real estate. The IFRIC therefore concluded that re-exposure would not result in the identification of new issues and was not necessary.
The IFRIC also believed that the main expected change in practice would be a shift from recognition of revenue using the percentage of completion method to recognition of revenue at a single point of time (eg at completion, upon or after delivery). Affected agreements would be mainly those accounted for in accordance with IAS 11 that do not meet the definition of a construction contract as interpreted by the IFRIC and do not result in a ‘continuous transfer’.
The IFRIC therefore concluded that a six-month lead time for implementation would be sufficient and decided to recommend that the Interpretation should be effective for accounting periods beginning on or after 1 January 2009 with retrospective application.
Finally, the IFRIC voted and confirmed the consensus. Subject to drafting changes, the IFRIC directed the staff to present the final Interpretation to the Board for ratification at its meeting in June, with the expectation that it will be issued by the end of that month