The IFRIC continued discussion of its project on recognising revenue from real estate sales. The project addresses situations in which an agreement for sale is reached before construction of the real estate is complete. At its September meeting the IFRIC had reached tentative conclusions about the applicable accounting standard (IAS 11 Construction Contracts or IAS 18 Revenue) and how IAS 18 should be applied to those contracts that were determined not to be ‘construction contracts’ within IAS 11.
At this meeting, it decided to proceed with a draft Interpretation that would interpret the definition of a construction contract in IAS 11 and supersede existing guidance on applying IAS 18 to real estate sales (Example 9 in the Appendix to IAS 18).
The IFRIC considered text for the draft Interpretation, focusing in particular on the circumstances in which a sale agreement would meet the definition of a construction contract and hence be within the scope of IAS 11. It considered a proposal to describe a construction contract as one that required the seller to provide construction services, and discussed whether those services should be described as being provided ‘to the buyer’s specifications’ or ‘in accordance with the buyer’s directions’. It considered suggestions that:
- construction contracts could additionally be described as contracts in which there is a continuous transfer of risks and rewards of ownership of the property in its current state and condition;
- one indicator that a contract is a construction contract is that the buyer has specified the original design, not just chosen from a range of designs or specifications offered by the seller. In such circumstances, the construction services are clearly being provided to the buyer’s specifications;
- a typical pre-completion agreement for the sale of a unit (eg apartment or retail unit) within a multiple-unit development is not a construction contract. However, there may be some circumstances in which an agreement for the sale of real estate after construction has commenced could include a construction contract—even though the original design was not specified by the buyer. An example might be a transaction in which an investor buys a whole development in its current partially completed state and engages the seller to provide construction services to complete the development. The draft Interpretation should either accommodate such transactions, or be restricted in scope—addressing only the initial sale of individual units within a development, rather than changes in ownership of the development as a whole.
The IFRIC directed the staff to analyse these suggestions further and draft text for discussion at a future meeting. It also asked the staff to consider whether any of the existing text constituted application guidance, which should appear in a separate section from the core consensus material.
The IFRIC noted that the matters that it had considered in its project did not include all of the matters that are at present addressed in Example 9 of the Appendix to IAS 18—the guidance developed so far would replace only the first paragraph of the Example. If the Interpretation were to supersede the whole of Example 9, the IFRIC would need to consider whether it should also bring forward or replace the second and third paragraphs of the Example. The IFRIC decided to return to this question at a later date, when other aspects of the draft Interpretation had been settled.
Finally, the IFRIC noted that, in view of the long-term nature of some real estate development projects, it should consider whether to propose specific transitional arrangements. It directed the staff to analyse the options for discussion at a future meeting.